With BTC approaching the $100k proverbial wall and every macro observer turning into a MSTR convertible bond expert over the past week, crypto dominated headlines as we captured mainstream’s attention to the largest extent since the FTX implosion.
Naturally, as we discussed over the past few weeks, the ‘easy innings’ are now over and things are going to be significantly more choppy as late comers come in with massive leverage to the system.
On top of their original $2.6bln convertible offering (0% coupon, 55% premium), Microstrategy managed to exercise the full $400M greenshoe on the deal to take the final size to $3bln, with Cointelegraph reporting that Allianz Insurance was a large participant of the deal, and the 2029 convertible closing at over $104 on day 1 of trading.
We are sure that the irony of Wall Street participation is not lost here. After vilifying crypto for years and criticizing the space for risky activities and lack of fundamental value, it’s interesting to see that our friendly neighbour banks are fighting over themselves to co-lead the deal. Effectively, while claiming that BTC was worthless at 6k to 60k, the bookrunners are effectively saying to investors that it’s now ‘sensible’ to purchase spot BTC at a 55% price premium at a 95k spot through an underlying equity vehicle that further trades at a nearly 3x premium to their BTC core holdings. Now we won’t go into the details of how MSTR is effectively convertible-financed convex vehicle for TradFi investors, but let’s just be clear that the mainstream ‘gatekeepers’ (including regulators) are now onboarding mainstream investors via this incredulous structure. But it’s all good because it’s done via equity and that’s a ‘regulated security’. How very touché and typical of our TradFi pals, don’t you think?
Never to let a profit opportunity slip, mainstream institutions have launched levered ETFs on Microstrategy, so retail investors can gain even more sub-optimal ways to generate leverage on spot BTCs as they are so late to the game. Bloomberg reports that the demand for the levered ETFs (MSTX, MSTU) have been so high that they are straining prime brokers who are responsible for securities lending, with the underlying AUMs skyrocketing to nearly $5bln in aggregate over the past week.
(As a friendly note to our readers — never buy levered ETFs except for short-term trading as they are mathematically designed to lose value over time. Google how their daily return math works for more detail.)
The prime brokers — units within banks that work with their clients on activities like securities lending — had reached their limits on how much swap exposure they were willing to offer for his roughly month-old fund, the T-Rex 2X Long MSTR Daily Target ETF (ticker MSTU), which by some measures was the most volatile exchange-traded fund to ever hit Wall Street at the time of its launch. — Bloomberg
Adding fuel to fire, mainstream mania has been adding to the recent froth with recognized TV personalities all of a sudden flipping their script on crypto, leading to a high level of realized volatility as significant leverage is added at current levels. Crypto media outlets reported that nearly 500 billion in crypto longs were liquidated over the last couple of days, registering supposedly the largest liquidation event in history just as we failed to break ATHs.
Looking ahead, and as we have been urging, it’s going to be extremely choppy markets for crypto in the near-future with BTC technicals flashing extremely overbought levels, against an ‘animal spirit’ charged public that’s developing a FOMO appetite for the asset class. We can see a further squeeze on BTC prices to the 120k to 130k area if markets manage to break the 100k-wall, but are less sanguine on a smooth ride up with asset markets being overbought across the board. Selling puts as an income or target buy strategy might continue to be an attractive strategy for many in the near term (DYOR: not investment advice).
Speaking of options, CBOE will be launching the industry’s 1st cash-settled options, following Nasdaq’s launch of IBIT ETF options. We continue to expect options to be a huge growth catalyst for the industry in 2025 and beyond, and SignalPlus is here to help with our full suite option to help you succeed in your options journey!
Outside of options markets, Mr. Lutnick (Trump’s New Secretary of Commerce) and Cantor’s recent initiatives in crypto should have long-term structural positives for the ecosystem, as the firm was recently disclosed to have invested $600M to be a 5% equity interest owner of Tether ($12B company valuation for those of you keeping track), in addition to being one of their T-bill custodians. Furthermore, the company will be launching an (off-chain) Bitcoin financing business where they will be lending fiat to clients against BTC collateral, further reinforcing Bitcoin’s role as a balance sheet asset in the mainstream ecosystem.
Back over in TradFi, things are back to ‘steady-as-she goes’ as equity markets are making a strong rebound off an earlier retrace, with Nvidia earnings beating expectations on Wednesday (albeit against high receiveables) and high consumer baskets breaking to new all time highs, reflecting a strong (high-income) US consumer base. Economic surprises have rebounded to the strong Q1 levels while inflation data has yet to breakout, keeping the Fed cuts in place (December odds = 56%), and the soft-landing scenario intact. Furthermore, BoA reported that over $448 billion of inflows have landed in US equities this year, blowing past the 2021 record and well into unprecedented territory.
US markets will be on Thanksgiving holidays on Thursday and activity will likely be very light all week. Hopefully that’ll also give us time for a short-breather as we head into the final month of another long and busy year.
Good luck & good trading!
