With BTC approaching the $100,000 mark and every macro observer seemingly turning into an MSTR convertible bond expert over the past week, cryptocurrencies are once again in the news, attracting the most mainstream attention since the FTX incident.
As we've mentioned in the past, the "easy phase" is over and market volatility is set to intensify significantly going forward as belated investors enter the market with significant leverage.
Microstrategy successfully exercised a $400 million over-allotment option on its original $2.6 billion convertible bonds (0% coupon, 55% premium), increasing the final size to $3 billion. According to Cointelegraph, Allianz Insurance is one of the main participants in this transaction. The closing price of this batch of convertible bonds due in 2029 exceeded $104 on the first trading day.
The irony of Wall Street’s involvement is obvious. After years of accusing cryptocurrencies of being highly risky and lacking fundamental value, these banks are now scrambling to lead this deal. In fact, these banks claimed that BTC was worthless when it was between $6k and $60k, and now these underwriters are suggesting that investors are “quite reasonable” to pay a 55% premium on the 95k price to buy BTC through an indirect equity vehicle. We won’t go into how MSTR is a convertible financing convexity vehicle for TradFi investors, but we must acknowledge that these mainstream “gatekeepers” (including regulators) are bringing mainstream investors into this market through this incredible structure, but it all seems reasonable and legal because it is done through “regulated securities”. It’s a typical traditional finance routine, right?
Mainstream institutions naturally would not miss such an opportunity and quickly launched Microstrategy's leveraged ETFs (MSTX, MSTU), allowing retail investors to have more "suboptimal" ways to leverage BTC spot. According to Bloomberg, the high demand for these leveraged ETFs has put pressure on prime brokers responsible for securities lending, and the related asset management scale has surged to nearly US$5 billion in the past week.
(Friendly reminder: Never buy leveraged ETFs except for short-term trading. Leveraged ETFs are mathematically designed to lose value over time. Please Google how their daily returns are calculated for more details.)
Prime brokers — units within banks that work with clients on things like securities lending — have reached the limit of swap exposure they are willing to provide to the roughly month-old T-Rex 2 X Long MSTR Daily Target ETF (ticker: MSTU), which at launch was the most volatile ETF ever on Wall Street, by some measures. — Bloomberg
Mainstream mania has further fueled the recent market froth, with prominent television commentators suddenly backtracking in support of cryptocurrencies, allowing the market to see a significant increase in leverage at current levels and causing a significant increase in realized volatility. Nearly $500 billion in long positions were reportedly liquidated over the past few days in what could be the largest wave of liquidations in history as prices failed to break out again.
As we have been reminding, the cryptocurrency market will be very volatile in the short term. BTC technical indicators show severe overbought conditions, and the public is experiencing FOMO sentiment towards this asset class. If BTC price can successfully break through the psychological barrier of $100,000, the price may have the opportunity to push further to the $120,000-130,000 range, but we are not optimistic about the prospect of a smooth price increase as the asset market is generally overbought. Selling put options as an income or target buying strategy may still be attractive in the short term (DYOR: not an investment recommendation).
Speaking of options, following Nasdaq’s launch of IBIT ETF options, CBOE will launch the industry’s first cash-settled options. We still expect the options market to become a significant growth catalyst for the industry after 2025. SignalPlus will provide full support for your options journey!
The recent moves by Lutnick (Trump’s new Commerce Secretary) and his company Cantor in the cryptocurrency space should have a positive impact on the long-term structural development of the ecosystem. According to recent disclosures, in addition to being Tether’s custodian, the company has also invested $600 million for a 5% stake in Tether (valuing the company at $12 billion). The company will also launch an (off-chain) Bitcoin financing business to provide clients with fiat loans using BTC as collateral, further strengthening Bitcoin’s role as a balance sheet asset in the mainstream ecosystem.
Back to TradFi, last Wednesday Nvidia earnings beat expectations, the high-income consumer index hit a new high, reflecting the strong spending power of the US (high-income) group, and the stock market rebounded strongly from the earlier pullback. The economic surprise index has returned to strong first-quarter levels, while the inflation data has yet to break out to the upside, keeping the possibility of a Fed rate cut alive (December probability = 56%) and the soft landing scenario remaining solid. Additionally, Bank of America reported that more than $448 billion has flowed into U.S. stocks this year, surpassing 2021 records and reaching unprecedented levels.
Trading activity is likely to be very light this week as the US market heads into the Thanksgiving holiday on Thursday. Hopefully this will also give us some time to catch our breath as we head into the final month of the year.
