3 Reasons Why Bloomberg’s Bullishness on Bitcoin Is Inaccurate

Bloomberg senior commodity strategist Mike McGlone recently released a mid-year cryptocurrency outlook report, saying that Bitcoin's volatility will continue to decline as it behaves more like gold. The report also said that major demand and adoption indicators remain positive.

The report concludes that Bitcoin will break through the $13,000 resistance level. While this view makes sense, the arguments presented in the report appear to be flawed. The correlation indicators over the past six months have made Bitcoin no longer a hedge against gold, as it has been moving in sync with the S&P 500 most of the time.

Regarding the oft-cited surge in demand, the recently reported inflows into Grayscale Investments cannot be interpreted as new money entering the space. The same can be said for the record growth in open interest in Bitcoin futures, as every derivative instrument requires buyers and sellers of exactly the same size.

Bitcoin's Correlation with Gold and the S&P 500

One of the reasons Bitcoin has captured the attention of investors over the past few years is the lack of correlation between the digital asset and traditional investments.

There have been periods of similar performance, largely caused by the same socio-political and economic headwinds that have impacted every major asset class.

Bitcoin’s 30-day correlation with gold (red) and the S&P 500 (blue). Source: TradingView

Bitcoin has been increasingly correlated with the S&P 500 in 2020. While recent data showed the most negative readings since December 2018, gold prices have shown no discernible trend.

A negative correlation indicates movement in the opposite direction, so there is no reason to go the other way.

Grayscale Bitcoin Trust (GBTC) Inflows

Bloomberg's report said that Grayscale Investments' increasing inflows indicate high investor sentiment. These funds are similar to ETFs and can be seen as a good indicator of investor demand. According to Cointelegraph, GBTC's huge interest in Bitcoin is unquestionable, with more than 53,000 Bitcoins held after the halving.

Grayscale Bitcoin Trust GBTC premium to NAV Source: YCharts

As the chart above shows, the fund has historically traded above its net asset value (NAV), or the market value of the Bitcoin held within it.

The main reason for this difference is that retail investors cannot buy shares directly from Grayscale Investments, and Grayscale's funds are exclusively for accredited investors.

The two ways professional investors can acquire GBTC shares directly from Grayscale are by transferring USD, or making an “in-kind” contribution by transferring their BTC.

Grayscale investment product inflows by type Source: Grayscale

The latest data at the end of 2019 shows that nearly 80% of Grayscale Investments' inflows were "physical", meaning there was not necessarily any buying activity. Those bitcoins could have been bought earlier by professional investors or borrowed from large over-the-counter trading platforms.

For example, Genesis, a leading OTC trading and lending firm, provided $545 million worth of active loans at the end of the fourth quarter of 2019, as Cointelegraph reported.

While these GBTC shares clearly have an ultimate buyer, it cannot be said that this flow has increased buying pressure in the market.

In effect, Bitcoin is being transferred from professional clients to Grayscale Investments, which acts as a custodian. This is regular trading, similar to the $82 billion in volume on regular exchanges over the past 30 days.

Open interest in Bitcoin futures

The Bloomberg report also cites growing open interest in CME Bitcoin futures as a signal of asset expiration and a positive price indicator. This is not quite accurate in many ways, as the recent $10 billion entry into this market by Medallion Funds certainly cannot be tied to long-term investments or even some fundamentally bullish scenario.

Such quantitative arbitrage trading platforms take both long and short positions, so it is impossible to link this increased activity to a bull or bear market.

Not to mention, CME’s Bitcoin futures are financially cleared instruments, meaning that upon contract expiration, the Bitcoin will not be moved.

All in all, Bloomberg’s report suggests that futures trading on a U.S.-regulated exchange is crucial for mainstream market adoption. Even considering BAKKT physical futures settled in Bitcoin, its custodial Bitcoin is not accepted as collateral.

Mainstream adoption has nothing to do with derivatives trading, as Bitcoin was designed to operate independently without the need for ETFs and financial instruments.

In fact, mainstream adoption of Bitcoin is more likely when major investment funds gain direct exposure to it.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.