BITX ETF: Rate Cuts Could Disappoint BTC Bulls #NewsETFs

On August 5th, the price of Bitcoin (BTC-USD) flash-crashed under $50k per coin. The price volatility was by no means unique to just Bitcoin. At the August 5th intraday lows, the S&P 500 had sold off by more than 8% from peak to trough over the course of just three trading sessions. At the time, I wrote that Bitcoin was likely a casualty of an unwind in the Japanese Yen (USD:JPY) carry trade.

Since the flash-crash at the beginning of the month, Bitcoin has recovered by 8.5% and even briefly hit $65k per coin on August 25th. As well as BTC has performed since that early-August flash-crash, the 2x Bitcoin Strategy ETF (BATS:BITX) has done even better after generating a 36.1% total return from the lows. This is well ahead of the 2x return goal and speaks to the importance of hitting the timing of a trade when the asset enters a strong uptrend.

If we judge the performance of BITX against BTC year to date, we can see that BTC is clearly the better play for longer-term holding, as the coin has outperformed a fund that is designed to double the returns of the coin itself. To reiterate, this is due to the daily rebalancing and long-term decay of leveraged ETFs like BITX. For those who are unfamiliar with this, I’d encourage you to read my previous BITX article for Seeking Alpha as I explain some of the fundamental issues more in-depth.

To summarize; BITX is bad for investing, but potentially good for short-term trading. In this update, I’ll get into some of the reasons why I believe speculators hungry to leverage BTC gains might want to wait before longing BITX.

Seasonal Setup & Capital Flows

I’ve covered Bitcoin’s September seasonality in a previous Seeking Alpha article in August, so I’m not going to use too much real estate on it in this article. But September has historically been a rough month for BTC returns:

Going back the last 11 years, with trading data from Kraken, Bitcoin has generated a positive return in September just 30% of the time. And at -5.8%, the month of September has historically been the worst month of the year for BTC by mean change.

To be clear, this doesn’t mean September 2024 is guaranteed to be a negative month for BTC. As the adage goes, past performance is not a guarantee of future returns. Furthermore, capital flows into Bitcoin investment products likely matter more at this point than seasonality and those flows have been very strong recently per data from CoinShares:

As of the end of August 24th 2024, Bitcoin benefited from $543 million in single-week investment demand. This brings year to date investment flow into Bitcoin to a staggering $21.3 billion. And given the weakness in Ethereum (ETH-USD) ETF demand, if one strips out Bitcoin from the table above, crypto investment in the preceding week was actually negative. A week with $533 million in capital flows into digital assets was entirely reliant on BTC to be net positive. What is going on here?

Liquidity And Fed Pivot

I’ve been making the point through various Seeking Alpha articles this year that Bitcoin is an anti-fiat asset. Given that, Bitcoin likely goes as global liquidity goes, and we can see that very clearly in this chart that has been shared by Lyn Alden on X:

There are clearly large booms and busts along the way, but the price of BTC has been rising over the last 15 years because it is viewed as an alternative to state money printing. This is why we can see the booms in the price generally coincide with the large increases in global M2. With the Federal Reserve now indicating that it will be appropriate to cut rates in the future, the market is beginning to price in rate cuts in September that could be as much as 50 bps:

However, I think it’s important to be mindful of what happened the last time the Federal Reserve cut interest rates, back in 2019:

Bitcoin was born out of GFC, so we only have one real attempt at a hiking cycle previous to 2022 that we can use to gauge the coin’s performance following cuts. Back in 2019 when the Fed had the funds rate at slightly above 2%, Bitcoin was enjoying a large rally that had taken it from $3k per coin at the end of 2018 up to $14k in June 2019. This proved to be the top for the year, in spite of the Fed cutting rates shortly after. From the time of the first rate cut in 2019 to eventual ZIRP in 2020, BTC fell by over 60% over a 7-month period. Even if we take out COVID as an outlier, BTC still fell by over 40% from July 2019 through the end of the year, even with the central bank cutting throughout that time.

Closing Summary

There are admittedly competing signals from this post. On one hand, seasonality would indicate caution for the time being as Bitcoin has historically performed poorly in the month of September. On the other hand, investment demand for BTC has been robust all year and capital flows into the asset figure to matter more than historical performance. The question is, how much of that demand has already come? Any attempt at answering that would be a guess. What I do think is a fairly safe assumption is higher BTC prices generally go hand in hand with growth in global M2.

But judging by the rate cuts that we saw in the second half of 2019, BTC may not actually like the widely expected cuts in September. I think it’s possible that BTC’s real move higher isn’t going to come until it’s very clear in the data that the United States is in a recession and the central bank liquidity hose gets turned back on to a much larger degree. BITX is not something that, I think, makes sense even as a trade at this point in time. I think BTC bulls who want leveraged ETFs like BITX need a clearer indication of short-term direction than what we currently have. If you like BTC, just hold BTC.