Crypto Long & Short: Bitcoin Outflows Aren't the Bullish Signal You Think They Are
  Weekly insights, news and analysis for the professional investor By Noelle Acheson, Managing Director of Research April 4, 2021 Sponsored by  Prices as of 04/04/21 @ 12 p.m. UTC If you were forwarded this newsletter and would like to receive it, sign up here.
Hi all!
Even on weeks like this one, with much of the world observing religious celebrations steeped in history and tradition, we are reminded of the relentlessness of change. It's in the tragic headlines, the struggle to adapt to new paradigms and the fluctuating balance between uncertainty and determination. It's also in the small steps forward we read about every day, the changing message of markets, and the shifts in collective understanding that we can only see if we step way back and squint at recent history.
This week we published our CoinDesk Quarterly Review 2021 Q1, with a view to doing just that. With over 100 insights, it aims to act as a snapshot of the crypto industry's changes over the quarter, with a layer of perspective on what these changes mean. It looks at how the influence of institutional investors in the bitcoin markets is ceding ground to retail participants, the outsized role of technological progress in Ethereum's outlook, the funding behind NFTs, the consolidation of DeFi and much more.
You can download all 100+ slides for free from our Research Hub. And on April 12, Christine Kim and I kick off a series of webinars (sign-up links to follow) in which we'll talk about the report's topics. Join us and ask questions!
This week's THE BRIEFING comes to you again from our Director of Data, Galen Moore. If, like me, you love retro music, you'll appreciate this essay for even more than its eye-opening take on exchange flows and quote currency dominance.
Read on...
– Noelle
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THE BRIEFING The Stablecoin Factor Conventional wisdom suggests that when big amounts of bitcoin exit exchanges, the hodlers are socking away coins in their cold-storage hoards, presumably forever. The reality is more complicated than that, and bitcoin outflows in 2021 have a lot more to do with another important digital asset: stablecoins.
 The chart above shows the estimated notional value of bitcoin flowing out of exchange wallets, summed by month. The real number is probably larger. Notably, Coinbase goes to greater lengths than most exchanges to disguise its Bitcoin addresses and therefore the largest U.S.-accessible exchange by volume is almost certainly undercounted here.
However, $60 billion a month is nothing to sneeze at. It's no wonder regulators are paying attention to these flows.
Much of the increase in outflows is due to bitcoin's extraordinary Q1 price run. It was a record first quarter for the orange coin. Historically, for whatever reason, the first quarter has been a weak one, with negative returns in five of the past seven years, according to CoinDesk Research. In 2021, bitcoin rose 103% on the quarter.
That's not the whole story, however. Last week saw another record: a single-day high-water mark in bitcoin-denominated outflows, with 1,365 BTC transferred off exchanges in a 24-hour period.
Some interpret these transfers bullishly: bitcoiners moving their exchange bitcoin into cold storage. Crypto analyst Willy Woo calls these hodlers "Rick Astleys," since the UK pop singer's chart-topping 1987 single, "Never Gonna Give You Up," aptly describes their feelings about bitcoin. But as I said on CoinDesk TV's All About Bitcoin show last Friday, it's possible that they are Stevie Wonders. Meaning, they're "Part-Time Lover(s)."
Here's what I mean by that: One of the underlying market dynamics of the past three years has been the rise of stablecoins. Tether (USDT), in particular, has replaced bitcoin as the dominant quote currency of crypto altcoin trading. What that means is, when I want to use crypto to buy crypto on an exchange, I'm much more likely to be doing that in tether or, to a limited extent, USD coin (USDC), Circle's dollar-pegged stablecoin.  What we're looking at here is quote currency volumes, the volume of markets priced in bitcoin and the top two stablecoins for the top four altcoins: ether, cardano, chainlink and Stellar lumens, on three exchanges included in TradeBlock's bitcoin XBX index, plus Binance. So, this is a sample of the market, but a significant one. (TradeBlock is owned and operated by CoinDesk, and its XBX index is drawn from the most liquid exchanges that are accessible to U.S. investors, and I'm using Binance as a reliable proxy for the rest of the world.)
As the chart shows, by the beginning of 2020, a flippening had occurred, with stablecoins already replacing bitcoin as the dominant crypto quote currency. Since then, tether and USDC have continued to eat up a growing share of quote currency volume, replacing bitcoin more and more. Bitcoin's quote volume is now down to 12% versus the two largest stablecoins. And so, increasing bitcoin outflows reflect that trend as much as anything else: as volume moves from markets quoted in bitcoin to markets quoted in tether, exchange wallet balances reflect that move.
In other words, when it comes to the popular narrative of bitcoin outflows as a bullish signal of hodler activity, I think that's a story dreamed up by the Doobie Brothers: it's "What a Fool Believes." I tend to lean more toward Tina Turner on this metric, wondering, "What's Love Got to Do With It"? My advice to investors would be to stay like Daryl Hall & John Oates, and keep their "Private Eyes" watching this market closely.
Having traded in a band between $50,000 and $60,000 for more than a month, bitcoin seems likelier every day to make a breakout. Be cautious of narratives based on tea leaves in the blockchain data.
– Galen Moore
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CHAIN LINKS Goldman Sachs is offering its private wealth management (PWM) clients access to crypto asset exposure. TAKEAWAY: The surprise here is that less than a year ago (when crypto prices were a fraction of what they are now), the Consumer and Investment Management Division, of which the PWM division is a part (according to its website), was advising its clients to stay away from the crypto market. What other influential wealth managers else will be changing their minds this year?
Morgan Stanley are going a step further and actively planning to invest in crypto assets. The firm has presented filings to allow five of its mutual fund families to invest up to 25% of its total assets directly in bitcoin through cash-settled futures contracts and Grayscale's bitcoin trust. TAKEAWAY: Blue-chip finance finally seems to be getting off the bench. Tentatively, but it's happening. JPMorgan, looking at you next.
Speaking of which, JPMorgan published a research note positing that bitcoin could fetch a long-term price of $130,000 if its volatility continues to decline, with the cryptocurrency potentially "crowding out gold" as a portfolio diversifier. Meanwhile, the volatility acts as "a headwind towards further institutional adoption." TAKEAWAY: "If" is the keyword here. Volatility tends to decrease as liquidity increases, and given the trading and transaction volume increase over the past few months, it's easy to conclude that liquidity is increasing. But is it? Our latest quarterly review shows liquid supply (defined by the ratio of liquid to illiquid holdings) trending down over the past few years, as more investors buy BTC to hold it. This could be why BTC's volatility has not been declining, even in the face of greater volumes.  Filings show BlackRock held $6.5 million in CME bitcoin futures contracts earlier this year. TAKEAWAY: This is a small holding by BlackRock standards, but the fact that the world's largest traditional asset manager has started speculating on bitcoin price movements is in itself quite amazing.
The Chicago Mercantile Exchange (CME) will launch smaller-sized cash settled bitcoin futures contracts in May, equivalent to one-tenth of one bitcoin vs. the five-bitcoin contracts available now. TAKEAWAY: Good news for investors of all types, as it puts the hedging and speculation tool within reach of a broader range of retail investors, and gives institutions more flexibility in their strategies (although they are likely to continue to prefer the larger contracts).
Capital markets company BTIG issued a "buy" recommendation for MicroStrategy (MSTR) in part because of its bitcoin holdings, saying the company's adoption of the cryptocurrency as its primary treasury reserve asset represents a "rational action" to protect the firm's value in the long run. Its valuation of MSTR stock assumes a BTC price of $95,000 by the end of 2022. TAKEAWAY: This might encourage other companies to add BTC to their balance sheet in the hopes of similar "buy" recommendations and share price bumps. The worrying part is the risk this could bring to corporate treasuries, which are all about safeguarding a company's liquid assets.
Finally, we have a launch date: Coinbase will list its shares under the ticker symbol COIN on April 14. TAKEAWAY: This is likely to be one of the most widely anticipated listings not just in the crypto industry, but in tech more broadly. If it starts trading at a $100 billion valuation, it will be more valuable than capital markets companies such as the CME Group (CME) and S&P Global (SPGI), tech darlings such as Zoom (ZM) and Snap (SNAP), and pharma firms such as Glaxo (GSK) and Merck (MRK.DE).
Europe's largest digital asset investment firm, CoinShares, released interim Q4 financial results this week that show a 147% year-on-year increase in EBITDA, to £7.9 million (US$10.9 million). This was helped by the contribution from ETP management fees, which increased 137% to £7.1 million (US$9.8 million). AUM grew to £1.74 billion ($2.4 billion) at the end of 2020, up 336% from 2019. TAKEAWAY: I've often said that the most exciting aspect for me of crypto companies going public is the access to financials. The available information is still relatively scant, but anything is better than nothing, and given the plans of many crypto companies to list this year, this situation should continue to improve and throw off some figures that highlight the industry's growth. As a hint of what figures we can expect from CoinShares this year, the company's current AUM is currently more than $4.5 billion, according to the company.
Crypto lending firms Genesis (a subsdiary of DCG, also parent of CoinDesk), BlockFi and Ledn are cutting the interest rates they pay on large-scale bitcoin deposits to around 2-4%. TAKEAWAY: No surprise here – it was inevitable that rates would come down as demand increased, just as it was inevitable that demand would increase, given the lack of attractive alternatives in traditional yield-bearing products.
A message from CoinDesk  Investor Momentum to NFT Boom: CoinDesk Research's Quarterly Review
Introducing CoinDesk Research's quarterly review, covering the main developments over the first three months of 2021 in Bitcoin, Ethereum, DeFi, stablecoins and – of course – NFTs.
The report presents over 100 insights on how retail investors are picking up market momentum, how Ethereum activity is not being driven by NFTs as much as one might think, how stablecoins have responded to increased activity, how DeFi is for now the realm of decentralized exchanges and more.
Podcast episodes worth listening to: 
A message from Coindesk  CoinDesk's Christine Kim and Consensys' Ben Edgington present a weekly podcast series on the live development of Ethereum 2.0 and its potential impact on the crypto markets.
In each episode, the team discusses major news events related to Eth 2.0 from addressing skepticism to the consequences of node slashing.
Listen to Mapping Out Eth 2.0 every Thursday on the CoinDesk Podcast Network.
Research Hub: New + Noteworthy 
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