View from the Arch #2

The GBTC discount, S&P rally, and OpenAI’s dev day

November 10, 2023

The screens are green, the group chats are full of “GMs” and my Uber drivers haven’t been shilling me meme coins…

I’m thinking we are so back?

Weekly summary of crypto markets

Bitcoin has continued its momentum of the previous weeks, breaking to new yearly highs. The move is thought to be largely driven by expectations of an ETF green light from our mate Gensler and his goons at the SEC.

A good proxy for the market’s expectation of approval is monitoring the GBTC discount, which has been steadily trending up and currently sits at just 12% (peak low was -48% for reference). $ETHE, the Ethereum Grayscale Trust, has shown a similar trend as well.

If you’re unfamiliar with GBTC, this is a good explainer. In short, GBTC and ETHE are closed end funds (CEFs). This means that the value of the trust (which holds underlying bitcoin) does not need to trade in line with the net asset value (NAV), because it lacks an arbitrage mechanism that ETFs have. If that’s poorly explained, don’t blame me, i’m working with a word count here.

Anyway, the takeaway is this: the discount to NAV shown by GBTC and ETHE is essentially a proxy for the probability of an ETF conversion being approved. A lower discount translates to the market pricing in a higher probability of conversion.

Two more important bits that have been somewhat underreported on in our opinion:

  1. Ordinal (NFTs on Bitcoin) activity has had another recent spike - the average tx fee on the Bitcoin blockchain was around $7 on Wednesday. For context, this was up from a low of $0.64 in August. An indication of the activity is reflected by the fact that 57% of the Bitcoin blockspace in the past 24 hours was used for ordinals transactions. This is great news for miners who are of course reaping the revenue benefits - fees accounted for over 20% of miner revenue yesterday (with the other 80% being of course from the block subsidy). It’s worth keeping an eye on this trend in our opinion, especially into the halving next year where the block subsidy will be cut in half.

  2. CME futures open interest has overtaken Binance’s this week for the first time. This is a function of both more interest from more traditional shops (who favor exposure via CME) and the cloud of uncertainty hanging over Binance given the interest the DOJ have shown in them.

Elsewhere in the market Solana (+10%) and Link (+32%) have been strong performers from the majors. As well as liquid staking protocols Rocketpool (+26%) and Lido (+25%). We recommend you keep an eye on $ETHBTC as a leading signal for continued altcoin performance.

$COIN, which for all of you who follow the Arch twitter account know is a fan favorite, has had another fantastic week. Like the aforementioned CME futures piece it gives a nice insight into how the boomers on Wall Street are viewing the crypto ecosystem as a whole. On the other hand, public miners had a red week in the markets, which is somewhat surprising given their usual higher beta relative to Bitcoin. One reason that again ties into ETF expectation is that historically, mining stocks were a Wall Street proxy for Bitcoin exposure - the market may be pricing in less reflexivity given less money going to purchase miners as a form indirect exposure post ETF approval.

Collated news from crypto markets

Collated news from legacy markets

The markets are known to rally through November and it is no different this time. The trend is your friend. The rally is into its second week with equities, rates and crypto - particularly, rewarding the risk-on trade. Even as Chinese data suggests more deflationary woes (driven by sharply lower pork prices) for the world's second largest economy and Germany enters recession, the rest of the world hangs on to the US stimulus to pile into equities.

There's little to stop the current rally in risk into the Thanksgiving period (still 2 weeks away). The tea-leaves are well-aligned with even oil prices falling by almost 10% in the last week. Before that, the major concern has/had been the eye-watering US debt financing requirement, but last week's surprise lower-than-expected funding announcement has really given a boost to the markets. What's not to like? Pain might come later and we think that this is a temporary lull and focus on the Treasury market but, for now, we would go with the flow.

It's worth noting that UBS managed to raise $3.5bn of AT1 debt, after $17bn was wiped out following the collapse and subsequent takeover of Credit Suisse. The timing perhaps was excellent given that yields have been declining and the 9.25% yield on offer were too good to pass on.

For next week, we would expect the rally to slow, and some profit taking to leave us range bound unless or until a new catalysts emerges to push us in either direction. Happy hunting.

Collated news from startup/tech markets

Big news this week with OpenAI’s dev day. Every announcement of theirs seemingly puts many startups out of business, as their product velocity is unparalleled.

Below are some highlights:

  • The introduction of GPT-4 Turbo, a new model with a context window of 128k (surpassing existing champion, Claude by Anthropic), and vision capabilities (GPT4V). This represents up to 300 pages worth of context.

  • The ability for people to build and publish custom “GPTs” assistants, with their own app store.

  • Addition of new text-to-image and text-to-speech models via API and slashed pricing across all models and input/output modalities.

Fintech and alternative assets are gaining some momentum in this market. There have been recent fundraising announcements for companies that are involved in financial services or software for alternative assets (more in the funding announcements below). We’re biased, but we think this space has massive potential and is widely underserved. Other’s seem to agree as well 🙂

Lastly, here are some select funding/M&A announcements from the week:

  • Bill.com is reportedly looking to acquire Melio for ~$2B

  • Craft Ventures announces $1.3B in new capital across two funds

  • Arch (don’t worry, not us), a software platform simplifying operations and reporting for alternative assets announced a $20M Fundraise

  • Qomodo, an Italy based BNPL + payment solutions provider for retailers announced a $37M pre-seed round (yes, you read that right!)

Arch updates

  • Give our latest blog a read - we explore how you can borrow against your liquid staked Ethereum

  • Stay tuned for next week’s edition where we will be launching beta access to a groundbreaking new product. Existing clients and newsletter subscribers will be first in line…

  • If you happen to be lounging around the New York City metropolitan area next Thursday, please come and have a brew with us at our SoHo Happy Hour co-hosted with Membrane Labs. You can RSVP here.