View from the Arch #12

BTC ETF inflows, China’s looming disaster, and a VC firm buys a hospital

January 19, 2024

This week was a bit of a weird one. Crypto markets didn’t trade well despite what should be considered a successful ETF launch, legacy markets had lots of geopolitical action and there was a surprising event in Tech markets.

This Week in Crypto

I want to make this section relatively short because there was a lot of action in other markets, so I will keep this confined mainly to ETF commentary.

How did the newly christened ETF do in its first week of trading? As per usual, I’ll turn to our pal Eric Balchunas over at Bloomberg for the latest data (correct as of 1/18):

Net inflows look pretty healthy at +1.2B (we want to look at the net because GBTC has seen significant outflows to products with cheaper fees - this is not new money). GBTC sellers fall into 3 categories:

  1. Those who were arbitraging the discount (no net effect)

  2. Those who are moving into cheaper products

  3. Those who are just selling

There’s no way to know what the breakdown of sellers looks like, but you would assume most are in the first two buckets.

Given this and the net inflow figure, you might think that BTC price action is somewhat surprising - after all, it’s been just 5 days and the ETFs already hold around 40% of the amount of Bitcoin as MicroStrategy. The most likely explanation is not that complicated or fancy - a general de-risking into what was a telegraphed sell-the-news event.

However, the promise of the ETF was never to be a one-hit wonder. In our view, the bottom line is two-fold:

  1. The ETF is a huge milestone and stamp of legitimacy for an asset that has been widely held in contempt by Wall Street. It is already the second-largest commodity ETF after gold, overtaking silver, in just 4 days. You can almost see the army of Wall Street analysts on their hands and knees repenting for their sins as their Lord and Saviour Larry Fink shills our bags.

  2. In the long run, you have a conduit for structural buy pressure. Always remember: Price is just a function of supply and demand at the margins. The halving affects supply, the ETF affects demand. As a reminder the halving (coming up in around 90 days) reduces the daily issued number of Bitcoins from 900 to 450 - meaning around $20M less of possible sell pressure. This is historically considered a significant structural flow change. So far we have seen $300M of daily buy pressure from the ETFs (net), we will of course expect this to be greatly reduced in time, but it gives some perspective on what effect it could have on demand at the margin.

A quick recap on the prices this week - this is quite clearly the worst week across the market since this newsletter started. Top performers were SUI (+5.0%), TIA (+7.8%), and BLUR (+11.7%). Bottom performers included OP (-25%), ARB (-22.5%), and LDO (-22%).

Crypto equities are similarly wrecked - Coinbase is 35% off its high and miners have all felt sharp corrections. We continue to believe that low triple-digit Coinbase offers long-term value.

News from Crypto Markets

This Week in TradFi

Chinese GDP growth came in at 5.2% for 2023, which is one of the lowest levels in a decade. China’s domestic retail sales for December (7.4% YoY) declined as well. The country's population decline accelerated in the year with 500k fewer births in 2023 (9 million total) than the previous year, promising a demographic disaster in the decades to come. With a property market in the dumps and goods deflation taking a stronger hold amidst an inadequate policy response thus far, 2024 could be considerably worse. A difficult global macro background won’t help China much either, given that external demand is likely to remain subdued.

The downward trajectory in the inflation rate in Europe stalled in December, and markets will be watching closely as to whether that's a blip or something more sinister. Either way, it's a wake-up call. Expectations are high for rate cuts across the Eurozone and BoE sometime in H1, but there might be calls for a pushback now by policymakers. This is a fine line, because the economic indicators point to a very difficult and declining macro situation across the Eurozone, with the latest indicator being the continued contraction in activity in the construction sector.

Elsewhere, Iowa took center stage on the U.S. political front, and New Hampshire assumes the mantle for next week. Meanwhile, the U.S. earnings season is underway. The big banks' earnings were a mixed bag and did little to help propel markets higher. It's quite likely that the equity markets will trade in a range and fail to break in either direction until some other catalyst provokes a move. U.S. retail sales came in well-ahead of expectations (0.6% MoM vs 0.4% MoM expected) in December. Rates have also backed up considerably over the past couple of weeks, with the 30-year UST yield passing 4.3% (more than 30bps higher this month already).

This week the markets were a mixed bag to contend with. The next week doesn't promise to be much better. There's no letting up in the Middle East, with the Red Sea shipping trade route still under threat. This diverts freight traffic and impacts the timeliness of goods reaching Europe from the Far East. Further geopolitical angst comes from news that Iran had struck bases in Pakistan for which there was retaliatory action by Pakistan. The threat of a wider Middle East conflict will likely leave the markets more risk-averse in the very near term as investors hesitate.

This Week in Tech

Aside from continued tech layoffs, this week had a rather unusual event: A venture capital firm announced it was buying a hospital in Ohio. Yes, you read that right!

General Catalyst announced its plans to buy Ohio-based health system, Summa Health. General Catalyst (GC) has long had healthcare ambitions beyond simply investing in startups. They publicly announced a subsidiary called HatCo last October to acquire a health system.

While there are many steps left before the deal closes, we think this is a masterstroke by GC. Let’s dig into two reasons below:

  1. GC becomes more full-stack in the healthcare chain, from operating a health system to incubating startups to investing in companies. They get to intimately learn about the various challenges health systems currently face. Healthcare is an incredibly large industry, with plenty of room for innovation. Operating a health system gives GC an edge with respect to both incubations and venture investments. Additionally, as a sector-agnostic venture firm, GC will be able to use their knowledge and information about advancements in other fields such as AI and Machine Learning to innovate in healthcare.

  2. GC opens up a distribution channel for their most promising portfolio companies. This not only provides a benefit to companies that GC already has an investment stake in, but also makes GC the most sought after investor for every healthcare founder. It’s tremendously hard to sell into health systems and having an investor that owns one is a huge benefit.

People from the outside enter healthcare bright-eyed and optimistic and then get beat down with all the incentive misalignments, bureaucracy, and regulatory complexities. We tip our hats off to GC for the vision and ambition and hope to see them succeed. We’ll keep a close eye on this and keep you updated if and when the deal closes. We’ve seen deals in-line with this trend in financial services with a group of tech veterans acquiring Lead Bank and former Plaid founder, William Hockey, buying Column Bank. It’ll be interesting to see how this trend follows in other similar industries:

SoftBank Vision Fund - where you at?!?

As usual, below are some fundraising announcements, M&A, and tech personnel changes that caught our eye:

Disclaimer: None of the above is financial advice, seriously.