Monthly Manager Commentary: January 2024

Multi-Strategy Fund Performance

The ETF approval and subsequent trading caused higher than normal volatility in January. The sell off from GBTC not only impacted bitcoin’s price, but caused more long tail assets to drop to an even greater extent. BTC rebounded towards the end of the month but alt coins lagged in their recovery as they typically do. That led to underperformance in our Fundamental Growth portion of our portfolio. Our algorithmic trading strategy started the month off strong and finished well. However, the algorithms struggled during the middle of the month due to the unusual trading activity in the market from the sell off of GBTC. With the GBTC overhang now behind us, there looks to be a more supportive trading environment and favorable macro backdrop heading into the rest of Q1.

Market Commentary

The bitcoin ETFs that began trading drove most of the price action this past month. Heading into the year, bitcoin’s price was climbing in anticipation of an ETF approval. On January 10th, the SEC approved 10 spot bitcoin ETFs that began trading the following day.

Nine of those ETFs were new sponsors starting with $0 in AUM prior to them launching. The tenth was GBTC, an existing trust run by Grayscale that originally launched in 2013, already contained $27 billion worth of bitcoin, and converted to an ETF rather than starting from scratch. Grayscale experienced over $6 billion flow out of its ETF in the first two weeks of its trading. That outflow from GBTC was initially greater than the inflow into the other ETFs which led to a net selling of bitcoin in the market which caused bitcoin’s price to dip by as much as 15% mid month. The sell off sparked some liquidations and fear in the market and most other cryptoassets fell along with BTC.

The reason for the outflow from GBTC was threefold. First, Grayscale decided to keep their fees significantly higher than all other ETFs. For anyone that held GBTC directly and wanted to switch to a lower fee ETF, it’s likely they haven’t reinvested that capital back yet because of the wash trade rule. After 30 days, it’s possible we will see some of that outflow come back into other lower fee ETFs. Second, because GBTC’s discount reached as much as 47% in the last couple years, there were many investors who bought GBTC at a steep discount not because they wanted to invest in bitcoin, but because they were betting GBTC would eventually convert to an ETF, the discount would go to zero, and they would capture that spread. That is in fact what happened. Once this group realized the gains from the discount going to zero, they sold their position for a profit. Third, FTX owned a fair amount of GBTC and reports have come out that they have sold at least $1 billion worth of GBTC since its conversion to an ETF as part of its bankruptcy process.

Despite all being valid reasons to sell GBTC, none of them had anything to do with bitcoin’s fundamentals or adoption. This is why Nickel always believed the drop in prices during the middle of January was a short term phenomenon and once that sell pressure subsided, we would see the market rebound. That’s exactly what happened. After seven days of trading, the outflows from GBTC began to decrease each day. At the same time, the other ETFs were still seeing constant capital inflows. By the end of the month there were finally net inflows of capital to the ETFs which meant net buying of BTC in the market. With the GBTC overhang now behind us, bitcoin rebounded in the last week of January which we anticipate will have a spillover effect into the rest of the crypto markets.

With many of the factors that pushed crypto’s performance to the downside now exhausted, there looks to be a more supportive trading environment and favorable macro backdrop heading into the rest of Q1.

The Nickel Team