Bloomberg Crypto Outlook – October 2019 Edition

Maturing Bitcoin Well Supported ‒ Bitcoin Maturing Process Accelerating; Growth Spurt Almost Done

‒ Just Like Gold, Bitcoin Is Consolidating Some of Its Gains

‒ Bitcoin Becoming an Adult; a Bright Future, Growth Spurt Over

‒ Tether, Libra and Yuan -- Bitcoin Positive, Alt-Coin Negative

‒ VanEck's Bitcoin `Non-ETF' Pushes Envelope as SEC Deadline Nears

CONTENTS

2 Overview

2 Bitcoin & Gold Revisit Support

3 Bitcoin Growing Up Fast

4 Tether, Bitcoin & the Yuan 4 'Not an ETF' Bitcoin Launch

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Bloomberg Crypto Outlook – October 2019 Edition

Data and outlook as of October 2 Learn more about Bloomberg Indices

Mike McGlone – BI Senior Commodity Strategist

BI COMD (the commodity dashboard)

Note ‐ Click on graphics to get to the Bloomberg terminal

Bitcoin Maturing Process Accelerating; Growth Spurt Almost Done Performance: Bloomberg Galaxy Cypto Index (BGCI) September -6.2%, 2019 +35.3% thru October 2 Bitcoin September: -14.4%, 2019 +124.1% thru October 2 (Bloomberg Intelligence) -- Bitcoin's price cage will keep narrowing with an upward bias and declining volatility into year-end, in our view. Strides in maturation are expected, with the transition from 2018's bear market complete and the realization that the youthful parabolic rally days are done. We expect the first-born crypto to perform more like gold. The trend is up in the quasi-currency -- revisiting support at the end of 3Q favors gains in 4Q. For most other crypto-assets, underperformance is the predominant theme likely to prevail. The success of Tether and other stable coins is sustainable, given they represent digital assets that can properly be used as currencies, since most cryptos are just too volatile and speculative. The plunging yuan, bond yields and increasing stock-market volatility are macro-economic Bitcoin tailwinds. Bitcoin & Gold Revisit Support Just Like Gold, Bitcoin Is Consolidating Some of Its Gains. A primary factor favoring the Bitcoin price in 4Q is ending 3Q close to a good support zone, in our view, and the situation is similar in gold. We expect both quasi-currencies to regain their supportive footings into the year-end amid favorable technical and fundamental drivers.

Bitcoin Likely to Recover With Gold. Bitcoin, like gold, will recover from its 3Q price dip, in our view. Returning to the parabolic rally days of old is unlikely as the first-born crypto matures into a digital version of the metal. Our graphic depicts Bitcoin nearing its upward sloping 12-month mean, yet the broader market is still trending lower. We expect this outperformance to endure as Bitcoin distinguishes itself as a quasi-currency -- like gold -- that's not subject to a primary authority.

Most the rest of the crypto-assets remain in an an enduring hangover, struggling to find use-cases amidst excessive volatility and plenty of supply competition. The rapidly increasing market cap of Tether, the primary stable coin, and the trend toward new stable coins such as Libra represent the future of most crypto assets other than Bitcoin, in our view.

Bitcoin Visiting Support, Broad Market Still Heavy

Appreciating Bitcoin Riding the Macro Wave. Some key Bitcoin more macroeconomic-orientated price companions that bottomed last year are in early recovery days, in our view. Gold bottomed in August, the Bloomberg Barclays Global Negative Yielding Debt Index in October and Bitcoin in December. Our graphic depicts increasing stock-market volatility from near-record lows in 1Q18 as a primary leading indicator. If mean reversion typical of volatility is a guide, these trends have room to run. The historic mean for the S&P 500 Volatility Index (VIX) 100-week average is about 19 vs. 15.6 on Oct. 2. Bitcoin Has Some Strong Tailwind Companions

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Bloomberg Crypto Outlook – October 2019 Edition

Similar to the VIX, also about 1Q18, the Chinese yuan peaked in value vs. the dollar and has been declining since. The depreciating currency can be considered an early macroeconomic warning and extols the benefits of diversification, which is supportive of Bitcoin. Bitcoin Edge vs. Alts, Akin to Gold Over Commodities. Outperformance of Bitcoin vs. altcoins should endure. Much like gold's standing vs. commodities, Bitcoin is gaining standout status among peers in an increasingly favorable macroeconomic environment with recovering stock-market volatility. Fundamental support factors for quasi-currencies that aren't subject to a primary authority -- plunging bond yields and central-bank easing -- trickle down from volatility reverting higher in the equity market.

Bitcoin & Gold Shine With Rising Equity Volatility

Our graphic depicts the strong performance of Bitcoin vs. the Bloomberg Galaxy Crypto Index. It's similar for gold vs. the Bloomberg Commodity Spot Index. The bottoming VIX Volatility Index 100-week average has acted as a key inflection point for similar in gold and Bitcoin prices.

Bitcoin Growing Up Fast

Bitcoin Becoming an Adult; a Bright Future, Growth Spurt Over. The Bitcoin maturation process will accelerate into the year-end as volatility declines in a more subdued price-appreciation process, in our view. Transactions and addresses, key price indicators that flashed warnings when the digital asset was above $10,000, appear comfortable at about $8,000. Bitcoin Is Just About Right Hovering Near $8,000

Transactions and addresses indicate the Bitcoin price in early October is neither too hot nor too cold. Our most robust underlying Bitcoin price companions -- adjusted transactions and addresses-used from Coinmetrics -- have settled into levels more consistent with about $8,000. Last year, these market metrics were precedent for the bear market and more recently, didn't endorse sustaining above $10,000. Our primary takeaway of the current landscape is the Bitcoin volatility-taming process will progress into year-end. Dips

toward $6,500 should encounter good support and good resistance will be found on rallies toward $10,000.

Not Too Hot or Too Cold in Early October

The initial euphoric transition to a bull from a bear market is over, which should lead to an extended consolidation period, but with positive bias for similar reasons as gold. Volatility to Further Decline as Bitcoin MaturesReturn to Top. Bitcoin is well on its way to becoming a digital version of gold, in our view. Price volatility should continue to decrease as the crypto becomes more stable. The Sept. 26 reading is about double the all-time low (October 2015) of 41% in 180-day volatility. It should be a matter of time to breach this low, which signaled the launch of the 2015-17 bull market. Increasing institutional interest and vehicles for exposure -- futures, options, Bakkt -- are part of the maturity process. Prices appear to be increasingly caged, with $8,000-$12,000 marking the majority of the range's bell curve. A Friendly Trend - Declining Bitcoin Volatility

Bitcoin 180-day volatility may see new lows this year. Rapidly rising prices have been the primary driver of increasing volatility. We think the best of the parabolic-rally days are over, with Bitcoin becoming more mainstream.

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Bloomberg Crypto Outlook – October 2019 Edition

Tether, Bitcoin & the Yuan Tether, Libra and Yuan -- Bitcoin Positive, Alt-Coin Negative. There's little to stop Bitcoin price-supportive and broad crypto-market repressive trends toward stable coins and the depreciating yuan. The rapid advancement in market-cap rank among crypto-assets of the primary stable coin, Tether, emphasizes issues with most volatile and highly speculative alt-coins and the attributes of Bitcoin. Tethered -- Depreciating Yuan, Appreciating Bitcoin. Favorable trends in the market cap of Tether and Bitcoin price will endure, supported by a depreciating yuan, in our view. The primary stable coin and fourth-ranked crypto-asset, according to Coinmarketcap at the beginning of October, Tether has advanced from about 16 at the end of 2017 on an almost 9% decline in the Chinese yuan and 80% loss in the Bloomberg Galaxy Crypto Index. The success of Tether and increasing focus on stable coins are setting the tone for the future of most crypto-assets, which are too volatile to be used as currencies.

Yuan Depreciating - Tether, Bitcoin Appreciating

Bitcoin, like gold, should keep gaining recognition as the stand-out independent store-of-value digital asset. Escalating trade tension, slowing Chinese economic growth, unrest in Hong Kong and the depreciating yuan are incentives for currency diversification. Stable Coin Trend Enhances Value of Bitcoin. Increasing interest in stable coins is widening the disparity between Bitcoin and most highly speculative digital assets known as alt-coins, in our view. The dominant stable coin, Tether, is blazing the trail for Facebook's stability-focused Libra cyptocurrency and others. The rapidly increasing market cap of Tether and focus on stable coins exposes the fallacy of many crypto assets masquerading as currencies. Tether and Libra enhance the value of Bitcoin in its move toward becoming a digital version of gold.

Tether Enhances Bitcoin Value, Pressures Alts

Similar to gold, Bitcoin towers above peers. Its computing power (hash rate) surpasses all others and is still increasing. Our graphic depicts Bitcoin gaining favor in the midst of supportive macroeconomic conditions vs. the Bloomberg Galaxy Crypto Index. 'Not an ETF' Bitcoin Launch VanEck's Bitcoin `Non-ETF' Pushes Envelope as SEC Deadline Nears. Contributing Analysts James Seyffart and Morgan Barna (Strategy)

A Bitcoin ETF isn't likely to arrive on U.S. exchanges in 2019, primarily due to SEC concerns about price manipulation and unregulated trading. VanEck withdrew and sidestepped the agency's approval process by launching a 144A Bitcoin fund. Bitwise and Wilshire still await SEC decisions on their Bitcoin ETF proposals. Bitwise in Play as Wilshire Delayed. Contributing Analysts Nathan R Dean (Government)

Despite being scheduled to hear back from the SEC in October, VanEck and SolidX withdrew their application for a Bitcoin ETF on Sept. 13. VanEck likely wouldn't have done so unless it saw almost zero chance of approval. Bitwise and Wilshire Phoenix still await SEC decisions, with Bitwise's expected around Oct. 13. Wilshire's proposal was delayed by the SEC on Sept. 24 and could be put off until Feb. 26. Its ETF would hold a combination of short-term Treasuries and Bitcoin to lessen volatility, while Bitwise's product would hold only Bitcoin. Being first to market in a category is advantageous for gathering assets.

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Bloomberg Crypto Outlook – October 2019 Edition

Bitcoin ETF Race

Institutions Only for VanEck's 144A Fund. The VanEck SolidX Bitcoin Trust 144A Shares (XBTCZ), launched on Sept. 6 for over-the-counter trading, is off-limits to most investors. As 144A securities, the shares can only be traded by Qualified Institutional Buyers (QIBs). To qualify as a QIB, institutions must manage $100 million in assets. The product is relatively costly, with a 2.9% expense ratio, comprising a 2% management fee and 0.9% insurance fee. Its open-ended structure provides the ability to create and redeem shares at net asset value.

XBTCZ Description Page

The product was likely launched to prove to the SEC that a functioning Bitcoin ETF is plausible. Some Similarities With Grayscale's GBTC. The VanEck SolidX Bitcoin Trust 144A Shares (XBTCZ) has been compared with the $2.4 billion Grayscale Bitcoin Trust (GBTC). Though both hold Bitcoin and trade OTC, that's where the similarities end. GBTC operates akin to a closed-end fund, while XBTCZ is structured like a traded open-end fund for institutions. While GBTC allows for creations, it can freeze that process.

Grayscale's GBTC vs. VanEck SolidX's XBTCZ

If the SEC denies all current Bitcoin ETF proposals, XBTCZ may garner interest from funds and institutions seeking to avoid the lockups and high premiums associated with GBTC. But it would be difficult to undermine GBTC's liquidity. If an ETF is approved in the next month, XBTCZ is likely to fade away.

Bitcoin ETF a Matter of When, Not If. Issuers have made progress in swaying the SEC on a Bitcoin ETF, but perhaps not yet enough to win approval, agency Chairman Jay Clayton said in an interview in September. He cited concerns surrounding the custody of crypto assets, as well as their primary trading on unregulated exchanges. Custody concerns were spotlighted several months ago and we suspect they've largely been resolved with institutional-level custody providers such as Bakkt and Fidelity.

Website

CME's Bitcoin Options a Positive Sign. CME's plan to allow options trading on Bitcoin futures in 1Q is another positive sign for institutional and regulated Bitcoin volume. The SEC has made clear that it's concerned about Bitcoin price manipulation on exchanges without any regulatory oversight or surveillance. Growing volume on regulated exchanges may increase the likelihood of a Bitcoin ETF approval.

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Bloomberg Crypto Outlook – October 2019 Edition

Strong CME Bitcoin Futures Open Interest & Volume

CBOE stopped listing Bitcoin futures in March, clearing the path for CME to extend its dominance of the market. GBTC's Biggest Drawback Is Its Premium GBTC NAV vs. Price: Premium as High as 130%

{CRYP} Page on the Bloomberg Terminal (5pm NY, Oct 2.)

{BI COMD} Cryptos, Under Data Library (5pm NY, Oct 2.)

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Bloomberg Crypto Outlook – October 2019 Edition

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