Day: August 21, 2024

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Bitfarms Expands Through Acquisition

Bitcoin miner Bitfarms Ltd. (NASDAQ:BITF) has announced a strategic move to acquire its rival, Stronghold Digital Mining Inc. (NASDAQ:SDIG), for $175 million in a combination of stock and assumed debt. The offer values Stronghold at $6.02 per share, a substantial premium compared to its last closing price of $2.93. This acquisition reflects Bitfarms’ strategy to diversify its revenue streams beyond cryptocurrency mining.

The deal includes $125 million in Bitfarms stock, offering 2.52 shares of Bitfarms for each share of Stronghold. This represents a 71% premium over Stronghold’s 90-day volume-weighted average price on the Nasdaq as of August 16. Following the announcement, Stronghold’s shares saw a premarket increase of 64% to $4.80, while Bitfarms’ shares decreased by 7% to $2.19.

Strategic Moves in the Bitcoin Mining Industry

The Bitcoin mining industry is facing significant challenges, including a 50% reduction in the block reward that miners receive for verifying transactions, effective April 2024. This halving event pressures miners to cut costs, particularly in power consumption, and to invest in more energy-efficient equipment. The industry is adapting by seeking alternative revenue sources such as high-performance computing (HPC) and artificial intelligence (AI) processing.

Bitfarms’ CEO Ben Gagnon highlighted that the acquisition of Stronghold is a crucial step in securing the company’s future. The move aims to enhance Bitfarms’ vertical integration with power generation, expand its energy trading capabilities, and secure high-potential sites for HPC/AI applications with significant expansion potential. This diversification is intended to increase long-term shareholder value.

Ongoing Industry Consolidation and Competition

Bitfarms is also navigating increased competition from Riot Platforms Inc. (NASDAQ:RIOT), which had previously attempted to acquire Bitfarms in June 2024. Riot Platforms chose instead to overhaul its board and increase its stake in Bitfarms to nearly 19%, with plans for future takeover attempts. Meanwhile, Stronghold had announced in May that it was exploring strategic alternatives, including a potential sale.

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Institutional Investments in Bitcoin ETFs

Bitcoin’s reputation as an investment asset has evolved significantly, moving from a symbol of extreme volatility to a more stable investment option over the past decade. Notably, Goldman Sachs Group Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS) made substantial investments in spot bitcoin exchange-traded funds (ETFs) during the second quarter of 2024, according to recent regulatory filings.

Goldman Sachs reported acquiring approximately $418 million in various bitcoin ETFs, as detailed in its quarterly 13-F filing with the Securities and Exchange Commission (SEC). This includes a significant $238 million stake in the iShares Bitcoin Trust (IBLC), representing nearly 7 million shares as of June 30. Goldman also invested in the Fidelity Wise Origin Bitcoin ETF (FBTC), Invesco Galaxy Bitcoin ETF (BTCO), and smaller amounts in other newly launched Bitcoin ETFs.

Morgan Stanley disclosed a $188 million investment in BlackRock’s iShares Bitcoin ETF (IBIT), comprising 5.5 million shares as of June 30. The bank also held smaller stakes in the Ark 21Shares Bitcoin ETF (ARKB) and the Grayscale Bitcoin Trust (GBTC).

Insights from Institutional Filings

The 13-F filings offer insights into institutional investor positions at the end of each quarter, though they may not represent current holdings. Despite the increasing presence of institutional investors, ETF issuers and analysts indicate that individual investors still dominate the market.

Several hedge funds have adjusted their positions in bitcoin ETFs. Hunting Hill Global Capital reduced its stakes in Grayscale and Fidelity ETFs but increased its investment in the Bitwise Bitcoin ETF (BITW) and established a new position in BlackRock’s ETF. Millennium Management LLC also modified its holdings, reducing its positions in three of the five bitcoin ETFs it initially held while boosting its investment in the Bitwise product. Overall, Millennium’s investment in bitcoin ETFs decreased from $2 billion at the end of the first quarter to approximately $1.15 billion by the end of the second quarter.

Why the Growing Interest?

Since the launch of the first Bitcoin ETFs on January 11, the asset has surged about 35%, even reaching a level of $70,000. The introduction of these ETFs marks a significant milestone in Bitcoin’s evolution, offering both retail and institutional investors a regulated and accessible investment vehicle. This development enhances liquidity and contributes to price stability.

Market observers suggest that an increasing number of long-term investors are entering the market for diversification and asset allocation purposes, recognizing Bitcoin’s potential as a store of value and hedge against traditional financial assets.

Evaluating Safety and Volatility

Despite recent gains and growing mainstream acceptance, Bitcoin remains a complex asset with the potential for significant price swings. Its historical volatility is an important consideration for investors.

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Crypto Stablecoins Enter the Treasury Market

In an unexpected development, traditional US Treasury securities are now connected with the volatile cryptocurrency market. Issuers of crypto stablecoins, which are designed to maintain a one-to-one value with the US dollar, have emerged as significant participants in the Treasury market. These issuers are seeking the most secure and liquid assets to back their tokens.

Market Skepticism and Institutional Comparison

For proponents of cryptocurrency, this intersection with Treasury securities represents a milestone, reflecting the industry’s efforts to build stronger ties with the US government. Tether Holdings Ltd. (USDT), the issuer of the largest stablecoin, has asserted that it can support US and global financial stability amid rising US debt and decreasing foreign investments. However, the reality often falls short of these claims. Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics and former Federal Reserve staffer, believes that while Tether’s $81 billion in Treasury bills is noteworthy, it remains minor compared to the overall Treasury market, which is measured in trillions of dollars.

Stablecoins account for only about 1% of Treasury bill purchases. The $6.19 trillion money-market mutual fund industry remains the largest buyer of these bills, holding approximately $2.4 trillion in government debt. This demand is expected to grow as new regulations impose liquidity fees during financial stress. Similarly, corporate giants like Berkshire Hathaway Inc. (NYSE:BRK.A) overshadow stablecoin issuers, with Berkshire increasing its T-bill holdings to $234 billion in the second quarter, nearly three times Tether’s holdings. The total market capitalization for stablecoins is around $167 billion, with Tether representing $117 billion, according to CoinGecko.

Future Prospects and Legislative Implications

The future impact of stablecoin issuers on the Treasury market will depend on the growth of the cryptocurrency sector and potential Congressional legislation. Stablecoins are widely used in crypto markets as a proxy for the dollar, offering stability during market fluctuations or enabling investments in decentralized finance platforms. Their popularity is growing in emerging economies, with notable premiums paid for stablecoins in countries like Argentina. By 2027, businesses and consumers in these regions are expected to pay $25.4 billion in premiums for stablecoins, according to the Centre for Economics and Business Research (CEBR).

JPMorgan Chase & Co. (NYSE:JPM) strategists suggest that demand for government debt from stablecoins might increase if Congress enacts legislation requiring tokens to be backed by high-quality liquid assets (HQLA), including Treasury bills. Despite these prospects, experts in the fixed-income market remain doubtful about significant impacts. Lawrence Gillum, chief fixed-income strategist at LPL Financial, argues that stablecoin purchases are unlikely to substantially influence broader market trends or yield movements due to supply concerns and other market forces. However, any additional demand from the crypto sector could benefit Treasury issuance.

Tether’s CEO, Paolo Ardoino, is optimistic about the company’s future role in the Treasury market. He expects that Tether will become the largest holder of three-month T-bills in the coming years and might eventually hold a substantial portion of all T-bills. Tether aims to be fully backed by US T-bills, with only excess reserves invested elsewhere.

The evolution of Tether’s involvement in the Treasury market represents a significant shift from its early days, marked by skepticism over its reserve backing. After settling allegations of reserve misrepresentation with the New York Attorney General and the Commodity Futures Trading Commission (CFTC), Tether has developed a strong relationship with Cantor Fitzgerald LP, a major player in the Treasury market. Cantor Fitzgerald’s thorough due diligence has helped reduce skepticism surrounding Tether.

Despite these advancements, Tether’s impact on the Treasury market remains modest in the context of US debt, which totals $27 trillion, with Treasury bills comprising about one-fifth. The Congressional Budget Office (CBO) projects that US debt will reach $48 trillion by 2034. According to Mark Sobel, former Treasury official and US chairman at the Official Monetary and Financial Institutions Forum, Tether’s holdings are significant but not a major factor in deficit funding. He notes that there are likely much larger issues for the Treasury to address.

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As Bitcoin’s price stabilizes near its previous all-time highs, many are questioning whether the current bull run has come to an end. However, historical data indicates otherwise. The market is presently testing support at the “fair value band” for the second time since the recent halving event. This pattern is reminiscent of the 2016 and 2020 cycles, during which Bitcoin similarly moved sideways before experiencing a significant breakout. With Bitcoin priced at $55,000 just 124 days post-halving, it is premature to declare the bull run finished. Historically, substantial price surges have followed around 160 days post-halving.

Whale Accumulation and Liquidity Signal Strength

Institutional investors, particularly Bitcoin whales, are demonstrating strong confidence in the market. Wallets holding between 100 to 1,000 Bitcoin have accumulated an additional 100,000 Bitcoin in just the past six weeks. This increased accumulation, occurring as Bitcoin consolidates at its fair value, suggests that large investors are positioning themselves for a forthcoming upswing. Additionally, rising global liquidity often precedes major Bitcoin price movements. This pattern, observed in past bull runs, indicates that a significant upward move could be on the horizon.

Institutional Adoption and Dollar Weakness

Institutional adoption of Bitcoin is gaining momentum, with approximately 60% of the largest U.S. hedge funds now holding Bitcoin exposure. This growing acceptance further establishes Bitcoin’s legitimacy in traditional finance. Companies like MicroStrategy, which shifted its strategy to holding Bitcoin as treasury, have seen substantial growth since 2021. Furthermore, the strength of the U.S. dollar plays a crucial role in Bitcoin’s price dynamics. Historically, Bitcoin’s price has surged when the dollar weakens. Current trends in the dollar index suggest a potential breakdown, which, combined with increasing institutional and retail adoption, implies that Bitcoin’s bull market remains robust and is likely to accelerate in the coming months.

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