$BTC (+0,81 %)
New control loops through institutions? 🔄
Bitcoin is a global, self-regulating system that is constantly growing and adapting. I have already written an article on the economic and technical control loops of Bitcoin, which you can find here: https://getqu.in/J56y9P/
The Bitcoin price has risen sharply in recent weeks and we are currently close to the magical $100,000 mark. Recently, on November 19, options trading also started for the Bitcoin Spot ETFs approved in January and the shares of the company of Bitcoin giga-bull Michael Saylor $MSTR (+2,08 %) has seen incredible gains in the meantime, rising more than 10% for several days in a row, resulting in a valuation of three times its Bitcoin holdings...
You're probably thinking to yourself "Get to the point and don't start writing a tabloid article here!" - as @Ash would say now: Rightly so!
That's why I'll cut a long story short: I think new, very powerful, control loops of institutions are crystallizing, which once again interlock perfectly. And that's exactly what I want to explain to you in this article 🫡
The flywheel from MicroStrategy🛞
What exactly is Saylor or MicroStrategy playing at?
(1) Raising capital
MicroStrategy uses various methods to generate new capital. They issue new shares on the one hand and convertible bonds on the other.
Issuing new shares is relatively self-explanatory. Convertible bonds mean that they issue normal bonds, so to speak - but at an interest rate close to 0%. In return, however, the buyers of the convertible bond receive an option to exchange the bonds for Microstrategy shares at the end of the term - at a predetermined price. Investors who expect Bitcoin to rise and Microstrategy's share price to increase are therefore willing to provide Microstrategy with their capital at low interest rates, as they hope to receive Microstrategy's shares at a greatly reduced price in the future.
(2) Bitcoin purchases
They use this capital to buy Bitcoin - and not in short supply. Over the next 3 years, Microstrategy wants to buy 42 billion dollars worth of Bitcoin in this way. Microstrategy is thus reducing the supply of Bitcoin on the market. The purchases are effective in terms of publicity, other companies may want to imitate Microstrategy, etc.
What do I mean by that? These massive purchases cause the Bitcoin price to rise.
(3) Increase in the value of the company
The rising Bitcoin price increases the value of MicroStrategy's Bitcoin holdings. As a result, the share price of MicroStrategy itself also increases.
(4) Raising capital again
With this increased company value, MicroStrategy can raise capital again (issue new shares or convertible bonds again) and the game starts all over again.
The options market
With the launch of options on the Bitcoin ETFs, a new, gigantic market with a daily trading volume of around 2.4 trillion dollars hits Bitcoin.
What is the Bitcoin options market?
Options are basically bets on the future price of Bitcoin. Most of you will probably know this, but here's a brief explanation:
- Call options: You secure the right to buy Bitcoin at a fixed price in the future. You are therefore betting on rising prices.
- Put options: Here you secure the right to sell Bitcoin at a fixed price. You are therefore betting on falling prices.
On the first trading day of the options $1.9 billion in volume was traded - and 80% of these were call optionsi.e. bets on rising prices.
Delta hedging by market makers
Now it gets exciting. As soon as market makers (the providers of these options) sell options, they have to hedge - this is called delta hedging. How does this work?
Hedging through Bitcoin purchases
When you buy a call option, the market maker has to make sure that he can also deliver Bitcoin if the price really rises. To do this, he buys some of the required Bitcoin in advance to hedge his position.
(1) Price increase
These purchases also drive up the price of Bitcoin - especially if many call options are bought (as is currently the case).
(2) Adjustment of the hedge
If the price of Bitcoin continues to rise, the value of the call options increases. The market maker has to buy even more Bitcoin in order to hedge further, which is again a self-reinforcing effect.
-> The hedging of the call options themselves therefore leads to price increases - especially in the case of an absolutely limited commodity such as Bitcoin - which the market makers must in turn protect themselves against - by doing what? Buy more Bitcoin, of course!
The synergy of the flywheels
These two mechanisms - MicroStrategy and the options market - reinforce each other and create a dynamic that can drive the price of Bitcoin higher and higher.
(1) MicroStrategy's purchases drive the Bitcoin price
Every MicroStrategy purchase removes available Bitcoin from the market. The scarce supply causes the price to rise.
(2) Rising prices increase the demand for options:
Investors see the price rise and bet on further price gains via call options.
(3) Delta hedging increases purchases:
Market makers buy Bitcoin to hedge their risks, which drives the price up further.
And now imagine if the US were to actually create a strategic Bitcoin reserve... that would probably result in an absolute omega flywheel😂
I don't currently believe that this will happen any time soon, but who knows👀
Conclusion: A new era for Bitcoin
The institutional control loops show how Bitcoin is being driven by new market mechanisms. With companies, financial markets and possibly soon states actively participating, Bitcoin is on the cusp of a new era.
The only question is whether these flywheels could turn the other way in a potential next bear market...
I hope I have been able to give you some insight into the "institutional control loops". Do you currently see other control loops? Then please write to me at Kommentare⤵️
Have a nice evening and here's to cracking the 100k-Marke✌️ soon
