Bitcoin ETFs, Single-Stock Funds, and the Layoff Season

Author: Marco Santanche

Here's a round up of what happened last week:

Did the BTC ETF frenzy fizzle out? Last week witnessed the SEC's approval of Bitcoin ETF licenses for important providers like Blackrock and ARK.

Despite initial enthusiasm, market response was muted, with a correction in pricing. The ETF, debuting at $27.53, dropped to $24.97, marking over a 9% decline. Some of the major websites in the space are already questioning if this should be a bear sign, rather than the bullish marker everyone expected.

However, it's premature to draw conclusions from the initial trading sessions. Typically, ETF prices stabilize after a few weeks from launch, particularly for news of this magnitude. The current volatility reflects initial speculations on direction, volume, and sentiment. Additionally, while there are considerable outflows from miners, this doesn't necessarily relate to the performance of the ETF. The shift of funds from mining to the ETF was significant, attempting to capitalize on the hype, though it didn’t yield expected results.

Is this a case of hype or hope? The situation appears to be a classic case of 'buy the rumor, sell the news,' as investors aimed to lock in the profits from the recent price surge in anticipation of the approval. Nonetheless, this doesn't imply a misjudgment of the impact of new traders on Bitcoin. The recognition of cryptocurrencies as valuable assets remains a great news for the market. Considering various factors like halving, easing monetary policy, and massive ETF inflows, the outlook for this year remains optimistic, potentially matching or exceeding last year's performance.

Did you miss single-stock ETFs? In the BTC ETF saga, many might have lost the launch of another new class of products: single-stock funds. These funds are a levered, sometimes inverse (short) product that tries to expose investors to the power of derivatives, amplifying returns (and risk). Some of the most active companies in the space include REX Shares and Tuttle Capital Management.

The high return potential of these funds, however, is not a straightforward reflection of the risks involved. When stocks go down and an investor has a levered exposure to them (i.e. they borrowed money to purchase more stocks than they could afford), the downside risk can lead to liquidations, which means, a 50% loss (in a 2x leverage fund) cannot be recovered. While normally we do not reach a 100% loss, with leverage the liquidation risk is much more likely.

So why did these companies collect about $5.9B last year? The allure lies in the potential for high returns, appealing to investors keen on short-term, high-stakes strategies. While these products are clever from a marketing standpoint, they may not be revolutionary. Their short-term nature and daily rebalancing needs limit their suitability for long-term growth strategies. Most importantly, they might attract uninformed investors who, attracted by the potential, disregard or underestimate the downside potential. Diversification is not necessarily good, but concentration is surely a bad idea, if one has no control over the specifics of the company.

Is layoff season ahead? A number of companies are facing further layoffs, prolonging a trend that lasted a few months now. Google had to let go an unconfirmed number of employees (probably around a thousand) in their Google Assistant and Core Engineering teams, in addition to their Hardware team responsible for Pixel, Nest and Fitbit.  Other tech companies, including Discord, Twitch and Unity, cut a major percentage of their staff, ranging from 15% to 25%.

But this is not limited to tech. Citigroup will have to cut 20,000 employees over the next two years due to the past quarter losses. Pixar, the animation studio at Disney, will also see a cut up to 30% of their headcounts. NBC news is also letting their employees go.

So what's next for the market? The current economic landscape is marked by high interest rates and peak inflation, presenting significant challenges. But the job market is typically sticky and adapts over time to the new regime. The market is expecting a monetary easing in 2024, with the Fed cutting rates, inflation falling and the job market further strengthening. Yet, the repercussions of the hiring and expansion boom experienced in 2021 and 2022 must be addressed. The biggest challenge will be to overcome the disparity between salaries and prices. Real wages are in the red, with Japanese salaries declining for the 20th consecutive month, while Europe follows as well, but the US is witnessing a modest growth which is outpacing inflation. The hope is that the interest rate decline will see a faster impact on prices and eventually that will bring good news to the entire economy.