The market correction in equities this week, caused by extreme interest rate volatility and a rise in long term rates as long dated treasuries sold off, has spilled into crypto. This is an interesting case of flow dynamics vs fundamental story.

As the long end of the yield curve steepens, it puts significant pressure on growth equity stocks. These are companies that might not be making a lot of profits right now, but they are showing excellent growth metrics and they are projected to be profit behemoths someday in the future. But those profits will likely come years from now. When long dated interest rates are low, the discounted cash flow fundamental value model uses a very low discount rate, so these projected future cash flows are worth quite a bit right here and now. This acts as a justification for the stocks to trade at extremely high PE multiples.

Recently, expectations that inflation will start to pick up  sooner than expected have taken ahold of the market. The read through is that as inflation picks up, the Fed will have no choice but to start to raise interest rates, and therefore rate hikes might come much sooner than Chairman Powell would like.  As long term interest rates pick up, these expected cash flows years from now need to be discounted more, and the multiples that the stocks are trading for need to contract. This has driven a selloff in growth technology stocks over the past two weeks or so.

One of the largest and most popular ETF managers, Cathy Wood’s ARK family of ETFs, is a large holder of baskets of these growth technology stocks. As such, these ETFs have come under significant pressure and are seeing outflows of capital. What does this mean for crypto? On its face, it shouldn’t mean much, other than that there is of course some asset correlation and many investors who might see this as a sign are reducing their positions in everything, crypto included.

But one particular fund, ARKW, the ARK Next Generation Internet ETF, shows us the link between tech stocks and BTC. ARKW’s second largest holding is GBTC, comprising nearly 5% of the ETF. As funds flow out of the ETF due to equity market dynamics, the fund (or market makers who are trading the ETF vs the basket of stocks it holds) will be selling the fund holdings aggressively. This type of activity links BTC directly to tech stocks during times of large inflows or outflows.

The result was at first a significant collapse in the premium that GBTC usually enjoys over the NAV of the BTC held in the trust. For the past months, that premium has usually stood around 6-8%. Yesterday it evaporated and turned negative under selling pressure, partially from regular retail traders but likely largely from ARKW. Once that premium evaporated, it started to drag BTC lower, as trading firms stepped in to buy the GBTC shares at a discount and sell BTC futures and spot as hedges.

So, pressure in tech stocks has caused forced selling in GBTC, which has put pressure on BTC. But the whole thing that kicked this off is that inflation expectations are picking up, which of course should be a reason to buy BTC, not to sell it. In my opinion, this has created a buying opportunity, because a fundamental story that should be BTC positive has the short term secondary effect of depressing BTC prices. We’ll see how all of this shakes out, but chaos often creates opportunity.

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