Summary Recent USDJPY carry trade sell-off highlighted liquidity risks, but Bitcoin's recovery indicates market overreaction. A repeat of the situation doesn't look likely as it won't come as such a big surprise. Bitcoin is consolidating near its all-time high, showing a bullish cup and handle pattern. A breakout should be setting up into the end of the year. Bitcoin continues to consolidate just under its all-time high after surviving the carry trade sell off. This article looks at why it may be setting up a break higher, and why the Fidelity Wise Origin Bitcoin Fund ETF ( FBTC ) is one of the better ways to own Bitcoin. First: A Word on the Risks Most Bitcoin investors will be aware of the main risks associated with Bitcoin and with cryptocurrencies. These are volatile assets. However, the USDJPY carry trade was perhaps not something everyone considered until very recently. It's not that the carry trade has any specific links to Bitcoin; rather, it's the need for liquidity that particularly targeted Bitcoin and other crowded trades such as Nvidia ( NVDA ) and the "Mag 7" stocks. Much of the carry trade is funded by debt. Traders borrow Yen at a very low-interest rates and buy dollars and US Treasuries. When the BoJ hiked rates at the beginning of August, it just so happened US yields fell sharply at the same time on growth fears, which made the carry trade less attractive and more expensive. To make matters worse, USDJPY dropped significantly, so the Yen-denominated debt required more dollars to pay back. To cut a long story short, traders involved in the carry trade were in trouble and with USDJPY down over -3% on the morning of Monday, August 5th, they desperately needed liquidity. This started during the Asian session, and the Nikkei was particularly hit hard - at one stage it was down -13%. Bitcoin spot was also an easy source of liquidity, especially ahead of the US open, and it traded down -10% in the early morning. Both Bitcoin and the Nikkei made a large bounce later that session, as did most other assets, and the subsequent recovery in August suggests the moves early in the month were an overreaction. That said, the carry trade is back in focus this week as the BoJ Governor submitted a document warning the bank could continue to raise rates. With concerns about the US economy rising ahead of Friday's Jobs Report, USDJPY has fallen sharply again, and Bitcoin is drifting lower. I do think the initial panic and liquidity grab at the beginning of August was likely the worst this situation will get. It surprised many and isn't likely to repeat as markets will be better prepared. Furthermore, the BoJ are unlikely to willingly blow up markets with an aggressive hiking schedule. While risks to Bitcoin remain, I think they are worth taking given the bullish potential. Bullish Patterns Despite the negative drivers in the background, Bitcoin continues to consolidate near the all-time highs in what is considered a bullish pattern called a cup and handle. Cup and Handle Example (Investopedia) The pattern is clear on a daily Bitcoin chart and it suggests a break-out is setting up. BTC Cup and Handle (TradingView) There is some logic behind the formation of this pattern. As a market returns back to resistance at previous highs, there is often a pause, especially when the rally is stretched, as was the case with Bitcoin in early 2024. A consolidation phase then resets positioning and gathers energy for a break-out. Bitcoin's older relative, gold ( GLD ) often makes this pattern and the large-scale cup and handle on the weekly chart may well provide a guide to what could happen in Bitcoin. Gold v BTC (TradingView) Bitcoin technicals remain bullish and suggest a move to new all-time highs should unfold into the end of the year and 2025. Whether this is driven by a post-election risk-on rally or some other catalyst can only be speculated upon, but my tactic is to buy and hold for the bullish potential. The Fidelity Wise Origin Bitcoin Fund ETF I have already written about the iShares Bitcoin Trust ETF (IBIT), and called it the gold standard in Bitcoin ETFs. I still think this is the case, but FBTC comes a close second for a number of reasons. Firstly, there's little difference in the expense ratio. While FBTC is listed at 0.25% and IBIT is listed at 0.12%, this is not entirely accurate. As per IBIT's fund page , "If the fund exceeds $5.0 billion of the Trust's assets prior to the end of the 12-month period, the Sponsor's Fee charged on assets over $5.0 billion will be 0.25%." IBIT now has $20B AUM, which means that 0.25% is charged on over 75% of its assets. This means the expense ratio is around 0.218%. In any case, the 0.25% fee will be introduced in full in January 2025. Secondly, other metrics are very similar and FBTC actually manages a very small outperformance. FBTC v INIT (Seeking Alpha) Thirdly, Fidelity has a different custodian than every other Bitcoin ETF, which are almost entirely with Coinbase. ETF custodians (Cointelegraph) I've looked closely at the Fidelity prospectus to see if there are any major differences between their custodian procedures and those of Coinbase. I don't see any, and both carry very small risks inherent when storing anything valuable. Consequently, there doesn't seem much reason for choosing one over the other, but there is a case to be made for choosing both and spreading the very small risk between the two. Conclusions Bitcoin survived the liquidity grab prompted by the early August carry trade unwind and has maintained a bullish pattern on the longer-term charts, which appears to be setting up a break to new all-time highs. While the risk has not completely dissipated, I do think the markets won't be surprised or panicked in a similar way again and Bitcoin should be less of a target. FBTC has caught my attention as an attractive alternative to IBIT, although I think the two can be held together and there is very little difference now IBIT's expense ratio is over 0.2%.
