Take $1,000 as an example to understand the impact of spot ETFs on Bitcoin prices in seconds

Written by: Atlascap invest

On January 10, the U.S. SEC approved the applications of 11 Bitcoin spot ETFs, officially marking the entry of crypto assets into the core pool of asset allocation of mainstream institutions around the world. However, on the first day after the ETF opened, the price trend of Bitcoin was completely opposite to the previous market high sentiment, falling from a low of $49,000 to $41,500, wiping out almost all the gains in the past month. What happened in the middle? What caused this big drop, and why did a large amount of funds flow out of the BTC market through the ETF after the spot ETF was approved instead of flowing in? After the actual operation, the editor took the whole process of $1,000 circulating in the ETF as an example to show you the transaction execution mechanism behind the ETF, hoping to help investors better grasp the investment opportunities of crypto assets in the ETF era.

Part 1: Through the operation of 1,000 US dollars, revealing the capital flow process behind ETF

First of all, we must understand the four important participants in the Bitcoin spot ETF system:

• Sponsor： Responsible for designing and managing ETF products, calculating the daily net value (NAV) of ETF products, and charging management fees. Currently, 11 companies have been approved, such as Blackrock, Fidelity, Ark, Grayscale, etc.

• Authorized Participant (AP)： The only institution that has the right to subscribe and redeem directly with the issuer, usually an asset management company/securities firm.

• Market Maker: Provide liquidity in the secondary market, buy and sell ETF shares, and request the authorized participant (AP) to subscribe for/redeem ETF shares if there is insufficient/excess liquidity.

• investor:Individual or institutional investors buy and sell ETF shares through the secondary market.

Now that we know the above parties involved, let’s follow a $1,000 ETF investment and uncover the capital flow process behind it.

It should be noted that since the US SEC has only approved Bitcoin ETFs based on cash subscription and redemption, all currently issued Bitcoin ETFs cannot be subscribed and redeemed in kind. Therefore, the capital flow process can only be carried out in the following ways:

• When you decide to buy a Bitcoin spot ETF with $1,000, you usually choose an online trading platform, such as Robinhood or Interactive Brokers (IBKR); place an order according to the current market price, and after the transaction is successful, your $1,000 will flow toMarket Maker;

• At the same time,Market MakerIt is possible that a large number of buy orders of $1,000 are received, and the ETF shares held are not enough to meet the demand for buy orders. The ETF price rises, and the market value is decoupled from the total Bitcoin assets held by the issuer, resulting in a positive premium.Market MakerWillAuthorized Participant (AP)Apply for assistance in purchasing ETF shares, and part of your $1,000 will be transferred toAuthorized Dealer (AP), for example, $200;

• AuthorizationTransaction Provider (AP)After receiving the subscription request and $200,SponsorApply to purchase ETF shares, $200 transferred toSponsor;

SponsorThe $200 will be used to purchase Bitcoin through platforms such as Coinbase. According to the agreements of different funds, the time for purchasing Bitcoin can be from the day of subscription to 1-2 days after subscription. The final capital inflowcryptocurrencymarket;

Part 2: ETF secondary market buying and selling volume ≠ Bitcoin market net inflow and outflow

Through the study and operation of the circulation process, we can draw the following conclusions:The buying and selling transaction volume of ETF in the secondary market is ≠ the net inflow and outflow of funds in the Bitcoin market. These two values cannot be directly equated but they have an impact on each other.

When we discuss the impact of Bitcoin spot ETFs on Bitcoin prices, the most important issue is to focus onHow many USD flows from the traditional financial market into the Bitcoin market through ETFs to purchase Bitcoin spot, that is, the total net inflow (Total Net Inflow).

So how is net inflow calculated?By adding up the overall subscription and redemption data of these 11 ETFs, we can calculate the total. Each sponsor will disclose the corresponding value on their official website. You can also use professional data tracking tools, such as Bloomberg, or Sosovalue's ETF section to query it on a daily basis. Take SoSo Value's ETF dashboard as an example.

We can see that the Grayscale GBTC Bitcoin ETF had an outflow of $594 million on January 16 (the third trading day after approval), and there were redemptions on the two trading days after the ETF was approved (the 11th and 12th), with net outflows of $95 million and $480 million respectively, for a total outflow of $580 million in these two days. Therefore, although the total market ETF transaction volume on the 11th and 12th was as high as $4.67 billion and $3.19 billion respectively, and other ETFs such as ARK, BlackRock and Fidelity received a total of $1.4 billion in net subscriptions, due to the large net outflow of the Grayscale ETF, the net inflow of funds in the overall Bitcoin market was significantly lower than market expectations, which in turn caused the Bitcoin correction starting on the 12th.(See the cross-sectional data on January 12 in the figure below).

Source: SoSo Value cross-sectional data as of January 12, 2024

Part 3: Why did Grayscale Bitcoin ETF experience a large amount of capital outflow? How long will this capital outflow last?

Three consecutive days of redemption of the Grayscale Bitcoin ETF brought about selling pressure of approximately 26,000 to 28,000 bitcoins, increasing the wait-and-see sentiment in the market.According to SoSo Value data, Grayscale GBTC had redemptions on January 11, January 12, and January 16, with a total net outflow of US$1.174 billion.

Source: SoSo Value cross-sectional data as of January 16, 2024

Management fees are 6 times higher than competitors,and the closing of the previous trust discount arbitrage positions, are the two core reasons for the net outflow of Grayscale Bitcoin ETF.

Grayscale Bitcoin Spot ETF (stock code GBTC), previously known as Bitcoin Trust, can only be subscribed and traded in the secondary market, and redemption is not allowed. From the perspective of the Bitcoin market, it is equivalent to Bitcoin Trust subscribed by Grayscale. Once funds flow into Bitcoin, they cannot flow out.It is a Pixiu that can only bring in Bitcoin but not out.. GBTC has been launched for 8 years.So far, it has accumulated about 620,000 bitcoinsOn January 10, the SEC approved the upgrade to ETF. Investors can finally redeem freely through authorized dealers (APs) and convert their ETF shares into US dollar cash.This has opened up a channel for Grayscale's funds to flow out of the crypto asset market. We divide specific redemption transactions into two types based on the different attributes of investors. By analyzing the trading intentions and behaviors of these two types of investors, we can more clearly analyze and predict how this round of Grayscale ETF net outflow will affect the price of Bitcoin over a long period of time:

The first type of investors:

I am optimistic about Bitcoin assets in the long term, but because Grayscale's management fees are too high, I have moved my positions to other ETFs. Comparing the 11 ETFs horizontally, the management fee of Grayscale GBTC is 5-6 times that of similar competitors. Grayscale's management fee rate is 1.5%, while other companies are generally below 0.3%, and early investors are given management fee reductions. Investors with large amounts of funds are very motivated to sell Grayscale ETFs and switch to other ETFs. For example, Ark was once one of the top ten investors in GBTC, and it is expected to shift its positions to its own ETF (ARKB) in the future. It is unknown whether BlackRock and Fidelity also held corresponding positions in Grayscale before and need to move positions. This process of applying for and redeeming positions will bring about capital outflows and inflows.cryptocurrencyThe time difference in the market, and the drop in BTC prices caused by the time difference, will increase the wait-and-see sentiment of new funds flowing into the market.

The second type of investors:

Arbitrage Grayscale GBTC discount rate and hedge by shorting BTC over the counter.Due to the chain reaction in the crypto asset market caused by the FTX crash, Grayscale's GBTC trust shares are not redeemable, resulting in a GBTC discount rate of up to 49%, and it has remained at around 20% for a long time. Six months ago, the market began to expect that the SEC would approve the Bitcoin spot ETF, and GBTC could be converted from a trust to an ETF share redeemed according to NAV, and the discount would disappear. Arbitrage funds began to intervene, buying discounted GBTC and shorting BTC over the counter to arbitrage the discount rate. After the Bitcoin spot ETF on January 10, the discount rate of GBTC on January 12 was only -1.18%. Therefore, for some investors who hope to make the discount disappear, there is a strong motivation to take profits. ByXiaobai NavigationSince most of the funds for arbitrage discount rates should have corresponding hedging mechanisms in the OTC market, after the profit is realized, the OTC hedging short positions will also be closed accordingly.Therefore, the funds with overall arbitrage discount rate will logically not have much impact on the price of BTC.

Through the above analysis, we can conclude thatIn the next 1-2 months, the selling pressure of Grayscale GBTC will directly affect the price of Bitcoin, then how long will the net outflow of Grayscale GBTC last? According to Grayscale's current total Bitcoin holdings of about 620,000 Bitcoins, the average daily sales in the past three trading days were about 9,000 Bitcoins. At this outflow rate,The net outflow of Grayscale GBTC should not affect the volatility of Bitcoin prices for more than two months.

Part 4: ETFs will bring in a wider range of investors to participate in the crypto market, which is beneficial in the long run

Although Grayscale has brought some selling pressure on Bitcoin spot in the short term,However, looking at all Bitcoin spot ETFs, the three trading days from January 11 to January 16 still brought $740 million in net buying to Bitcoin.Among them, BlackRock ETF (IBIT) ranked first with a three-day net inflow of US$710 million. After the news that Grayscale transferred 9,000 bitcoins to Coinbase on the 16th quickly plunged, the price of Bitcoin quickly rebounded to around 43,000, and the price of Bitcoin showed a trend of stabilizing.

The reason behind this is that Grayscale's redemption pressure has a short-term impact on the overall Bitcoin market.The main narrative of the ETF era is that a wider range of investors will experience participation in investing in crypto assets.As analyzed in the previous part, if the investors who move only because of the management fee rate are expected to buy other Bitcoin ETFs in the future, they will continue to contribute to the buying of Bitcoin; the impact of investors who earn discounts on Bitcoin is neutral. But on the other hand, let's take a look at the strength of the newly added Bitcoin spot ETF managers. The issuers approved this time, such as Blackrock (with a total asset management scale of 8.59 trillion US dollars), Fidelity (with a total asset management scale of 4.5 trillion US dollars), and Invesco (with a management scale of 1.6 trillion US dollars), are all top companies in the global asset management industry. Among them, Blackrock, Vanguard Group, and State Street Bank were once called the "Big Three" and controlled the entire index fund industry in the United States; and the current size of the entire cryptocurrency market is only 1.7 trillion. Head asset management companies are generally believed to have more sufficient management experience, stricter compliance processes, and stronger loss acceptance capabilities, which can enhance investor trust for emerging assets such as Bitcoin. In addition, the global sales channel network accumulated by head brands for many years will help better promote Bitcoin spot ETFs, a new category of assets.

Part 5: In the next three months, there are three important nodes in the crypto market

The order of importance is as follows:

1/ Bitcoin halving:

It is expected that in April 2024, the new supply of Bitcoin will decrease significantly, while the demand will increase with the ETF.

Bitcoin uses a mechanism of halving its output every four years to ensure that its total supply will never exceed 21 million coins. The halving will directly lead to a significant reduction in the new supply of Bitcoin. Combined with the passage of Bitcoin ETF, it has opened up a channel for funds to flow into Bitcoin, bringing a large amount of new demand for Bitcoin. On the one hand, the new supply of Bitcoin is about to be halved, and on the other hand, the demand is increasing. At the same time, the US dollar interest rate cut cycle has increased the preference for risky assets. Crypto market investors generally believe that 24 will usher in a new round of increases, commonly known as a clear bull market.

We can refer to the changes in Bitcoin prices within 1 year after the previous Bitcoin halving. Bitcoin was issued in 2009, when the mining output was 50 BTC per block. Since then, it has experienced three halvings.

• The first halving occurred in November 2012, when mining output dropped from 50 BTC per block to 25 BTC. The price of Bitcoin rose from $13 to a high of $1,152 within one year.

• The second halving took place in July 2016, when mining output further dropped to 12.5 BTC per block, and the price of Bitcoin rose from $664 to a high of $17,760.

• The third halving took place in May 2020, when mining output was halved again to 6.25 BTC per block, and the price of Bitcoin rose from $9,734 to a high of $67,549.

• The next halving is expected to occurApril 2024.

In addition, according to the Coinshares report, after this Bitcoin halving, the average Bitcoin miner's mining cost per Bitcoin (electricity consumption + maintenance costs in addition to the one-time mining machine cost, etc.) will rise to US$37,856.

2/ Ethereum spot ETF approved:

Expected May 2024.Institutions such as BlackRock, Fidelity, and Invesco have also applied for Ethereum spot ETFs, which are likely to be approved. With the approval of the Bitcoin ETF, the market began to expect that the Ethereum ETF will be approved in May, and prices have begun to respond to this.

3/ Ethereum Cancun Upgrade:

It is expected that by February-March 2024, the transaction costs on the Ethereum Layer2 network will be reduced to one tenth.The Cancun upgrade may be similar to the iPhone moment for mobile Internet for Ethereum. Lower transaction fees and better transaction experience will give rise to more application scenarios that can truly serve large-scale users.

Most of the time, people tend to overestimate short-term impacts and underestimate long-term impacts. The launch of the Bitcoin spot ETF is a milestone and the first step in introducing crypto assets into core financial assets. Looking back many years later, this will surely be a lasting and long-term benefit.

The article comes from the Internet:Take $1,000 as an example to understand the impact of spot ETFs on Bitcoin prices in seconds

Related recommendations: Weekly Project Selection: 9 projects worth paying attention to

This issue of weekly selections covers the period from December 1 to December 15, with a total of 9 projects. This article is the text version of TrendX Research Institute's weekly selections. This issue of weekly selections covers the period from December 1 to December 15, with a total of 9 projects. HiveMapper Basic Information: Twitter followers: 22,600 Number of top KOL followers:…