The introduction of the spot Bitcoin exchange-traded fund (ETF) on January 12th was met with some chaos during the first trading session. Investors were unsure of the actual inflow, and market makers faced difficulties due to different liquidation timelines for each instrument. Despite the challenges, the Bitcoin spot-based ETFs saw record-breaking trading volume of $4.66 billion in the traditional finance industry. However, the question remains: is this enough to justify a Bitcoin price rally above $47,000?
Critics have raised concerns about Grayscale’s GBTC, which previously functioned as a Trust fund and held over $27 billion worth of BTC. In just the first three trading days, the GBTC experienced net outflows of $1.17 billion. Most of these outflows occurred on January 13th and 16th, offsetting 86% of the inflows to other spot Bitcoin ETFs during that period. In total, there was a mere net inflow of $157 million over two days.
The data presented by senior Bloomberg ETF analyst Eric Balchunas highlighted a net inflow of $782 million, with most of it occurring on the first trading session. Due to different settlement times, arbitrage desks were unable to exit their GBTC positions on January 12th. For example, a short position on CME Bitcoin futures could have been used to offset the long position on GBTC, taking advantage of the discount that the fund shares used to trade at before the spot ETF approval.
It is true that most of the inflows into spot Bitcoin ETFs have been paired with outflows from Grayscale’s GBTC. However, even when excluding the first trading day, there was still a net inflow of $157 million over two days in the products issued by BlackRock, Fidelity, Bitwise, Ark/21 Shares, Invesco, and other ETFs. The question investors should consider is whether the exit from GBTC will continue and if the aggregate net inflow is sustainable in the long run.
If the same pattern continues for the next month, with GBTC experiencing a net outflow of $11.3 billion while the remaining spot ETF contenders capture a net inflow of $13 billion, what will be the expected price impact of the $1.7 billion growth of spot Bitcoin listed funds in the U.S.? From a trading perspective, this number seems relatively insignificant considering that these ETFs traded a combined $1.9 billion on January 16th alone.
There is undeniably a continuing demand for spot Bitcoin ETFs. However, it can be challenging to differentiate between volume and flow in financial markets. It’s impossible to know if a seller is simply closing a position acquired earlier in the day, or if the buyer is engaging in the opposite trade in derivatives markets or at different exchanges to take advantage of arbitrage opportunities.
One thing is clear: with Grayscale’s GBTC fee at 1.5% and other contenders offering 0.25% or less, it is likely that investors will gradually shift their holdings. So, regardless of whether it takes 20 or 120 days for this movement to stabilize GBTC holdings at a certain level, investors should focus on who is buying the remaining $157 million over two days.
A user on the X social network named ‘Byzantine General’ raised this question on January 17th, suggesting that there is indeed ongoing demand for spot Bitcoin ETFs. At current price levels, Bitcoin miners receive around $76.1 million worth of newly issued coins every two days, so the recent net inflows into spot ETFs are slightly more than double that value. Additionally, the resulting price impact will significantly change after the Bitcoin halving in April.
It may be premature to assume that the marginal spot ETF buying will continue to counterbalance the net outflow from Grayscale’s GBTC funds. Data could easily shift to favor diminishing aggregate assets under management for the industry, including CME’s Bitcoin futures open interest. However, Bitcoin bulls can take solace in the fact that eventually, GBTC holdings will deplete or stabilize, paving the way for a bull run above $47,000 as investors realize the impact of the Bitcoin halving on the supply side.
Please note that this article does not provide investment advice or recommendations. Every investment and trading decision carries risk, and readers should conduct their own research before making any decisions.