The digital asset industry experienced a record-breaking inflow of $2.45 billion in the week ending Feb. 17. This, along with the appreciation of Bitcoin’s price, led to the industry’s assets under management reaching $67.1 billion, levels last seen in December 2021. According to a blog post by CoinShares on Feb. 19, most of the investment came from the United States through Bitcoin’s spot exchange-traded funds (ETFs). However, some data suggests that the inflow into Bitcoin ETFs may not be driven by new investors, which is less optimistic than previously believed.
Considering the success of the ETF launch, it is worth questioning whether the 21.8% price increase by Feb. 19 meets investors’ expectations. Despite this achievement, Bitcoin’s price is still nearly 25% lower than its all-time high of $69,000. Previous instances of entities announcing billion-dollar acquisitions in Bitcoin have caused a much stronger price reaction. Therefore, one would have expected a greater impact from the $4.93 billion net inflow into the ETFs since their launch on Jan. 11, as shown by data from BitMEX Research.
Bitcoin has shown resilience even in the absence of retail investors. There are several possible explanations for Bitcoin’s limited performance, although it is difficult to determine how each market participant values their position or the reasons behind selling pressure. However, it is clear that if nearly $5 billion of net inflows entered the spot Bitcoin ETFs, an equal amount was sold by previous holders. Some analysts and investors mistakenly equate daily issuance with available supply for trade, but these two factors do not necessarily align.
Currently, the Bitcoin network issues 900 BTC per day as miners’ incentives, equivalent to approximately $328 million per week. In comparison, Bitcoin’s daily adjusted volume exceeds $10 billion. Therefore, the coins minted for subsidies do not significantly impact pricing, considering that over 93% of the maximum 21 million Bitcoin supply is already in circulation. In short, miners’ flow is unlikely to be the cause of Bitcoin’s limited upside after the spot ETF launch.
On Feb. 8, 2021, Tesla announced a $1.5 billion investment in Bitcoin, which resulted in a 48% rally in just 14 days. Interestingly, the starting price of $38,870 was only 7.5% lower than the previous all-time high just 30 days earlier. This suggests that even if the market anticipated the movement, the event itself drove Bitcoin’s price to a much higher level. This highlights the relatively lower impact of the spot ETF launch in the U.S. in terms of price action.
There are numerous benefits for Bitcoin holders to migrate their positions to a spot ETF. Some of the inflow into the ETF may have been offset by investors who sold an equivalent position. Reasons for this migration include tax efficiency, simplified fiscal reporting, easier estate planning, and reduced custody risks. While some investors prefer direct investments through their own wallets, many find these advantages appealing.
Furthermore, the increasing open interest in CME Bitcoin futures suggests that some of the inflow into the spot ETF could have been matched by short positions in futures contracts. Arbitrage desks profit from the price difference between fixed-month contracts and regular spot prices. This “cash and carry” trade involves buying a spot position and selling futures contracts at a premium.
Therefore, it is possible that part of the 26,500 BTC increase in open interest at CME in the 14 days leading up to Feb. 19, which is worth over $1.3 billion at current prices, could be attributed to the inflow into the spot ETF, although it may have been neutralized by short positions in futures.
In conclusion, there is no bearish outlook from the data on the spot Bitcoin ETF. The longer the inflow continues, the higher the chance of a supply shock that could push Bitcoin’s price above $60,000.
It is important to note that this article does not provide investment advice or recommendations. Investing and trading carry risks, and readers should conduct their own research before making any decisions.