With the fourth Bitcoin halving set to take place in April and ETFs setting new market dynamics, what can Bitcoin investors expect? To determine this, one must understand how Bitcoin ETFs increase trading volume and effectively stabilize Bitcoin price fluctuations. This article is derived from SHANE NEAGLE’s work, compiled, translated, and written by BlockBeats.
(Table of Contents)
Understanding Bitcoin ETFs and Market Dynamics
Stabilization Mechanism
Analyzing Fund Flows and Market Sentiment
Historical Background and Future Implications
Conclusion
As of March 14th, according to data from Farside Investors, Bitcoin spot ETFs have accumulated a net inflow of $11.8288 billion since their launch. Among them, IBIT has accumulated a net inflow of $12.0278 billion, FBTC has accumulated a net inflow of $6.7033 billion, and GBTC has accumulated a net outflow of $11.4026 billion.
In this bull market triggered by ETFs, the inflow of ETFs constantly affects the price trend of cryptocurrencies. Regarding this, Shane Neagle, the editor-in-chief of The Tokenist, pointed out that higher trading volume generates higher liquidity, which can smooth price fluctuations. Moreover, from the perspective of fund flows and historical background, after 15 years of scrutiny and examination, Bitcoin’s credibility has reached its peak and may become a hedge asset that replaces gold.
BlockBeats has translated the original text as follows:
The approval of eleven Bitcoin ETFs has added new legitimacy to this groundbreaking cryptocurrency. With official recognition from the SEC, the barrier for institutional investments has been eliminated.
With this barrier removed, financial advisors, mutual funds, pension funds, insurance companies, and retail investors can now easily gain exposure to Bitcoin without having to directly custody it. More importantly, the negative impressions that Bitcoin was compared to “tulip mania,” “poison,” or a “money laundering indicator” have been washed away.
After the unprecedented bankruptcy wave in the cryptocurrency market in 2022, the price of Bitcoin returned to the level of $157,000 by the end of the year, equivalent to the level in November 2020. After those large-scale panic sales, Bitcoin gradually recovered in 2023 and reached the level of $45,000 in early 2024, which was first reached in February 2021.
With the fourth Bitcoin halving set to take place in April and ETFs setting new market dynamics, what can Bitcoin investors expect? To determine this, one must understand how Bitcoin ETFs increase trading volume and effectively stabilize Bitcoin price fluctuations.
Bitcoin itself symbolizes the democratization of currency. Not constrained by central authorities like the Federal Reserve System, Bitcoin ensures its limited supply of 21 million tokens cannot be tampered with through its decentralized miner network and currency policy determined by algorithms.
For Bitcoin (BTC) investors, this means they can access an asset that does not naturally depreciate, which is in stark contrast to all existing fiat currencies in the world. This is the foundation of Bitcoin’s value proposition.
ETFs provide another democratized avenue. The purpose of an ETF is to track the price of an asset, represented by shares, and unlike actively managed mutual funds, it can be traded around the clock. The passive price tracking of ETFs ensures lower costs, making it an easily accessible investment tool.
Of course, custodians of Bitcoin, such as Coinbase, need to take sufficient cloud security measures to enhance investor confidence.
In the ETF space, Bitcoin ETFs have shown high demand for a decentralized asset that resists dilution by centralization. In the past 15 days, they have generated a total trading volume of $293 billion, with selling pressure from the Grayscale Bitcoin Trust Fund (GBTC) reaching $149 billion.
Image Source: James Seyffart, Bloomberg Intelligence
This is not surprising. With the speculation of Bitcoin ETFs driving up the price of Bitcoin, 88% of Bitcoin holders entered the profitable zone in December 2023, eventually reaching 90% in February. As a result, GBTC investors started cashing out, exerting $5.6 billion worth of selling pressure on the price of Bitcoin.
In addition, GBTC investors took advantage of the lower fees of newly approved Bitcoin ETFs and moved funds out of GBTC’s relatively higher 1.50% fee. Ultimately, BlackRock’s iShares Bitcoin Trust (IBIT) became the winner in terms of trading volume with a fee of 0.12%, which will increase to 0.25% after a 12-month exemption period.
Placed in the broader context of the ETF market, IBIT and FBTC have exceeded the iShares ESG Aware and Transition MSCI USA ETF (USCL) launched in June 2023 in terms of monthly trading.
Image Source: Eric Balchunas, Bloomberg Intelligence
Considering Bitcoin’s history, which has been attacked from a sustainability perspective, this is particularly noteworthy. It is worth noting that in May 2021, Elon Musk tweeted that Tesla would no longer accept Bitcoin payments due to environmental concerns, causing the price of Bitcoin to drop by 12%.
According to Morningstar’s report, in January, IBIT and FBTC ranked 8th and 10th, respectively, in terms of assets’ net inflows, with iShares Core S&P 500 ETF (IVV) taking the top two spots. Approximately 10,000 Bitcoins flow into the ETF daily, indicating a huge demand for approximately 900 Bitcoins per day.
Looking ahead, with the easing of the outflow pressure from GBTC and the increasing trend of inflows, the inflow of funds into Bitcoin ETFs has stabilized the price of BTC.
Further reading:
Bitcoin vs. Taiwan’s popular ETF 00940: Which one performs better in terms of performance and risk?
With 90% of Bitcoin holders entering the profitable zone, the highest level since October 2021, selling pressure may come from various sources, including institutions, miners, and retail investors. The increasing inflow of funds into Bitcoin ETFs is a defensive fortress against this, especially in another speculative event, the upcoming fourth Bitcoin halving.
Higher trading volume generates higher liquidity, smoothing price fluctuations. This is because larger trading between buyers and sellers can absorb temporary imbalances. In January, CoinShares’ report showed that Bitcoin saw inflows of $1.4 billion, compared to $7.2 billion for newly issued US funds, with outflows from GBTC reaching $5.6 billion.
Image Source: CoinShares
Meanwhile, large financial institutions are setting new liquidity benchmarks. As of February 6th, Canada’s largest asset manager, Purpose Investments, launched a Bitcoin ETF that traded $165 million worth of shares within a day.
With the increasing adoption of Bitcoin ETFs and the positive impact on trading volume and price stability, the cryptocurrency market is expected to experience significant changes. Investors can look forward to a more regulated and mature market environment, as well as increased confidence in Bitcoin as a viable investment option.Vanguard has allocated 1% of its conservative All-in-One ETF fund to Bitcoin. Given its “conservative” name, this indicates that future non-conservative funds will have a higher allocation percentage to Bitcoin.
Ultimately, if Bitcoin were to account for 1% of the $749.2 trillion in various asset classes, its market value could grow to $7.4 trillion, pushing the price of Bitcoin up to $400,000.
The current market value of Bitcoin is within the range of $85 billion to $90 billion. Image source: Blockware Solutions.
Considering that Bitcoin ETFs provide a consistent and transparent market price reference, bulk trading reduces the potential market impact from miners. FalconX research shows a significant increase in daily trading volume, ranging from an average of 5% to 10% to 13%.
In other words, the market structure triggered by the new Bitcoin ETF is reducing overall market volatility. So far, Bitcoin miners have been a major price suppressing factor on the other side of the liquidity equation. In Bitfinex’s latest weekly chain report, mining wallets accounted for an outflow of 10,200 Bitcoins.
This aligns with the previously mentioned inflow of around 10,000 Bitcoins into the Bitcoin ETF, resulting in a relatively stable price level. Another potential stabilizing mechanism is options, as miners reinvest and upgrade mining equipment ahead of the fourth halving.
Although the US SEC has not approved options on Bitcoin ETFs for spot trading, this development will further enhance the liquidity of ETFs. After all, a wider range of hedging investment strategies will increase the bidirectional liquidity of trading.
As a forward-looking indicator, implied volatility in options trading can measure market sentiment. However, with the launch of BTC ETFs, we will inevitably see a more mature market and potentially more stable pricing of options and derivative contracts.
As of February 9, 2024, the Grayscale Bitcoin Trust ETF (GBTC) holds 468,786 BTC. Last week, the price of BTC rose 8.6% to $46,200. Consistent with previous predictions, this means that the selling pressure of BTC may spread out during the fourth halving and subsequent rebounds.
According to the latest data provided by Farside Investors, as of February 8, 2024, Bitcoin ETFs have accumulated inflows of $403 million, totaling $2.1 billion, while GBTC outflows totaled $6.3 billion.
Based on a weekly basis, the outflow of GBTC has gradually decreased. In the first week, their average outflow was $492 million. In the second week, the average outflow of GBTC was $313 million, and in the third week, the average outflow was $115 million.
This means that the selling pressure decreased by 36% from the first week to the second week, and decreased by 63% from the second week to the third week.
As of February 9, 2024, with the launch of GBTC FUD, the cryptocurrency fear and greed index reached 72, rising to the “greed” level. Looking back at January 12, 2024, the second day when the Bitcoin ETF was approved, the fear and greed index at that time was 71.
Looking ahead, it is worth noting that the price of Bitcoin depends on global liquidity. After all, it was the interest rate hike cycle of the US Federal Reserve in March 2022 that led to the bankruptcy of a large number of cryptocurrencies and ultimately the collapse of FTX. The current federal funds futures expect this cycle to end in May or June this year.
In addition, the US Federal Reserve is unlikely to change its course of printing money. In this case, the price of Bitcoin may follow suit.
M2 money supply measures the amount of available currency in an economy. Image source: LookIntoBitcoin.com.
Considering that $34 trillion is a relatively large amount of national debt, and federal spending continues to exceed income, Bitcoin positions itself as a hedge asset, a currency waiting for capital to flow into its limited supply of 21 million tokens.
Gold Bullion Securities (GBS) is a hedge asset similar to Bitcoin, and it became the first gold ETF to be listed on the Australian Securities Exchange (ASX) in March 2003. In 2004, SPDR Gold Shares (GLD) was listed on the New York Stock Exchange (NYSE).
Since November 18, 2004, within one week, the total net assets of GLD increased from $114,920,000 to $1,456,602,906. By the end of December, this number dropped to $1,327,960,347.
Although not adjusted for inflation, this may indicate that the market sentiment for Bitcoin is better than that of gold. Bitcoin is digital and based on a globally distributed proof-of-work mining network, and its digitization makes it portable.
In 1933, President Roosevelt issued Executive Order 6102, requiring citizens to sell their gold bars. Unlike Bitcoin, new gold veins are frequently discovered, but the supply of Bitcoin is limited.
In addition to these fundamentals, Bitcoin ETF options have not yet been launched. Standard Chartered Bank analysts predict that the size of Bitcoin ETFs will reach $50 billion to $100 billion by the end of 2024. Furthermore, large companies have not followed MicroStrategy’s approach of converting stock sales into depreciating assets.
Even a 1% BTC allocation in mutual funds could potentially drive up the price of BTC. For example, Advisors Preferred Trust allocates 15% of its range indirectly to Bitcoin positions through futures contracts and BTC ETFs. The Bitcoin allocation in mutual funds is likely to cause a surge in the price of Bitcoin.
After 15 years of doubt and slander, Bitcoin has reached the pinnacle of credibility. The believers of the first wave of sound money ensured that its blockchain would not disappear into the annals of coding history.
With confidence in Bitcoin, investors have formed two waves so far. The approval of Bitcoin ETFs may be a milestone for the third wave. Central banks around the world continue to weaken people’s confidence in cryptocurrencies as governments cannot control themselves and become obsessed with spending.
By introducing so much noise into the value exchange, Bitcoin represents a return to the roots of sound money. Its appeal lies in its digitization, born out of physical proof-of-work. Unless the US government takes extreme action to disrupt systemic risk positions, Bitcoin may replace gold as a traditional hedge asset.