Bitcoin ETF Launch - What Happened?
To say that the spot Bitcoin ETF launch on January 11 was a highly anticipated event in crypto markets would be an understatement.
The crypto world has been waiting for this moment since at least the summer of 2013, when the Winklevoss twins, co-founders of cryptocurrency exchange Gemini, filed the first application for a Bitcoin ETF with the Securities and Exchange Commision (SEC). At the time, Bitcoin’s market capitalization stood at $1.6 billion vs $835 billion today. The SEC eventually rejected the application in 2017, citing concerns about the maturity of Bitcoin markets, and has since rejected numerous other spot BTC ETF applications, citing insufficient safeguards against price manipulation by cryptocurrency exchanges.
Buy the rumor, sell the news
The hype surrounding potential Bitcoin spot ETF approval as a price catalyst has been tied to the hopes of opening the floodgates of trillions dollars from traditional capital markets through a low cost exchange listed product and into Bitcoin. The historical performance of gold price post the launch of SPDR Gold Shares trust (NYSE: GLD) was often cited. The anticipation was that the massive ETF capital inflows from institutions and retirement accounts would cause a supply crunch in the Bitcoin markets, launching the spot BTC price to the proverbial “moon”.
Contrary to those expectations, Bitcoin price experienced a significant sell-off after the launch of 11 Bitcoin ETFs in the US. While the hype surrounding the ETF approval led to an initial surge in Bitcoin’s price, reaching a two-year high of around $49,000, the market saw an immediate sell-off to the lows under $42,000 in the next few days.
We attribute the sell-off to a combination of market dynamics, including the “buy the rumor, sell the news” effect exacerbated by cascading liquidations of leveraged Bitcoin derivatives speculators, a likely shift in institutional investment strategies from high cost to lower cost Bitcoin products, as well as the ETF approval serving as a liquidity event for large BTC holders.
The “buy the rumor, sell the news” effect is a common phenomenon in the financial markets. Traders and investors often buy an asset in anticipation of a positive event, such as an earnings report or product launch, and then sell their holdings once the event occurs. This results in a decrease in demand and a subsequent drop in price. In the case of Bitcoin, traders and investors may have bought Bitcoin in anticipation of the ETF launch and then sold their holdings once the event occurred, leading to a decrease in demand and a subsequent drop in price. The market has actually shown its “sell the news” hand on January 9 when the SEC Twitter account was hacked and a premature ETF approval announcement was posted, triggering a rather disappointing price action. The Bitcoin derivatives market has experienced hundreds of millions of long position liquidations since, which put additional downward pressure on BTC price, as the underwater leveraged longs doubled down on their positions and ultimately got liquidated en masse.
Elementus Sonar analysis shows that aggregate centralized exchange (CEX) Bitcoin balances actually increased starting January 7, contrary to the “supply shock” narrative promoted by the crypto influencers on social media and highly anticipated by the retail investors.
The new ETF products have shown strong inflows in the first couple of trading days with the BlackRock product alone (NASDAQ: IBIT) reaching $500 million NAV while starting with only $10 million seed. That poses a question - how come ETF inflows did not reduce the spot Bitcoin liquid supply and haven’t propped up BTC market price, as was universally expected?
The answer is clear if we look at NAV change dynamics of the new ETFs along with the sole Bitcoin investment product converted to ETF - Grayscale Bitcoin Trust (NYSE: GBTC).
It appears that spot Bitcoin ETF inflows in the first four days of trading were offset by GBTC outflows during the same time, while GBTC daily volume has been hovering around 50% of total BTC spot ETF volume. Now that makes total sense because Grayscale has kept GBTC sponsor fees high at 1.5% while the leading new issues such as IBIT went with low fees of 0.25% and even less. Since GBTC was the original spot Bitcoin vehicle providing BTC exposure to institutions and retirement plans, it looks like a capital shift is underway from Grayscale to the new low cost Bitcoin ETFs. With more than 600,000 BTC locked in GBTC trust prior to ETF conversion and a persistent discount to NAV, there seems to be a long way to go before that capital shift is over and the open market Bitcoin supply needs to be tapped by ETFs instead of Grayscale redemptions. There is also an arbitrage opportunity in buying discounted GBTC while hedging BTC market price exposure and subsequently redeeming for face value. Per Elementus Sonar, Grayscale BTC balance has experienced a dramatic decline since late November, likely to fund the early redemption requests placed in anticipation of the ETF conversion approval for GBTC.
Follow the Bitcoin
During the last 3 months Grayscale sent more than 42K BTC to Coinbase Custody, which happens to be the leading custodian for the Bitcoin ETFs. In the same time, the total amount of BTC under Coinbase Custody has grown dramatically from 250K to the high of 320K on January 2, which is indicative of large scale institutional accumulation happening well in advance of the ETF launch.
Bitcoin flows analysis in Elementus Sonar also shows that most Bitcoin used to seed the new ETFs likely came from OTC purchases. Some OTC desks have been accumulating Bitcoin inventory in anticipation of the ETF approval ever since the BlackRock application was confirmed. Thus, it appears that with the ETF launch the OTC desks and other Bitcoin whales have entered a distribution phase, which is similar in dynamics to the aftermath of other large scale BTC liquidity events, such as CME Bitcoin futures launch in December 2017 and CME Micro Bitcoin futures launch in May 2021.
The launch of the spot Bitcoin ETFs, a landmark event in the crypto space, defied widespread expectations by triggering a significant sell-off, underscoring the unpredictability of market reactions to major developments. The "buy the rumor, sell the news" phenomenon, coupled with leveraged liquidations and a strategic shift to low-cost Bitcoin products, notably from Grayscale to new ETFs, played a pivotal role in this outcome.
This reallocation of capital, demonstrated through an Elementus Sonar analysis of Bitcoin flows and centralized exchange balances, further highlights the intricate dynamics of supply and demand in the cryptocurrency market. This serves as a reminder of the complex interplay of hype, market anticipation, and the impact of new financial products on asset prices, and should offer valuable insights into the evolving world of cryptocurrency investment and market behavior as the industry continues to mature.
Despite the initial price action that has disappointed the speculators, we consider BTC ETFs launch a success with strong inflows into the new products, which propelled Bitcoin to overtake silver as the second largest ETF commodity in the US after just one week of trading.