Original author: Atlascap invest
On January 10, the U.S. SEC approved 11 Bitcoin spot applications, officially marking the entry of crypto assets into the core asset allocation pool 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 high market sentiment. It fell from a minimum of $49,000 to $41,500, erasing almost all the gains in the past month. What happened in the middle? What caused this crash? Why did a large amount of funds flow out of the BTC market through ETFs instead of inflows after the spot ETF was passed? After practical operation, the editor will take the entire process of the circulation of US$1,000 in ETF as an example to help you understand the transaction execution mechanism behind 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, reveal the fund flow process behind ETF
Part 2: ETF secondary market buying and selling turnover ≠ Net inflow and outflow of funds in the Bitcoin market
Part 3: Why did Grayscale Bitcoin ETF experience large capital outflows? How long will this outflow last?
Part 4: ETF will introduce a wider range of investors to participate in the crypto market, which will be beneficial in the long term
Part 5: In the next three months, there will be three major nodes that will play a decisive role in the encryption market
Part 1: Through the operation of 1,000 US dollars, reveal the fund flow process behind ETF
First, you must understand the 4 important participants in the Bitcoin spot ETF system:
Issuer (Sponsor): Responsible for designing and managing ETF products, calculating the daily net value (NAV) of ETF products, and collecting management fees. There are currently 11 approved companies, such as Blackrock and Fidelity. , Ark, Grayscale, etc.
Authorized Participant (AP): The only institution with the right to subscribe and redeem directly with the issuer, usually an asset management company/brokerage firm.
Market Maker: Provides liquidity in the secondary market, buys and sells ETF shares, and requests the authorized participant (AP) to subscribe/redempt ETF shares if insufficient/excess liquidity is found.
Investors: Individual or institutional investors who buy and sell ETF shares through the secondary market.
After understanding the above participants, let us now follow a $1,000 ETF investment and reveal the capital flow process behind it. It should be noted that since the US SEC only approved Bitcoin ETFs based on cash subscription and redemption, the current issuance All Bitcoin ETFs cannot be purchased and redeemed in physical form. Therefore, the flow of funds can only be carried out in the following ways:
When you decide to spend $1,000 to buy Bitcoin spot ETF, you usually choose an online trading platform, such as Robinhood, Interactive Brokers (IBKR); place an order according to the current market price. After the transaction is successful, your $1,000 will flow to Market Maker;
At the same time, the market maker may have received many US$1,000 buy orders, and the ETF share held on hand is not enough to meet the demand for buy orders. The ETF price rises, and the market value is unanchored relative to the total Bitcoin assets held by the issuer. If a positive premium is generated, the market maker will apply to the authorized participant (AP) and ask it to assist in purchasing ETF shares. Part of your $1,000 will be transferred to the authorized dealer (AP), such as $200;
After receiving the subscription request and $200, the authorized dealer (AP) will apply to the issuer (Sponsor) to subscribe for ETF shares, and the $200 will be transferred to the issuer (Sponsor);
The issuer (Sponsor) will use the $200 to purchase Bitcoin through platforms such as coinbase. According to the agreements of different funds, the time for funds to purchase Bitcoin can be from the day of subscription to 1-2 days after the subscription, and the funds will eventually flow into the cryptocurrency market;
Part 2: ETF secondary market buying and selling transaction volume ≠ Net inflow and outflow of funds in the Bitcoin market
Through the research and operation of the circulation process, we can conclude that the ETF secondary market buying and selling volume ≠ the net inflow and outflow of funds in the Bitcoin market. These two values cannot be directly equated but they influence each other.
When we discuss the impact of Bitcoin spot ETF on the price of Bitcoin, the most important issue is to focus on how much USD flows from the traditional financial market to the Bitcoin market to purchase Bitcoin spot through ETF, 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, it can be calculated. Each issuer (sponsor) will disclose the corresponding values on their official websites, or through professional data tracking tools, such as Bloomberg or SoSo Values ETF sector, query by day. Take SoSo Values ETF dashboard as an example.
We can see that the grayscale GBTC in the Bitcoin ETF had an outflow of $594 million on January 16 (the third trading day after approval), and there were also outflows on the two trading days (11th and 12th) after the ETF was approved. Redemptions and net fund outflows were US$95 million and US$480 million respectively, with a total outflow of US$580 million in these two days. Therefore, although the trading volume of all market ETFs on the 11th and 12th was as high as US$4.67 billion and US$3.19 billion respectively, and other ETFs such as ARK, BlackRock and Fidelity received a total of US$1.4 billion in net subscriptions, due to the large volume of Grayscale ETF The net outflow of funds in the overall Bitcoin market was significantly lower than market expectations, which in turn caused the Bitcoin correction that began on the 12th (see the cross-sectional data on January 12th in the figure below).
Source: SoSo Value cross-sectional data on January 12, 2024 (https://alpha.sosovalue.xyz)
Part 3: Why did Grayscale Bitcoin ETF experience large capital outflows? How long will this outflow last?
Grayscale Bitcoin ETFs redemptions for three consecutive days brought selling pressure of approximately 26,000-28,000 Bitcoins, increasing the markets wait-and-see mood. According to SoSo Value data, there were redemptions of Grayscale GBTC on January 11, January 12 and January 16, with a total net outflow of US$1.174 billion.
Source: SoSo Value cross-sectional data on January 16, 2024 (https://alpha.sosovalue.xyz)
Management fees that are 6 times higher than those of competitors and the unwinding of early trust discount arbitrage are the two core reasons for the net outflow of Grayscale Bitcoin ETF.
Grayscale Bitcoin Spot ETF (stock code GBTC), formerly a Bitcoin trust, can only be purchased and traded in the secondary market, and no redemption is allowed. From the perspective of the Bitcoin market, it is equivalent to a Bitcoin trust subscribed through Grayscale. When funds flow into Bitcoin, they cannot flow out. Since its launch 8 years ago, GBTC has accumulated approximately 620,000 Bitcoins. After being upgraded to an ETF with the approval of the SEC on January 10, investors can finally redeem it freely through an authorized dealer (AP), turning their ETF shares into US dollar cash, thus opening up this part of Grayscale’s funds. Channels for outflows from crypto asset markets. Specific redemption transactions are divided 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 whether this round of gray ETF net outflows will How does it affect the price of Bitcoin over what timeframe:
The first type of investors: They are optimistic about Bitcoin assets in the long term, but because Grayscale management fees are too high, they move their positions to other ETFs. A horizontal comparison of 11 ETFs shows that Grayscale GBTCs management fee is 5-6 times that of similar competitors. Grayscales management fee is 1.5%, while other ETFs are generally below 0.3%, and early investors are given discounts on management fees; For investors with large amounts of capital, they are very motivated to sell Grayscale ETFs and switch to other ETFs; for example, Ark was once a top ten investor in GBTC, and is expected to shift its positions to its own ETF (ARKB) in the future. It is unknown whether BlackRock and Fidelity previously held corresponding positions in Grayscale and needed to move their positions. This process of repurchase and redemption of positions will bring about the time difference between the outflow and the inflow of funds into the cryptocurrency market. The fall in BTC price caused by the time difference will also increase the wait-and-see sentiment of new inflows of funds in the market.
The second type of investors: arbitrage Grayscale GBTC discount rate and short BTC over the counter for hedging. Due to the chain reaction of the crypto asset market triggered by the FTX thunderstorm, Grayscales GBTC trust shares are not redeemable, resulting in a GBTC discount rate of up to 49%, and has remained at around 20% for a long time. Six months ago, the market began to expect that the SEC would approve a Bitcoin spot ETF, GBTC could be converted from a trust into ETF shares redeemed based on NAV, and the discount would disappear. Arbitrage funds began to intervene, buying discounted GBTC and shorting BTC on the market to arbitrage the discount rate. After the Bitcoin spot ETF was launched on January 10, the discount rate of GBTC on January 12 was only -1.18%. Therefore, for some investors who hope to make a profit when the discount disappears, there is a relatively strong motivation to take profits. Since most of the arbitrage discount rate funds should have corresponding off-site hedging mechanisms, after the profits are known, the off-site hedging short positions will be closed accordingly. Therefore, the overall arbitrage discount rate funds will not logically affect the price of BTC. It will have too big an impact.
Through the above analysis, we can conclude that in the next 1-2 months, the selling pressure of Grayscale GBTC will directly affect the price of Bitcoin. So how long will the net outflow of Grayscale GBTC last? According to the current total Bitcoin holdings of Grayscale is around 620,000 Bitcoins, and the average daily sales in the past three trading days are around 9,000 Bitcoins. According to this outflow rate, the net outflow of Grayscale GBTC will have an impact on the price of Bitcoin. The impact of the fluctuation should not exceed two months.
Part 4: ETF will introduce a wider range of investors to participate in the crypto market, which will be beneficial in the long term
Although Grayscale has brought a certain amount of selling pressure on Bitcoin spot in the short term, looking at all Bitcoin spot ETFs, the three trading days from January 11 to January 16 still brought a net gain of US$740 million to Bitcoin. Among the buying orders, BlackRock ETF (IBIT) led the way with a net inflow of US$710 million in three days. Bitcoin price plunged rapidly after the news of Grayscale transferring 9,000 Bitcoins to Coinbase on the 16th, and quickly rebounded to around 43,000. Bitcoin prices are trending towards stabilization.
The reason behind this is that the impact of Grayscales redemption pressure on the overall Bitcoin market is short-term, and a wider group of investors will participate in the investment of crypto assets, which is the main narrative of the ETF era. As analyzed in the previous section, if investors relocate only because of management fees, they are expected to buy other Bitcoin ETFs in the future and will continue to contribute to Bitcoin; the impact of investors who earn discounts on Bitcoin is neutral. But on the other hand, lets take a look at the strength of the new Bitcoin spot ETF managers. Issuers approved this time include Blackrock (total assets under management of US$8.59 trillion), Fidelity (total assets under management of US$4.5 trillion), Invesco (total assets under management of US$1.6 trillion) USD), are all the top companies in the global asset management industry. Among them, BlackRock, Vanguard Group, and State Street were once known as the Big Three and controlled the entire index fund industry in the United States; and the current size of the entire cryptocurrency market Only 1.7 trillion. Leading asset management companies are generally considered 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 leading brands for many years will help better promote Bitcoin spot ETF, a new category of assets.
Part 5: In the next three months, there will be three major nodes that will play a decisive role in the encryption market
Ranked in order of importance:
1/ Bitcoin Halving: It is expected that in April 2024, the new supply of Bitcoin will decrease significantly, while the demand will increase with ETFs. Bitcoin ensures that its total supply will never exceed 21 million through the mechanism of halving its output every four years. Halving will directly lead to a significant reduction in the new supply of Bitcoin. Combined with the adoption of the Bitcoin ETF, it opened up the channel for funds to flow into Bitcoin and brought a large amount of new demand for Bitcoin. On the one hand, the new supply of Bitcoin is about to be halved. On the other hand, demand is increasing. At the same time, the U.S. dollar interest rate cut cycle has increased preference for risky assets. Investors in the crypto market generally believe that 24 years will usher in a new round of rise, commonly known as Mingpai. bull market.
We can refer to the changes in Bitcoin price within one year after the previous Bitcoin halving. When Bitcoin was released in 2009, the mining output was 50 BTC per block. It has experienced three halvings since then.
The first halving occurred in November 2012. The mining output dropped from 50 BTC to 25 BTC per block. The price of Bitcoin rose from US$13 to a maximum of US$1,152 within one year.
During the second halving in July 2016, mining output further dropped to 12.5 BTC per block, and the price of Bitcoin rose from $664 to a maximum of $17,760.
The third halving occurred in May 2020, when mining output was halved again to 6.25 BTC per block, and the Bitcoin price rose from a maximum of $9,734 to $67,549.
The next halving is expected to occur in April 2024.
In addition, according to Coinshares report calculations, after the Bitcoin halving, the average Bitcoin miners mining cost per Bitcoin (power consumption + maintenance costs in addition to one-time mining machine costs, etc.) will rise to $37,856.
2/ Ethereum spot ETF approved: expected in May 2024. BlackRock, Fidelity, Invesco and other institutions have also applied for Ethereum spot ETFs, and are more likely to be approved. With the passage of the Bitcoin ETF, the market has begun to anticipate that the Ethereum ETF will be approved in May, and prices have begun to react to this.
3/ Ethereum Cancun Upgrade: It is expected that in February-March 2024, the transaction cost on the Ethereum Layer 2 network will be reduced to one-tenth. The Cancun upgrade may be similar to the iPhone moment of the mobile Internet for Ethereum. Lower transaction fees and better transaction experience will lead to more application scenarios that can truly serve large-scale users.
Most of the time, people tend to overestimate short-term effects and underestimate long-term effects. The launch of Bitcoin spot ETF is a milestone and the first door to introduce crypto assets into core financial assets. Looking back many years later, this must be a lasting and long-term benefit.
This article is a detailed article made by Atlascap invest using sosovalue data to focus on the recent adoption of ETFs but not boosting the price of BTC. It operates ETFs and analyzes its mechanisms in depth, comparing the performance of Grayscale and other ETFs. Dimension advantages and disadvantages. sosovalue is authorized by Atlascap invest to publish articles.
This article does not constitute any investment advice.
Reference materials: various ETF prospectuses and official websites
Fidelity Wise Origin BitcoinFBTC https://www.sec.gov/Archives/edgar/data/1852317/000119312523306021/d375081ds1a.htmhttps://digital.fidelity.com/prgw/digital/research/quote/dashboard/summary?symbol=FBTC
iShares Bitcoin TrustIBIT https://www.sec.gov/Archives/edgar/data/1980994/000143774924000785/bit20240106_s1a.htmhttps://www.ishares.com/us/products/333011/ishares-bitcoin-trust#/
Franklin Bitcoin ETFEZBC https://www.sec.gov/Archives/edgar/data/1992870/000113743923001486/ftdhts1a122023.htmhttps://www.franklintempleton.com/investments/options/exchange-traded-funds/products/39639/SINGLCLASS/franklin-bitcoin-etf/EZBC
ARK 21 Shares Bitcoin ETFARKB https://www.sec.gov/Archives/edgar/data/1869699/000119312524003823/d5 49524 ds 1 a.htm https://ark-funds.com/funds/arkb/
Hashdex Bitcoin Futures ETFDEFI https://www.sec.gov/Archives/edgar/data/1985840/000199937124000009/tct_424b3-010224.htmhttps://hashdex-etfs.com/defi
Vaneck Bitcoin TrustHODL https://www.sec.gov/Archives/edgar/data/1838028/000093041324000044/c106800_s1a.htmhttps://www.vaneck.com/us/en/investments/bitcoin-trust-hodl/overview/
Invesco Galaxy Bitcoin EtfBTCO https://www.sec.gov/Archives/edgar/data/1855781/000119312524003812/d5 0789 3d s 1 a.htm https://www.invesco.com/us/financial-products/etfs/product-detail?audienceType=Advisor&ticker=BTCO
Valkyrie Bitcoin FundBRRR https://www.sec.gov/Archives/edgar/data/1841175/000183988224000518/bitcoin-s1a_010824.htmhttps://valkyrieinvest.com/brrr/
WisdomTree Bitcoin FundBTCW https://www.sec.gov/Archives/edgar/data/1850391/000121465924000371/wtbs1a6.htmhttps://www.wisdomtree.com/investments/etfs/crypto/btcw
Grayscale Bitcoin Trust ETFGBTC https://www.sec.gov/Archives/edgar/data/1588489/000119312524004895/d264170ds3a.htm#rom 264170 _ 7 https://etfs.grayscale.com/gbtc
Bitwise Bitcoin ETFBITB https://www.sec.gov/Archives/edgar/data/1763415/000199937123001336/bitwise-s1a_122923.htmhttps://bitbetf.com/
