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Following their approval by the US securities regulators a week ago, about $3bn gross has flowed into spot bitcoin ETFs and bitcoin’s spot price is down 9 per cent. Bitcoin’s slide is inconvenient for crypto promoters who said spot ETFs would be crypto’s watershed moment, though they have plenty of tradfi-proven excuses: profit taking, better to travel than arrive, buy the rumour sell the news, etc.
A neater explanation involves Grayscale Bitcoin Trust, a publicly listed bitcoin warehouse that led the lobbying for US spot ETFs to be legalised. GBTC had since 2017 been operating a bitcoin lobster pot: anyone with bitcoins could give them to Grayscale Investments in exchange for OTC-traded shares in the trust, but there was no way to get the bitcoins back.
GBTC last week converted to an ETF, giving its backers their first opportunity to reclaim the $28bn or thereabouts of bitcoin it had collected. And in the four days following spot ETF approval GBTC redemptions have totalled more than $1.6bn.
It’s been industry practice to assume all the coins previously trapped in GBTC are being reallocated to cheaper ETFs, meaning at-launch net inflow falls to $1.4bn-ish — but fund reallocation shouldn’t move the bitcoin price; there’s no net selling pressure.
It’s also possible, however, that some GBTC shareholders just want to cash out. And though it’s silly to draw conclusions from only four days of data, it’s interesting that GBTC redemptions on Tuesday exceeded total inflows for all the other US spot ETFs.
Here’s a chart from JPMorgan, whose analyst Nikolaos Panigirtzoglou expects an overhang from previously trapped GBTC punters to remain for a while yet:
It looks like GBTC investors who over the past year had been buying the GBTC fund at a significant discount to NAV to position for its eventual ETF conversion, have been taking full profit post ETF conversion by exiting the bitcoin space entirely rather than shifting to cheaper spot bitcoin ETFs. We had previously estimated that up to $3bn had been invested into GBTC in the secondary market during 2023 in order to take advantage of the discount to NAV. If the previous $3bn estimate proves correct and given $1.5bn has exited already then there could be an additional $1.5bn still to exit the bitcoin space via profit taking on GBTC, thus putting further pressure on bitcoin prices over the coming weeks.
Whatever the motive behind the past few days $1.5bn of outflows from GBTC, these outflows are exerting pressure on GBTC to lower its fees. The GBTC fee at 1.5% still looks too high compared to other spot bitcoin ETFs risking further outflows even if for some institutional investors fees are not the only reason to consider when deciding whether to shift to cheaper spot bitcoin ETFs. Liquidity and market depth also matter but again there is risk for GBTC on that front also if other spot bitcoin ETFs manage to reach critical mass in terms of size and liquidity. A lot more capital, perhaps an additional $5bn-$10bn, could exit GBTC if it loses its liquidity advantage.
Other places to look for rotation are among futures-based bitcoin ETFs, which have bled out by about $300mn since last Thursday, and from exchange accounts. Panigirtzoglou highlights that since spot ETFs were legalised, on-chain cumulative bitcoin flow by smaller digital wallets — an imperfect proxy for retail punting — has ticked a tiny bit lower.
JPMorgan says that if retail brokers and exchanges aren’t quick enough cut fees then approximately $36bn ex GBCT could rotate into spot bitcoin ETFs. Its base case however is that exchanges will retaliate, the price war escalates, and spot BTC ETFs inflows fall short of the highest expectations.
Whichever way, for bitcoin’s price, it’s all a nil-sum game at best.