The United States’ spot Bitcoin exchange-traded funds (ETFs) may have unintended consequences for on-chain adoption and liquidity, despite initial promises of attracting more baby boomers to Bitcoin.
According to Jim Bianco, founder of macro research firm Bianco Research, one of the main concerns with ETFs is their potential to cannibalize on-chain liquidity. In a post on May 19, Bianco highlighted the risk of ETFs pulling on-chain liquidity into traditional finance (TradFi), which has been a long-standing concern for him.
This concern arises at a crucial time for the Bitcoin price, as it is currently trading below a significant resistance line. If Bitcoin manages to break above the $67,500 mark, Markus Thielen, the head of research at 10x Research, believes it could rally to new all-time highs.
However, instead of driving adoption, ETFs appear to be diverting on-chain liquidity away from retail trading. This is evident in the first-quarter financial results of Coinbase, which reported a revenue of $1.64 billion despite a decrease in retail trading volume. In contrast, institutional trading volume increased from $215 billion in Q1 2021 to $256 billion in Q1 of this year.
Bianco sees this as a sign of Coinbase balancing institutional growth to offset the decline in retail trading. However, this raises concerns about Bitcoin’s narrative as a decentralized alternative to the fiat fiscal system.
Furthermore, the ETFs have not been successful in attracting baby boomers, as retail investors hold over 85% of the underlying BTC, while hedge funds only hold 10%.
Although there was a three-week slump of net negative outflows, inflows from U.S. Bitcoin ETFs turned positive during the week of May 6. According to Dune data, these ETFs accumulated over $200 million worth of net inflows in the past week.
The average purchase price of spot Bitcoin ETFs ranged from $58,000 to $59,000. When Bitcoin fell below the $60,000 mark in early May, there was a widespread sell-off, indicating that retail investors were behind the majority of these transactions.
Institutional inflows from ETFs played a significant role in the recent Bitcoin rally to new all-time highs. As of February 15, Bitcoin ETFs accounted for about 75% of new investments in the cryptocurrency as it surpassed the $50,000 mark.
In summary, while the introduction of Bitcoin ETFs was expected to attract more baby boomers to the cryptocurrency, it appears that they may pose a risk to on-chain adoption and liquidity. The diversion of on-chain liquidity into traditional finance, as well as the lack of interest from baby boomers, raises concerns about Bitcoin’s decentralized alternative status.