The digital asset industry experienced a remarkable influx of $2.45 billion in the week ending on February 17, leading to a resurgence in the industry’s assets under management, reaching December 2021 levels of $67.1 billion. According to a blog post by CoinShares on February 19, the majority of this investment occurred in the United States through Bitcoin’s spot exchange-traded funds (ETFs). However, certain data suggests that the influx of Bitcoin ETFs may not be driven by new market participants, which is a less optimistic outcome than previously believed.
Considering the success of the ETF launch, it is important to assess whether the 21.8% price increase by February 19 meets the expectations of investors. Despite this achievement, Bitcoin’s price still remains nearly 25% below its all-time high of $69,000. In previous instances, when entities announced billion-dollar acquisitions in Bitcoin, it led to a much more significant price reaction. Therefore, one would have expected a greater impact from the ETFs’ net inflow of $4.93 billion since their launch on January 11, as indicated by data from BitMEX Research.
Bitcoin has demonstrated resilience in the absence of retail investors. There are several possible explanations for the limited performance of Bitcoin, although it is difficult to determine how each market participant values their position or what is driving the selling pressure. However, one thing is clear: if nearly $5 billion of net inflows entered the spot Bitcoin ETFs, then the same amount was sold by previous holders. Some analysts and investors mistake daily issuance for available supply for trading, but these two factors are not necessarily aligned.
Currently, the Bitcoin network issues 900 BTC per day as incentives for miners, equivalent to approximately $328 million per week. In comparison, Bitcoin’s daily adjusted volume exceeds $10 billion. Therefore, the coins minted for subsidies do not significantly impact pricing, especially considering that over 93% of the maximum 21 million supply of Bitcoin is already in circulation. In other words, miners’ flow is unlikely to be the reason behind Bitcoin’s limited upside following the launch of the spot ETF.
In February 2021, Tesla announced a $1.5 billion investment in Bitcoin, which resulted in a 48% rally in just 14 days. Interestingly, the starting point for this rally, $38,870, was only 7.5% below the previous all-time high that occurred just 30 days earlier. This indicates that even if the market had somehow anticipated the movement, the event itself drove Bitcoin’s price to a much higher level. This demonstrates the relatively minor impact of the spot ETF launch in the United States on Bitcoin’s price action.
The spot Bitcoin ETF offers several benefits that incentivize holders of Bitcoin to migrate their positions. It is possible that some of the inflow into the ETF was offset by investors who sold an equivalent position. The advantages of the spot ETF include tax efficiency, as gains or losses in the stock market can be offset by the ETF instrument, simpler fiscal reporting, easier estate planning, and reduced custody risks. While some investors prefer direct investments through their own wallets, this is not the reality for many.
Furthermore, the increasing open interest in CME Bitcoin futures suggests that some of the inflow into the spot ETF may have been matched by equivalent short positions. Arbitrage desks capitalize on the price difference between fixed-month contracts and regular spot prices, known as a premium or basis rate. The “cash and carry” trade involves buying a spot position and selling the futures contracts at a premium.
Therefore, it is possible that part of the 26,500 BTC increase in open interest at CME in the 14 days leading up to February 19, which is equivalent to over $1.3 billion at current prices, could be linked to the inflow into the spot ETF, although offset by short positions in futures.
Regardless, the spot Bitcoin ETF data does not indicate a bearish scenario, and the longer the inflow continues, the higher the likelihood of a supply shock that could push Bitcoin’s price above $60,000.
This article does not provide investment advice or recommendations. Every investment and trading decision carries risks, and readers should conduct their own research before making any decisions.