Introduction
The SEC’s approval of Bitcoin ETFs in January 2024 marked a turning point for the cryptocurrency industry. These new financial instruments allow investors to be exposed to Bitcoin through traditional stock markets, without the need to buy and hold the cryptocurrency directly. The event has generated great excitement and access to debate about its potential implications for the market.
When investors engage in buying or selling Bitcoin through centralized exchanges like Coinbase or Binance, each transaction directly impacts the price of Bitcoin. These platforms continuously match buyers with sellers around the clock, displaying a price that reflects the average of what buyers are willing to pay and what sellers are willing to receive. Bitcoin on exchange, has a real-time influence on the price.
However, the dynamics become more intricate when it comes to Bitcoin ETFs. While new spot Bitcoin ETFs are designed to directly track the Bitcoin price, their impact is not the same. Buying a share of an ETF does not have an immediate, real-time effect on Bitcoin’s price.
The relationship between Bitcoin ETFs and the price of Bitcoin is complex and multifaceted. While ETFs offer a convenient way for investors to gain exposure to Bitcoin, they do not directly impact the price in the same way as buying or selling Bitcoin on exchanges.
The short-term and long-term effects
The initial impact of the approval of The ETFs cannot be ignored. When the SEC approved Bitcoin ETFs, the price of Bitcoin fluctuated widely, touching $46,500 and then falling below $40,000.
In the 1st week of February, Bitcoin prices approached $47,000. This shows the market’s sensitivity to regulatory changes and investor sentiment, highlighting the need for deeper analysis.
The Bitcoin spot ETF saw a significant net inflow of $197 million on Jan. 31, marking the fourth consecutive day of positive net inflows. In contrast, Grayscale’s GBTC experienced a net outflow of $187 million, while other ETFs, excluding Grayscale, collectively witnessed a net inflow of $384 million. Notably, the Fidelity ETF FBTC recorded an impressive single-day net inflow of approximately $232 million.
The concentrated increase in funds flowing into Bitcoin ETFs, particularly those designed to track the spot price of Bitcoin rather than futures, indicates growing investor confidence in the digital asset as a long-term investment. This trend may serve as a precursor to the broader acceptance and integration of Bitcoin into traditional investment portfolios, potentially contributing to increased price stability and a reduction in long-term volatility.
The long-term potential of ETFs is not to be underestimated. Increased liquidity due to the entry of new investors, particularly institutional ones, could make the market more resilient to volatility and facilitate price discovery. In addition, the growth in demand could put pressure on OTC liquidity and push ETFs to buy directly from exchanges, influencing the price. In particular, the Bitcoin network has a maximum supply of 21 million coins, and while thousands of bitcoins are daily added to ETFs, only 900 BTC is mined each day, this daily mining supply is expected to decrease to 450 BTC in the next 80 days, persistent demand could pose challenges in creating new ETF shares.
Cryptocurrency analysts suggest that the recent approval of Bitcoin ETFs could drive Bitcoin price higher than expected. In the long term, it could be a significant inflow of new capital that pushes Bitcoin higher than the current circle predicts.
In fact the introduction of US-based Bitcoin exchange-traded funds (ETFs) is seen as an opportunity to address the deterioration in the cryptocurrency markets caused by the downfall of the FTX exchange and its affiliated hedge fund, Alameda Research, as stated by market makers.
Prominent players in the digital asset market, including Auros, Wintermute Trading, and GSR Markets, express optimism about the ongoing trends and anticipate that Exchange Traded Funds will contribute to the long-term stabilization of crypto markets. The recent recovery in the value of the largest cryptocurrency over the past year adds further support to this outlook. Chuan Jin Fong, GSR’s Head of Sales for Asia, Europe, the Middle East, and Africa, encapsulates the prevailing sentiment by stating that there will be a natural narrowing of bid-ask spreads, an overall increase in liquidity, larger order sizes, and enhancement of market depth.
Thanks to the approval of the Bitcoin ETF and its success, the SEC might be more inclined to approve an ETF for Ethereum. The anticipated date for this approval is May 23, the last day by which the SEC would consider ETF applications submitted by VanEck and Ark 21Shares. Geoff Kendrick, Head of FX Research, West, and Digital Assets Research at Standard Chartered, suggests that Ethereum shares key similarities in legal and financial status with Bitcoin, indicating it may follow a similar approval pattern. According to the analyst, Ether is expected to see a price increase to $4,000 by the projected May 23 approval date, assuming it follows a trading pattern similar to Bitcoin during the ETF approval process. However, this price prediction is contingent on several assumptions being true, including the market sentiment for approval remaining low, potential inaccuracy in implied volatility predictions, and the SEC approving multiple applications on the same day. Standard Chartered anticipates that Ether will avoid much of the sell-offs that Bitcoin experienced post-ETF approval.
The Role of Blackrock: iShares Bitcoin Trust
The crypto sector has been captivated since BlackRock announced its plan to establish a spot Bitcoin ETF on June 15, 2023. Although other companies had previously submitted applications, BlackRock had a remarkable track record, with just one rejection out of over 1,400 ETF applications, heightening expectations.
The mere prospect of the world’s largest asset manager introducing a bitcoin ETF led to a 96% price surge. This underscores the undeniable influence of bitcoin ETFs on the cryptocurrency’s price.
The entry of BlackRock, the world’s largest asset manager, into the market with IBIT has generated great interest. The ETF has raised over $3,2 billion in inflows as of February 2024, a significant figure that represents a strong validation of Bitcoin and prompts other financial giants to follow suit. This influx of money enabled the fund to acquire more Bitcoins, bringing the total to 70,000 Bitcoins.
Conclusion
The introduction of ETFs has had a profound impact on various aspects of the market. They have acted as catalysts for significant regulatory developments worldwide, prompting regulators to consider the integration of cryptocurrencies into traditional financial products. Furthermore, the operational requirements of ETFs have led to improvements in market infrastructure, bringing about benefits in terms of security and efficiency.
The launch of Bitcoin spot ETFs is a historic event with far-reaching implications. While initial enthusiasm may have been excessive and volatility remains a constant factor, the long-term potential is decidedly significant. The increase in legitimacy, liquidity, and institutional participation could pave the way for a more stable and mature market, heralding a broader adoption of Bitcoin and cryptocurrencies.
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