What are ETFs?
The term ETF stands for Exchange Traded Fund, which is a
fund containing Bitcoin and is traded on the stock market as shares. These
shares directly track the price of Bitcoin, meaning your gains and losses are
directly tied to Bitcoin’s price movements. The supply and demand for these
shares, when the stock market is active, directly influence the price of
Bitcoin. It’s noteworthy that the SEC is responsible for overseeing these
funds.
The
purpose of creating Bitcoin spot ETFs
Institutional/organizational investors
faced two main risks when investing in Bitcoin. Recent unfavorable events in
the crypto industry, such as the CoinEx exchange hack, the dissolution of HTX
(formerly Huobi), the closure of FTX, and vulnerabilities occasionally observed
in wallets, have naturally raised concerns about custody or holding large
volumes of Bitcoin.
Moreover, regulatory and legal risks
posed by regulators are also a concern for organizations intending to invest in
Bitcoin. Now, Bitcoin ETFs provide a solution to mitigate these two risks for
organizations. Companies like BlackRock, Fidelity, and Ark Invest offer their
own Bitcoins in the form of shares on the market. It seems that organizations
and major investors intending to invest in Bitcoin entrust these companies with
the responsibility of holding their Bitcoins, thereby safeguarding them from legal
and regulatory challenges.
Elnaz Javanshir
Is Bitcoin spot ETF the only Bitcoin fund up to now?
For a long time, we’ve witnessed the
activity of Bitcoin futures ETFs and Bitcoin trust funds in the United States;
let’s examine both separately! Well, Bitcoin futures ETFs were essentially
future contracts traded, for example, on the Chicago Mercantile Exchange,
without the need for actual Bitcoin transactions. Consequently, upon the
approval of Bitcoin futures ETFs a few years ago, not only did we not have a
positive impact on the price of Bitcoin, but also due to manipulations that
occurred, a volatile and heavy price cycle was created. In Bitcoin trust funds,
companies like Grayscale purchased a limited number of Bitcoins and converted
them into shares. The price of these shares aligned with the movement of
Bitcoin prices, and we consistently witnessed a gap between the share prices
and the actual price of Bitcoin. The share prices were determined by their own
supply and demand, hence having no specific impact on the price of Bitcoin.
However, the story differs with Bitcoin spot ETFs, where the supply and demand
of Bitcoin shares directly impact the price of Bitcoin!
A few years ago, with the approval of
gold spot ETFs, we witnessed an explosive growth in the price of gold. Are we
envisioning something similar for Bitcoin?
No, from a technical perspective,
these two asset classes are not directly comparable! The first difference
relates to the market value of these two assets, and secondly, at that time,
gold was widely accepted as a fiat reserve in many countries. Therefore,
comparing these two is fundamentally flawed.
An overlooked aspect during the approval of Bitcoin spot
ETFs
Before Bitcoin spot ETFs were accepted on January 10th,
all applicant companies were striving to have actual Bitcoin for their proposed
Bitcoin shares. However, the SEC did not approve this, and companies were
compelled to have cash for the Bitcoin shares they intended to offer. It is
worth noting that major financial companies like BlackRock, with their
intelligent advisors and analysts, were well aware that their demand would
likely boost Bitcoin prices. Consequently, they strategically made their
purchases at lower prices in advance! Given that they cannot use the actual
Bitcoins they purchased, it becomes easier for them to sell or save profits.
The reason of decline in Bitcoin shortly after the
approval of Bitcoin spot ETFs
Firstly, financial markets generally respond more to
expectations than to events. The market expected a significant influx of
capital into Bitcoin with the approval of Bitcoin spot ETFs, which did not
materialize. “In financial markets, one should generally ‘buy the rumor
and sell the news.'”
Secondly, we observed continuous and substantial outflows
from Grayscale’s Bitcoin ETF, which could have two reasons:
a) Investors
seek ETFs with better performance and liquidity.
b) Grayscale’s
sale of Bitcoin shares due to the bankruptcy of FTX exchange, With the
permission of the court.
Reflection of Bitcoin Spot ETF Activity
With the introduction of Bitcoin ETFs to the U.S. stock
market, we expect increased volatility in the crypto market during the New York
trading session! The New York session, based on the global clock, spans from
13:00 to 22:00, reaching its peak fluctuations from 20:00 due to approaching
the daily close.
Since the approval of Bitcoin spot ETFs implies Bitcoin’s
entry into the U.S. stock market, it will significantly increase the
correlation between the crypto market and the stock market compared to before!
Consequently, if stocks experience a decline, it will have a clear negative
impact on Bitcoin prices.
In the U.S. stock market, given macroeconomic issues and
the fact that the start of the annual candle was bullish, I don’t anticipate a
favorable situation for the U.S. stock market in 2024!
Advantages and Disadvantages of Bitcoin Spot ETFs
1. By
mitigating custody and regulatory risks for organizations, a positive impact on
Bitcoin’s long-term outlook is expected. However, the mid-term and short-term
price behavior will depend on the capital flow into these ETFs and will be
influenced by various factors.
2. The
United States has long sought ways to control the crypto market, even
introducing tools like CBDC (Digital Dollar) for this purpose, which has
remained unsuccessful so far. Now, imagine a future where a massive amount of
Bitcoin is accumulated by giant U.S. companies. The result would make market
control by the government easier, contradicting the decentralized nature of the
crypto industry!
3. From
a technical perspective, Bitcoin spot ETFs are not attractive.
Suppose, in the future, Bitcoin spot ETFs attract
significant capital:
· Reduced
network transactions
· miner’s
income decrease (the heart of the Bitcoin network)
· Decreased
mining profitability
· Influence on network health and miner capitulation
Evaluating the overall performance of Bitcoin ETFs so far
Grayscale, as the world’s largest Bitcoin fund, decided
to sell about 600,000 of its collected Bitcoins in the spot market after the
approval of Bitcoin spot ETFs. Over the past two weeks, Grayscale has sold
around 150,000 of its Bitcoins on the Binance spot market. Interestingly,
Bitcoin ETFs in the U.S. stock market have bought approximately the same
amount.
Should we wait for other crypto ETFs?
it seems unlikely that the U.S. Securities and Exchange
Commission (SEC) will approve additional ETFs soon. They are likely to evaluate
the performance of approved ETFs before considering more approvals. Currently,
some major financial management companies, such as Grayscale and BlackRock,
have applied to establish Ethereum spot ETFs. As of the writing of this
article, all applications are delayed by the SEC, with a 50% chance of a final
decision on Ethereum ETFs in May. If no decision is made in May, the final
decision by the SEC will likely be postponed until after the U.S. presidential
elections in November.
Additionally, recent mysterious and indirect statements
in interviews with Larry Fink (CEO of BlackRock) and the CEO of Ripple
regarding the possibility of establishing an XRP ETF have strengthened
speculations about the potential formation of such ETFs in the future.
How do the United States Securities and Exchange
Commission (SEC) and Commodity Futures Commission (CFTC) look at spot bitcoin ETFs?
Mr. Rostin Behnam, the head of the
CFTC, expressed concerns about the risks and dangers of spot Bitcoin ETFs,
recently approved by the SEC. Acknowledging his Iranian origin, he emphasized
the need for accelerated legislative efforts to regulate the crypto industry.
It’s noteworthy that 2024 is considered the year of regulatory framework
establishment in the crypto field.
Gary Gensler, after approving spot
Bitcoin ETFs, remains cautious in his press statement, highlighting Bitcoin’s
potential involvement in illegal activities such as money laundering, financing
terrorism, and circumventing sanctions. Gensler warned about the overall
investment risks associated with Bitcoin. In a specific part of his statement,
he clarified that approving the listing of Bitcoin ETFs doesn’t necessarily
imply SEC’s endorsement or rejection of Bitcoin, emphasizing SEC’s disclaimer.
Should we expect the launch of Bitcoin
spot ETFs in other countries?
One of the countries we anticipate to
grant approval for Bitcoin spot ETFs in the first quarter of 2024 is Hong Kong.
Despite its initial appearance as a small country in East Asia, Hong Kong holds
significant financial importance, serving as a special administrative region
for China. Despite China’s general prohibition and adversarial stance towards
the crypto industry, Hong Kong is considered a unique financial testing ground,
being a financial window for China.
It’s noteworthy that the Securities
and Futures Commission (SFC) in Hong Kong has specified that trading permission
is granted only to cryptocurrencies with a minimum presence in two out of five
indices: Nasdaq, Bitwise, 21Shares, Galaxy, and WisdomTree. Therefore, if
future ETFs, besides Bitcoin, are to be approved, they are likely to be limited
to cryptocurrencies that meet these criteria in Hong Kong.
These alternative coins may include:
▪️ ADA
▪️ AVAX
▪️ MATIC
▪️ LINK
▪️ ETH
▪️ LTC
▪️ BCH
▪️ DOT
▪️ SOL
▪️ XRP (uncertain)
This article was written by Elnaz Javanshir.