Impact of ETFs on Bitcoin’s Price

Capital Flow Chart Now Live!

Hello Bitcoiners,

What a monumental week for Bitcoin, the institutional-grade asset! As anticipated in our previous edition, the ETFs have indeed received approval. This marks only the beginning of corporate investment strategies towards Bitcoin, as the “BTC”-tickers are now visible on the trading terminals of financial institutions. We observed a substantial trading volume on the initial day of ETF trading, yet the impact on Bitcoin’s price was very modest at first. Let's take a closer look at how the ETF pricing mechanism works to better understand its future impact! But also, stay tuned for the chart and a thought-provoking question at the end! As always, I’m here to assist you with the latest data, market trends, and insightful charts! 👊

Price Action and the Effects of the ETFs

To illustrate, let’s consider the BlackRock ETF. Naturally, other ETFs function similarly. The iShares Bitcoin Trust launched with 400,000 shares at $25 each, with a $10M seeding from BlackRock resulting in the holding of 227.9BTC acquired for an average price of ~$43,875.

The math:

($10M seed) / ($25 share) = 400,000 shares.

These shares represent:

($10M seed) / ~$43,875 = 227.9BTC

Net-Asset-Value (NAV)

The share price, initially $25, then fluctuates with the spot price of Bitcoin as the dollar value of the holdings of the 227.9BTC increases or decreases, known as the NAV.

On the first day of trading, investors can only trade the 400,000 outstanding shares, and depending on demand, the share price starts to develop a ‘premium’ or ‘discount’, trading above or below the NAV price, respectively. Note that at this stage, no new shares (read: no Bitcoin) are acquired!

The premium or discount incentivizes traders to arbitrage, taking advantage of price discrepancies between the share price and the NAV, functioning as a mechanism to align them. If the premium or discount persists, the next business day, new shares are created or redeemed by the Authorized Partners (Aps), in BlackRock’s case: JPMorgan.

JPMorgan facilitates the creation and redemption of ETF shares. When there's a premium, they create new shares and increase their Bitcoin holdings. Those shares then get sold, diluting the share price, to align with the NAV. Conversely, when there's a discount, they redeem shares and sell a portion of the Bitcoin holdings.

Now we understand why the ETF volume had a modest effect on the Bitcoin Spot price until the second trading day. It's only on the subsequent business day that the creation or redemption of new shares can occur, resulting in a potential increase or decrease of the ETF’s Bitcoin holdings.

Self-Custody Bitcoin vs. Outdated Tech

Despite counterparty risk and limited trading hours, the pricing mechanism of an ETF is hindered by its slow nature, attributed to the delay in holdings reflecting the invested money.

High Volume and its Implications

We saw a substantial trading volume on the ETFs, overall indicating a healthy start. ETFs, particularly those focused on crypto like Bitwise, started with enthusiasm, evidenced by their $200 million seeding. A considerable part of the volume was money rotating back into Bitcoin, such as ARK Invest selling its Grayscale position pre-launch of their ARK 21Shares Bitcoin ETF. Over the past months, we witnessed a considerable surge in the Bitcoin price leading up to the ETF launch; currently, these share prices are taking some time to find equilibrium.

In conclusion: Tracking the ETF Holdings Increase

What we’re really interested in is the increase in holdings across the ETFs. This metric is crucial, and I will diligently track it.

As mentioned in last week’s newsletter, market psychology plays a key role, and market sentiment will reflect in ETF inflows. Inflows will be gradual; it might take several months due to the build-up of general interest, internal company policies, tax regulations, and other hurdles like credit lines.

While the “BTC”-tickers will appear on the trading terminals of Investment Banks, Hedge Funds, Asset Management firms, Brokerage firms, and Financial Advisory Firms, let’s be prudent and patient. 🫡

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Support & Resistance Levels

The price has been fluctuating nicely within our defined target range and was unable to surpass the resistance level. This is an important chart to follow closely:

Capital Flow Chart Available

The Capital Flow chart discussed in detail last week is now available on the Bitcoin Strategy Platform!

Investment Strategies: Should I Lump Sum or Dollar-Cost-Average?

Next week, we’ll go into great detail to answer this crucial investment question!

Stay tuned for more insights! 🧡

-Root