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After many years of refusal, the U.S. Securities and Exchange Commission (SEC) has finally approved the first Bitcoin-based Exchange Traded Funds (ETFs), allowing them to be traded on the American market. This historic decision marks a major advancement for the cryptocurrency industry, following nearly ten years of unsuccessful attempts and repeated rejections by the SEC. The rule changes adopted by the SEC allow for the listing of various Bitcoin ETFs, including those by Grayscale, Bitwise, Hashdex, BlackRock, Valkyrie, and others, totaling 11 approved applicants.
An ETF is an investment vehicle that allows traders to buy shares backed by Bitcoin without directly holding the asset. Until now, only Bitcoin futures-based ETFs were available to American investors, with the SEC reluctant to approve a spot ETF, which would follow the actual real-time price of Bitcoin. This approval follows a long series of rejections, beginning in 2013 with the proposal from the Winklevoss brothers, and underscores the SEC’s ongoing concerns about market manipulation and hacking risks. Despite challenges and concerns, the arrival of Gary Gensler as head of the SEC and the perseverance of industry players such as BlackRock, Fidelity, and WisdomTree have contributed to this decisive turn.
The launch of the new ETFs was remarkable, with a trading volume reaching $4.5 billion on the first day. This performance far exceeded market observers’ expectations, who had not anticipated such immediate success. BlackRock, with its iShares Bitcoin Trust listed on the Nasdaq, almost generated a billion dollars in volume by itself, representing 22% of the total volume of the 10 Bitcoin ETFs in circulation that day. Yesterday, the ETFs generated an exceptional trading volume of $1.8 billion, surpassing more than three times the combined volume of all 500 ETFs launched in 2023, which amounted to $450 million. This remarkable performance was dominated by funds offered by Grayscale, BlackRock, and Fidelity, which alone accounted for $1.6 billion of the total volume.
Grayscale continues to lead the pack in terms of total trading volume, with more than $5.1 billion, but its Bitcoin fund has seen significant capital outflows, with over $579 million withdrawn since it began trading on January 11th. BlackRock is considered to have the potential to attract even more investment and could surpass Grayscale as the leading player in terms of liquidity. It is this volume from Grayscale that appears to largely explain the price drop that has been recorded since the launch of the ETFs.
Indeed, the GBTC (Grayscale Bitcoin Trust) was previously advantageous for arbitrage investors, but this dynamic has reversed, leading to significant losses when the premium turned into a discount. With the successful conversion of GBTC into a spot ETF, the discount has decreased, reaching 1.55%, allowing investors with long-held locked-up Bitcoins the opportunity to disengage. With its 1.5% management fees, we are witnessing a massive exit of investors. Some are turning to more competitive ETFs, while others are simply happy to exit this product that has been trading at a discount for a long time.
In three days, about $1.1 billion was withdrawn from Grayscale’s ETF, as investors rushed to leave the fund following the reduction of its discount to its lowest level in nearly three years. Bloomberg ETF analyst James Seyffart noted capital inflows into other recently launched Bitcoin ETFs. However, it remains uncertain if these inflows compensate for the massive outflows from the Grayscale Bitcoin Trust on the same day. The estimated outflows from GBTC, amounting to $1.17 billion, equate to about 27,000 Bitcoins at the current price of approximately $42,800. Except for GBTC, the other nine spot Bitcoin ETF issuers hold 35,761 Bitcoins, according to X CC15Capital. Apart from Grayscale’s 605,891 Bitcoins, BlackRock and Fidelity’s ETFs hold 11,439 and 9,750 BTC, respectively, according to CC15Capital data.
Yesterday, Grayscale transferred an additional 9,000 bitcoins to an exchange early Tuesday, as part of the continued net sale of its product after its conversion into an exchange-traded fund. According to Arkham Intelligence data, these transfers were made in batches of 1,000 bitcoins just after the opening of the American stock market, following a three-day weekend. This action initially caused the price of bitcoin to drop on Tuesday morning, although it quickly recovered.
In short, the volume coming from Grayscale is putting downward pressure on prices, not the other way around. This situation should resolve itself within a few days or weeks at most.
Despite Grayscale’s sales, the price of Bitcoin has shown some resilience, maintaining around $43,000. The BTC spot markets have largely stabilized with an increase in supply liquidity above the current price. Now that many investors have left GBTC and the new ETFs are competing in advertising to attract maximum capital, several believe that the bullish trend could soon resume.
Jurrien Timmer, the Director of Global Macroeconomics at Fidelity, concurs with this view. Despite a nearly 7% drop in Bitcoin over the last week, following the impact of the BTC ETF launch, Timmer does not expect the bearish trend to continue much longer. In a thread on X, he suggested that the current Bitcoin price trends indicate more of a short-term positioning adjustment than a long-term trend reversal. While some predictions foresaw a Bitcoin crash, placing it between $32,000 and $38,000, Timmer anticipates instead a consolidation of recent gains. According to him, what we are observing might be a ‘sell the news’ moment, but he believes it will take some time to consolidate these recent gains, especially since many participants have ‘equitized’ their future positions on Bitcoin via the futures market or Bitcoin-sensitive stocks. Timmer considers the current price of Bitcoin reasonable, influenced by the growth of its network, real interest rates in the economy, and long-term prospects that seem promising. He raises the question of whether this marks a new chapter towards wider adoption of Bitcoin as a currency-commodity, a transition that could take time. Despite the slowdown in the bullish trend, many asset managers maintain a significant net long position in the Bitcoin futures market.
The United States Internal Revenue Service (IRS) has announced that the new tax regulation requiring the reporting of cryptocurrency transactions over $10,000, similar to cash transactions, is not yet implemented and will be delayed until the Treasury and IRS publish specific regulations. This clarification comes after concerns in the crypto community about the immediate enforcement of this law. The measure requires that any commercial transaction in cryptocurrencies over $10,000 be declared, but raises practical questions, particularly for payments from DAOs or staking activities. In response to these ambiguities and potential problems, the cryptocurrency advocacy group Coin Center has filed a lawsuit against the Treasury and the IRS, arguing that the law is unconstitutional, a case that is currently on appeal.
BlackRock CEO Larry Fink, once a skeptic of Bitcoin, has defended the cryptocurrency as a bulwark against economic manipulations by authoritarian governments in an interview on Fox Business. Fink considers Bitcoin a store of value and a means to counter economic manipulation by governments. Fink, who in 2017 shared JP Morgan CEO Jamie Dimon’s criticisms of Bitcoin, has changed his view, particularly during the pandemic. He certainly recognizes Bitcoin’s use in illicit activities, but now sees great potential and opportunity in Bitcoin. According to him, the question now is whether people will believe in Bitcoin’s ability to be a cross-border asset. With the SEC’s approval of Bitcoin ETFs, Fink believes we are legitimizing cryptocurrency and strengthening its security. In another interview on CNBC, Fink expressed interest in an Ethereum ETF, considering it a step towards tokenization.
The correlation between Bitcoin and gold has reached historically high levels recently, despite the fact that Bitcoin has become more accessible than ever on stock markets thanks to ETFs (exchange-traded funds). Historically, Bitcoin and gold mostly moved independently, but since the 2020 stock market crash and the COVID-19 crisis, this correlation has tightened. Currently, it is at 0.76, meaning that Bitcoin and gold prices tend to move in the same direction 76% of the time. While this correlation has not yet reached its highest level, it is getting closer and closer. This increase in the Bitcoin-gold correlation has occurred in a context of global economic changes, including central bank interest rate hikes, and coincided with the introduction of Bitcoin ETFs on the American market, an event considered a major step in the transition of Bitcoin to an asset similar to a stock. However, despite this increasing integration into traditional finance, Bitcoin’s relationship with gold has strengthened, the current correlation being just a few points below the historical record of 79%. This situation indicates an increasingly close link between these two assets, both seen as solid stores of value. Furthermore, the Bitcoin-gold ratio, which compares the price of Bitcoin to that of gold, also saw a strong rise in 2023, reaching a peak towards the end of the year before experiencing a slight decline.
Finally, it is noteworthy that for the first time in its history, Bitcoin has recorded a ‘golden cross’ on its weekly price chart. This technical term refers to the situation where the Bitcoin’s 50-week simple moving average (SMA) crosses above the 200-week SMA, an event interpreted by market enthusiasts as a positive price change indicator. This golden cross, perceived by many traders as a harbinger of a long-term bullish market, contrasts with the ‘death cross’, where the short-term SMA falls below the long-term SMA. However, this bullish interpretation can be contested, as averages are based on past data and tend to lag behind current prices. Indeed, this first golden cross on the weekly chart is the result of a Bitcoin rise of more than 70% to $42,700 in four months. Experienced traders often consider these crosses as lagging indicators, sometimes coinciding with the exhaustion of a trend. Are we at the dawn of a long bull market following the historic approval of spot ETFs and the upcoming halving scheduled for the spring? Certainly, conditions seem to suggest it.
The presented information is as of January 17th, 2024, unless otherwise indicated and is provided for information purposes only. The information comes from sources that we believe are reliable, but not guaranteed. This statement does not provide financial, legal or tax advice. Rivemont Investments are not responsible for any errors or omissions in the information or for any loss or damage suffered.
