The digital asset industry experienced a remarkable inflow of $2.45 billion in the week ending on February 17, leading to a resurgence in the industry’s assets under management to reach $67.1 billion, a level last seen in December 2021. Most of this investment activity took place in the United States through Bitcoin’s spot exchange-traded funds (ETFs), as reported by CoinShares in a blog post on February 19. However, some data suggests that the inflow into Bitcoin ETFs may not be driven by new participants, which is less optimistic 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 investors’ expectations. Despite this achievement, Bitcoin’s price still remains almost 25% below its all-time high of $69,000. In the past, when entities announced billion-dollar acquisitions in Bitcoin, it resulted in a much more significant price reaction. Therefore, one would have expected a higher impact from the ETFs’ net inflow of $4.93 billion since their launch on January 11, as observed in BitMEX Research data.
Bitcoin has shown resilience despite the absence of retail investors. There are several potential explanations for Bitcoin’s limited performance, although it is difficult to determine how each market participant values their position or the reasons behind the selling pressure. However, it is evident that if nearly $5 billion of net inflows entered the spot Bitcoin ETFs, an equal amount was likely sold by previous holders. Some analysts and investors mistakenly equate daily issuance with 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, indicating that the newly minted coins are not significant in terms of pricing. This is because over 93% of the maximum supply of 21 million BTC is already in circulation. Therefore, the flow of newly minted coins from miners is unlikely to be the reason for Bitcoin’s limited upside following the spot ETF launch.
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 price of $38,870 was only 7.5% below the previous all-time high, suggesting that the event itself drove Bitcoin’s price to a much higher level. This indicates that the spot ETF launch in the U.S. had a less significant impact on price action.
There are numerous benefits for Bitcoin holders to migrate their positions to a spot ETF. It is possible that some of the inflow into the ETFs was offset by investors selling their equivalent positions. These benefits 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 spot ETFs may have been balanced out by equivalent short positions. Arbitrage desks take advantage of 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 futures contracts at a premium.
Therefore, it is possible that a portion of the 26,500 BTC increase in open interest at CME in the 14 days leading up to February 19, which is valued at over $1.3 billion, could be linked to the inflow into spot ETFs, although it may have been neutralized by short positions in futures.
In conclusion, the data on spot Bitcoin ETFs does not indicate a bearish outlook, and the longer the inflow continues, the higher the likelihood of a supply shock that could push Bitcoin’s price above $60,000.
It is important to note that this article does not provide investment advice or recommendations. All investment and trading activities involve risks, and readers should conduct their own research before making any decisions.