In a move that sent ripples through the cryptocurrency market, the Securities and Exchange Commission (SEC) recently approved spot bitcoin Exchange-Traded Funds (ETFs).
Brimming with optimism, investors anticipated a surge of fresh capital flowing into Bitcoin, boosting its market capitalization. However, the post-ETF approval has left many scratching their heads as money seems to be moving unexpectedly.
Unprecedented Trading Volumes Mask Bitcoin's Decline
At first glance, the trading activity in the newly-listed bitcoin ETFs appears robust. Within a mere three days, trading volumes surpassed $10 billion, a figure that dwarfs transactions for any other ETFs introduced in the past year.
Update on the #Bitcoin ETF Cointucky Derby. The ETFs have traded almost $10 billion total over 3 days. Will have updated flows and assets later tonight or tomorrow morning. pic.twitter.com/OnpCshjYJP
— James Seyffart (@JSeyff) January 16, 2024
Bloomberg ETF analyst James Seyffart lauded the launches as "very successful" by most metrics, highlighting the exceptional performance of these ETFs in their initial days.
Senior ETF analyst Eric Balchunas provided a striking comparison, revealing that the total trading volume of 500 non-bitcoin ETFs launched in 2023 amounted to only $450 million.
In contrast, the Bitcoin ETFs achieved a historic $10 billion in just three days. However, beneath this apparent success, a more nuanced reality emerges.
Outflows Overshadow Inflows: GBTC's Struggle
Despite the impressive trading volumes, the actual flow of money tells a different story. Post-approval, cash has flowed out of Bitcoin, causing a decline in its market capitalization by over $60 billion.
Notably, Grayscale's Bitcoin Trust (GBTC), a leader in terms of volume, faced substantial outflows totalling nearly $600 million since the ETFs started trading.
Bloomberg ETF analyst Seyffart predicted a net outflow day for the Bitcoin ETFs, estimating around $594 million exited GBTC alone.
While other Bitcoin ETFs experienced inflows, questions lingered regarding their ability to offset the significant drainage from GBTC.
Balchunas pointed to BlackRock's ETF, IBIT, as a potential contender to overtake GBTC as the "Liquidity King."
Capital Rotation: Sophisticated Investors Play Chess
In a surprising twist, sophisticated investors appeared to be playing a strategic chess game. While some anticipated an inflow of new money into Bitcoin, the reality seems to be a rotation of existing Bitcoin investments into the newly launched ETFs.
This trend is evident in institutional moves, such as Cathie Wood's Ark Invest selling off bitcoin futures-based BITO to invest in its newly approved spot bitcoin ETF, ARKB.
Similarly, Grayscale's GBTC witnessed a substantial outflow, with approximately $1.17 billion moving into other spot bitcoin ETFs.
Bitcoin investors also engaged in larger capital rotation, selling off shares in companies like MicroStrategy, Riot Platforms, and Marathon Digital to redirect funds into spot bitcoin ETFs.
The dance of capital rotation involves trillions of dollars moving across various securities, commodities, and currencies daily.
In the case of bitcoin ETFs, this capital shuffling isn't necessarily problematic. As the market witnesses a rotation of approximately $36 billion of existing Bitcoin investments, it's vital to recognize the dynamic nature of financial markets.
Bitcoin's Value Decline Amidst Shifting Investments
The cryptocurrency market finds itself in flux as the dust settles from the SEC's approval of spot bitcoin ETFs.
A JP Morgan report estimates a staggering $20 billion capital rotation from crypto exchanges into spot bitcoin ETFs, with an additional $16 billion flowing from other bitcoin products into ETFs.
With such huge shuffling from various investment avenues, determining the precise net inflows into the newly approved spot bitcoin ETFs remains elusive.