The Bitcoin community and the wider crypto market were in celebration mode recently as multiple spot Bitcoin ETFs got the green light in the United States in early January.

But Bitcoin took an unexpected price dip, nearly 15 per cent, from the day Bitcoin ETFs were announced to be legitimate financial instruments for serious investors.

Now, the big question on everyone’s mind is what happened? Did the ETF news fail to spark excitement?

Another ‘buy the rumour, sell the news’ action

For seasoned investors of traditional and digital assets, this should come as no surprise. In the financial markets, Bitcoin and other cryptocurrencies included, early speculators often take big risks in buying up assets under uncertainty. In Bitcoin’s case, for the past three months it was still uncertain if the US Securities and Exchange Commission (SEC) would approve spot Bitcoin ETFs on the expected deadline.

However, as the deadline loomed closer, that uncertainty slowly diminished as more people became convinced the dream for a spot Bitcoin ETFs would be realised. In the markets, generally when investors become certain of something they may risk more capital as the perceived risk (that expectations will be completely wrong) becomes lower.

As a result, Bitcoin’s price in the past three months surged nearly 80 per cent. But while the later investors were becoming more confident of their investments, early speculators were already sitting on unrealised profit.

If you were one of them, you’d probably sell a little bit of excess Bitcoin for profit, and that is natural. This was shown by blockchain data (there was a high number of profitable coins being sold in the past month during the time the market became increasingly excited).

Why long-term investors don’t seem concerned

When investing in any asset it’s always important to look at the fundamental reason why an asset is undervalued, and why it could be priced much higher.

In Bitcoin’s case, there are several reasons Bitcoin’s price today may still be at a discount. Think of what spot Bitcoin ETFs imply. This new investment class is a regulated investment instrument located at the heart of the most influential financial markets in the world. According to Bitcoin blockchain analytics platform Glassnode, the North American region contributed US$1.2 trillion in value to Bitcoin’s blockchain between July 2022 and June 2023. That’s two out of every 10 Bitcoin investors on Earth.

Affluent and retail investors will rely on ETF issuers so they don’t have to invest in Bitcoin directly, due to technical risks like misplacing wallet private keys. BlackRock, Fidelity and 17 other US fund managers will be there to serve a new wave of investors adopting Bitcoin for investment purposes.

What's all the news surrounding Grayscale?

Grayscale is one of the earliest fund managers who moved into Bitcoin, even before the SEC approved Bitcoin derivative ETFs (which are less popular than spot Bitcoin ETFs). In fact, Grayscale produced America’s first working model of something that resembled a spot Bitcoin ETF. Grayscale would buy Bitcoin and investors would buy shares of Grayscale Bitcoin Trust (GBTC) to own shares of Grayscale’s Bitcoin.

When spot Bitcoin ETFs were approved, the SEC also approved GBTC’s conversion into a true Bitcoin ETF. However, in the first week of approval we saw over US$2 billion flowing out of the GBTC fund. This also prompted Grayscale to sell billions of dollars in Bitcoin, and short-term investors were scared of this rare and powerful selling pressure.

There were also several factors contributing to the sale of GBTC. It’s worth noting that US$1 billion of GBTC came from the bankruptcy estate of FTX, which sold off 22 million shares of GBTC. Others suggest that GBTC’s current fees are not competitive against other fund managers offering the same product.

GBTC also has an interesting price history. Before it became an ETF, GBTC had its own unique rules of trading imposed on the holders. Consequently, GBTC’s price sometimes did not align with Bitcoin’s real market value. It could be selling much higher (at a premium) or selling lower (at a discount) than actual Bitcoin, despite its value being backed by actual Bitcoin.

As a fresh new ETF, GBTC will probably act differently from now on, but its past quirkiness may have motivated its old customers to find other opportunities with a different ETF issuer.

Money flows into the new spot Bitcoin ETFs

Money is nevertheless flowing into the newly-approved spot Bitcoin ETFs, and investors appear to prefer them over GBTC for now. Leading the pack is BlackRock’s iShares Bitcoin Trust, standing tall as the top performer among the 10 new ETFs in the market. It currently has US$1.3 billion in assets under management.

The new spot Bitcoin ETFs have also managed to convince investors of other crypto funds. A CoinShares report reveals that as much as US$21 million flowed out of funds that issue assets that expose investors to other coins, such as Ethereum and Solana.

Despite the apparent market downturn, notable voices in the crypto arena, such as Mike Novogratz, CEO of Galaxy Investment Partners, are incredibly positive about the long-term impact of the spot Bitcoin ETFs. Arthur Hayes, former CEO of BitMEX, added that crypto markets need the return of global liquidity (a great abundance of cash from central banks) to truly flourish.

This is why investors, in traditional and crypto markets, are now shifting their gaze towards the upcoming macroeconomic data prints in the US, with the addition of the next Federal Open Market Committee policy meeting on January 31.

According to some analysts, the US Federal Reserve might maintain rates steady at a target of 5.25-5.50 per cent. However, rumours of potential rate cuts later this year are gaining momentum as inflation eases.

The takeaways

The approval of multiple spot Bitcoin ETFs in the US triggered a decline in the price of Bitcoin and the broader cryptocurrency market, likely due to early ETF speculators capitalising on their successful investments.

While fund managers experience renewed capital inflows, Grayscale’s GBTC faced a unique scenario. With a substantial outflow of US$2 billion, including US$1 billion from the FTX bankruptcy estate, the market briefly witnessed the looming threat of temporary selling pressure, leading to a 15 per cent dip in the price of Bitcoin.

Despite these challenges, Bitcoin’s future appears promising. The introduction of Bitcoin ETFs is fundamentally reshaping its adoption among high net worth investors, laying the groundwork for a potentially more valuable Bitcoin in the future.

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Steven Blackburn

Head of Marketing

Easy Crypto

w: easycrypto.com e: steven@easycrypto.ai