The Securities and Exchange Commission (SEC) approved the launch of spot bitcoin ETFs earlier this month, a decision that came after repeated rejections of such funds due to concerns about the susceptibility of the underlying market to fraud. The approval was influenced by a court ruling last year in favor of Grayscale.
The Grayscale Bitcoin Trust (GBTC), which converted into an ETF on January 11, has seen an outflow of approximately $8 billion, according to Bloomberg Intelligence data. In contrast, nine newly launched spot-bitcoin ETFs have attracted about $4 billion in inflows within their first six trading days. Funds from BlackRock and Fidelity Investments have each drawn more than $1 billion in inflows.
For years, the Grayscale Bitcoin Trust was one of the few options for individual investors to gain exposure to bitcoin without purchasing the cryptocurrency directly. However, it was not an ETF, and investors could not easily redeem shares for the underlying bitcoin. The fund's shares would trade at a discount to the underlying value of the bitcoin it held. Since early 2021, the fund had traded at an increasingly steep discount to the underlying bitcoin it held, peaking at nearly 50% in December 2022.
The transformation of the Grayscale Bitcoin Trust into an ETF has narrowed its discount to near zero. However, this change has also led to investors taking profits on the price gain and moving to lower-fee competitors, contributing to a downturn in crypto markets. Despite hopes that the new bitcoin ETFs would boost the price of bitcoin by attracting individual investors, the price of bitcoin has fallen over 10% since the SEC approval.
The conversion of Grayscale's 10-year-old bitcoin trust into an ETF has allowed some of its investors to exit their holdings altogether. The fund's overall size has fallen from $28 billion earlier this month to $22 billion. Analysts believe much of the money in the 10 new funds is likely to have come from investors exiting Grayscale, which charges much higher fees than its competitors. This could also explain the 10% price drop in bitcoin as well. The approval of spot Bitcoin ETFs was a long-awaited “catalyst” in the crypto market. However, it has proven to be a "buy the rumor, sell the news" trend among investors, despite the long-term bull case.
How does this influence bitcoins price?
So how could GBTC even affect the price of bitcoin
This answer lies in how GBTC and many other ETFs are structured.
Here is an excerpt from investopedia for how GBTC is structured.
When an authorized partner wishes to invest, Grayscale buys bitcoins on the cryptocurrency market and issues an equivalent number of GBTC shares in exchange for capital. Those shares can then be sold on the stock market to retail investors. The trust holds a significant amount of actual bitcoins, and the price of its shares is meant to reflect the value of bitcoin held per share.
So Grayscale will change the number of bitcoins they own based upon the buying/selling of their GBTC shares. So an outflow of GBTC shares would mean an outflow of bitcoins in their cryptocurrency wallets, meaning they are being sold in the market. With many investors taking profits, this created a surge in supply, lowering the price of bitcoin.
Possible Consequences for Crypto Exchanges
The approval of Bitcoin ETFs could alter perceptions of cryptocurrencies by making them more accessible to retail investors and offering lower fees than direct crypto purchases. These ETFs could also become competitors to crypto exchanges rather than avenues for them to acquire new customers.
Coinbase, a leading cryptocurrency exchange, reported a quarterly trading volume of $177 billion in 2021. However, in its most recent quarter, this figure dropped to $11 billion. This substantial decrease in trading volume is largely due to the inherent price volatility of the cryptocurrency market, coupled with the collapse of numerous cryptocurrency projects. As Exchange-Traded Funds (ETFs) start to offer access to a variety of cryptocurrencies, and the number cryptocurrencies begins to consolidate, Coinbase could further see their market share drop in terms of trading volume. Coinbase's stock is trading almost 30% below its level in late December, when speculation about likely SEC approval began.
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