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Bitcoin ETFs in Financial Markets: What’s the Long-Term Impact?

Last Updated January 27, 2024 8:42 AM
James Morales
Last Updated January 27, 2024 8:42 AM
Key Takeaways
  • New Bitcoin ETFs launched in the US this month could become some of the largest BTC whales in existence.
  • Grayscale’s GBTC currently holds the most Bitcoins, but others are closing the gap.
  • Collectively, spot Bitcoin ETFs could become a powerful force in financial markets, influencing crypto prices and trading activity around the world.

The launch of the first US-listed spot Bitcoin Exchange Traded Funds (ETFs) earlier this month marked the end of a year-long campaign for regulatory approval. But the real journey has only just begun. 

As Bitcoin enters its ETF era, meaningful volumes of institutional money could flow into crypto for the first time. With the arrival of new capital sources, ETF managers are set to become major players in the global Bitcoin market – wielding what some predict will be hundreds of billions of dollars of buying power.

ETF Managers Are the New Bitcoin Whales

According to one estimate, Bitcoin ETFs could raise $40 billion in 3 years, with the market ultimately swelling to over $400 billion. 

Even though the cryptocurrency’s price has retraced by nearly 20% since the Securities and Exchange Commission (SEC) first announced its approval of 11 spot Bitcoin funds, at the close of trading on Monday, January 22, the new ETFs held assets worth nearly $27 billion. With a net asset value (NAV) of $22.95 billion, Grayscale’s GBTC is currently the largest of the lot. But rivals could soon close the gap.

Unlike its peers, GBTC wasn’t always structured as an ETF. In its previous life as a unit investment trust, GBTC had a monopoly on the market for exchange-listed Bitcoin products and it still towers over other funds. 

However, an exodus of Grayscale investors has already started to reshape the leaderboard. At present, the second and third largest funds, managed by BlackRock and Fidelity, have a NAV of $1.4 billion and $1.26 billion respectively.

With 3 ETFs already valued at over a billion dollars, Nansen’s Principal Research Analyst, Aurelie Barthere, told CCN that she expects the new funds will come to overshadow the whales that have traditionally influenced the price of Bitcoin, shifting the balance of power away from large individual investors.

Even before ETFs arrived on the scene, the analysts noted that the concentration of ownership was already trending downward. Nevertheless, she said that 0.4% of BTC wallets still controlled as much as 60% of the cryptocurrency’s total supply. Going forward, “I would expect ETFs to accelerate this redistribution to new buyers, especially retail traders and retail investors,” Barthere said.

Liquidity and Volatility in Crypto Markets 

Considering Bitcoin’s historical tendency for sensational interday price swings, the redistribution of coins and liquidity boost provided by new ETF investments could reduce market volatility, but Barthere cautioned against overstating the impact. 

Although she predicted that ETFs will ultimately lead to less dramatic price spikes, “you can still have very major drawdowns, even in very liquid markets,” Barthere observed. “You still need to have the risk appetite to go into crypto,” she added, noting that the generally volatile nature of cryptocurrencies remains unchanged.

For all its unpredictability, however, Bitcoin is still known to follow certain patterns. These too could fall under the influence of ETFs buying and selling activity.

Daily Bitcoin Cycle Could Sync With US Trading Hours

According to a 2022 study , Bitcoin trading activity typically peaks just after the opening of US stock markets. Meanwhile, price volatility tends to follow an M-shaped pattern, with 2 peaks that coincide with the opening of US and European exchanges.

Post-ETF approval, asset managers based in New York and Chicago are set to drive an increased volume of trading activity. In turn, the cryptocurrency’s daily trade cycle may become even more synced to US Trading Hours.

Bitcoin, BTC daily trading patterns
  Bitcoin trading activity tends to peak just after the US stock market opens.

For example, BitMEX founder Arthur Hayes predicted  that ETFs will drive “statistically significant trading behavior on and around 4 pm EST,” when they publish their NAV for the day. 

Noting that Bitcoin ETFs calculate their NAV according to the CF Benchmark, which collates price data from various global crypto exchanges, Hayes said he anticipates a surge in arbitrage trading around that time as traders seek to leverage differences between the CF Benchmark and spot prices on individual exchanges.

Crypto in the Global Economy

While cryptocurrency exchanges are open 24 hours a day, 7 days a week, synchronization with the trading hours of traditional securities exchanges implies their interconnectivity.

Post-ETF launch, with Bitcoin no longer isolated from the world’s largest financial markets, the symbolic and material barriers that have historically separated crypto from traditional finance suddenly look flimsy. More than ever before, Bitcoin is now embedded within the core infrastructure of the global economy, marking the beginning of a new era for the world’s preeminent cryptocurrency.

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