Assessing the Impact of ETFs on Bitcoin So Far

By  Ayush Sharma March 7, 2024

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What the ETF Means for Bitcoin

The crypto market witnessed a historic event in January, as the first-spot Bitcoin ETFs began trading in the U.S. market. This was a long-awaited milestone for the crypto industry, as it opened the doors for more mainstream adoption and institutional investment. But how did the market react to this news, and what does it mean for the future of crypto?

ETF, or exchange-traded fund, is a basket of securities that trades on an exchange just like a stock. An ETF can track or seek to outperform a particular index, sector, commodity, or other asset. For example, an ETF that tracks the S&P 500 index would hold shares of all the 500 companies that make up the index.

A Bitcoin ETF, therefore, is an ETF that tracks the price of Bitcoin. It would allow investors to buy and sell Bitcoin through a regulated and transparent platform, without having to deal with the technical and security challenges of buying and storing BItcoin directly. This would also make Bitcoin more accessible to institutional investors, such as pension funds, hedge funds, and mutual funds, who may have stricter rules or preferences for types of assets they can invest in.

There are two types of Bitcoin ETFs: spot and futures. A spot Bitcoin ETF would hold actual Bitcoin in custody and track its price directly. A futures Bitcoin ETF would hold contracts that bet on the future price of Bitcoin, and track its price indirectly. A futures Bitcoin ETF would also incur additional costs and risks, such as rollover fees, contango, and counterparty risk.

In October 2023, the SEC approved the first Bitcoin futures ETF, however, the crypto community was still eagerly awaiting the approval of a spot Bitcoin ETF, as it would offer a more direct and efficient way to invest in Bitcoin. Many believed that the approval of a spot Bitcoin ETF was inevitable, as the SEC had already approved several spot ETFs for other cryptocurrencies, such as Ethereum, Litecoin, and Bitcoin Cash, in late 2023.

Following the success of BITO, several other Bitcoin futures ETFs were launched in the U.S. market, such as the Valkyrie Bitcoin Strategy ETF (BTF), the Invesco Bitcoin Strategy ETF (BTCO), and the VanEck Bitcoin Strategy ETF (XBTF). As of January 11, 2024, there were 10 Bitcoin futures ETFs trading in the U.S., with a combined AUM of over $6 billion.

However, the crypto community was still eagerly awaiting the approval of a spot Bitcoin ETF, as it would offer a more direct and efficient way to invest in Bitcoin. Many believed that the approval of a spot Bitcoin ETF was inevitable, as the SEC had already approved several spot ETFs for other cryptocurrencies, such as Ethereum, Litecoin, and Bitcoin Cash, in late 2023.

On January 7, 2024, the crypto world was pleasantly surprised, as the SEC announced that it had approved the first spot Bitcoin ETFs, the BlackRock Bitcoin ETF (IBIT) alongside others, which began trading on the Cboe BZX Exchange on January 11. The approval of the spot Bitcoin ETFs was seen as a major victory for the crypto industry, as it signaled the SEC's recognition and acceptance of Bitcoin as a legitimate asset class.

The crypto market reacted positively to the news of the spot Bitcoin ETF approval, as Bitcoin's price surged to almost $49,000 on January 11, a 13% increase from the previous day. The market also saw a boost in trading volume and liquidity, as more investors flocked to buy Bitcoin through the ETFs. The ETFs themselves also saw strong demand, as FBTC traded over $400 million worth of shares and IBIT traded over $300 million worth of shares on their first day.

However, the market momentum was short-lived, as traders appeared to sell the news of the much-anticipated event. Bitcoin's price plunged to below $42,000 on January 15, a 14% drop from its peak. The wider crypto market also saw a pullback, dropping from just under $1.9 trillion on January 11 to $1.7 trillion on January 15, per data from CoinGecko. Bitcoin dominance likewise dropped from 49.32% on January 11 to 47.6% on January 15, while data from CoinGlass showed Bitcoin open interest slipping from $20.05 billion to $18.37 billion over the same timeframe.

Market sentiment also took a hit, as the Crypto Fear and Greed Index slipped to "neutral" for the first time since November 2023, tumbling to a level of 52 after hitting a high of 76 in the run-up to the approval of spot Bitcoin ETFs.

Some analysts attributed the market correction to profit-taking, overbought conditions, and technical resistance. Others pointed to external factors, such as the rising U.S. inflation, the hawkish stance of the Federal Reserve, the regulatory crackdown in China, and the geopolitical tensions in Ukraine and Kazakhstan.

Despite, the market slipping after the ETF approval the BItcoin prices have reached reached even higher than ETF's short lived highs. With Bitcoin reaching ATH of $69K, the effect of this is being felt throughout the crypto community with Coinbase ranking top 100 in app store after 2 years. The sudden fall in the price of $BTC after hitting ATH has some people worried, but it's just a small dip if we consider the long term. Bitcoin had reached this point with mostly up only movement since $40,000.

Bitcoin showed a similar pattern in 2020, when it reached ATH and then retraced by around 16% and then went on to pump by around 200% in a few months. With the Bitcoin halving happening in April, the supply cut paired with ETF demands will most probably launch the price above $100K long term.

Most analysts and experts remain bullish on the long-term outlook for Bitcoin and the crypto market, as they believed that the spot Bitcoin ETF approval was a significant catalyst for more adoption and innovation. Bitcoin ETFs would have to buy and hold actual Bitcoin in custody, reducing the supply available on the market, estimating that the spot Bitcoin ETFs could potentially buy up to 10% of the total Bitcoin supply in the next few years, creating a supply squeeze that would drive up the price of Bitcoin. Beluga's founder and CEO Sonny Singh commented in a Bloomberg interview, " Everyone relates back to what happened with the gold ETF when it was launched and all that, right? And if you do the same comparison, you're going to see huge buying pressure that could happen in the crypto space."