For this update, we will investigate the recent Bitcoin physical filings, see how they may affect the market, and look at trade volumes throughout 2023.
Price (1 June 2023)
Price (30 June 2023)
Bitcoin led the rise in digital assets this month as it reacted to the news of the Bitcoin physical filings, and particularly the news that Blackrock has lodged an application with the SEC for a Bitcoin physical ETF. It is primarily Blackrock’s interest in Bitcoin that drove the market’s positive reaction. After Blackrock, there has been a wave of institutional interest, with other large institutions such as Fidelity, Wisdom Tree, and Invesco also filling applications. Most analysts believe that the SEC’s approval of this round of applications is likely as the applicants have addressed the major concerns cited by the SEC in previous rejections. These include price manipulation protections through market surveillance agreements with Coinbase. However, even if these applications are approved, there are doubts that they will have a significant impact on prices.
JP Morgan is questioning whether the Bitcoin ETF will lead to organic demand (rather than just attempted front-running speculation) as there are already international Bitcoin ETFs which haven’t grown to significant AUM. Also, there are Bitcoin ETFs (based on futures in the US) which have only attracted $1bil of AUM since their launch in late 2021. I believe the JPM view that investors can already have access to Bitcoin has merit, so doubting why a new ETF would make a difference seems correct at first glance. However, I believe they have not factored in how much these large financial institutions are geared to grow AUM by gathering assets and that their marketing teams will aggressively try to raise assets for a newly-launched Bitcoin ETF.
Additionally, as we have discussed before, Bitcoin experiences all the characteristics of a ‘highly reflexive asset’, a term coined by George Soros. As a brief reminder, a reflexive asset is one where investor psychology has the biggest impact, with news and prices creating a strong feedback loop. Therefore, positive institutional ETF news may very well spark the next beginning of a bull run. Another factor at play is thinking through what the ‘pain trade’ is, i.e., what would hurt the most for investors to see? Right now, in my view, the most painful price direction is upwards, as investors have already watched an 80% recovery while not participating. We know they haven’t participated because the recovery has occurred in two of the lowest volume quarters since 2020. The low volume shows how the speed of the recovery has caught most investors by surprise.
We are expecting significant volatility around the launch approval and launch process over the next nine months. The above image shows when the next SEC feedback will happen, which is early September. In terms of tracking the likely outcome, one of the best proxies for gauging the market’s belief in the timing of the approval is the discount of the GBTC trust, which is attempting to convert to an ETF. As of June 29th, it trades at a 29.2% discount to the fair value of its physical holdings (up from a 45% discount in January) as investors have bet on a positive response from the SEC.
With regards to volume, spot trade volumes in crypto dropped to their lowest levels since pre-covid. Binance saw a 70% drop in trade volume; some of this drop is due to recent SEC concerns around the exchange, but also due to the reintroduction of fees on its most liquid BTC pairs. However, it wasn’t the only exchange to suffer from low trade volumes – trade volume on Coinbase, Kraken, OKX and Huobi also fell by over 50% in Q2.
Spot liquidity is a key metric we are watching in the build-up to the ETF announcements and beyond as it will show if the momentum in the market has shifted. We would expect it to climb towards at least 2022 levels and beyond as more investors enter the space.
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