Was the Bitcoin ETF Launch a Failure?
Issue 98
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Today's Bullets:
BTC Launch Stats
Unlocking GBTC
Chokepoint 3.0?
Long-Term Verdict
Inspirational Tweet:
With all the hype and lead-up of the inevitable approval of spot-based Bitcoin ETFs, many investors (including me) were expecting a healthy rally of BTC and the ETF prices at the commencement of the first day of trading the securities.
But that's not what happened.
Instead, Bitcoin and the ETFs momentarily spiked in value (Bitcoin reached $49,000) and then proceeded to fizzle for the rest of the day and continued falling on Friday.
So, what exactly happened?
Why didn't the new Bitcoin ETFs soar and Bitcoin itself run to test new highs?
Where is the God Candle?!?!
Sure, the multiple SEC premature releases of approval no doubt ruined the excitement and dampened enthusiasm of Bitcoiners and investors who were anticipating a victory for the asset.
This undoubtedly had some sort of negative impact, but it is unknown just how much.
Then what else could it be?
It turns out there were (and still are) a number of other factors that are playing into the ETF and Bitcoin prices, ones that have a material impact to their performance.
If this all sounds confusing, no worry. We will break them down one by one here today, nice and easy as always.
So, grab your favorite cup of coffee and settle into your favorite chair for an easy but informative Sunday read of The Informationist.
🤓 BTC Launch Stats
First things first, if you are new here and wondering what the big deal is with these new Bitcoin ETFs, how they are different from the other Bitcoin ETFs that have been trading for years, and why there's so much hype around them, I wrote a whole newsletter about that last week. I encourage you to go have a peek at that first, and then come back to this one.
You can find that Issue here:
TL;DR: The new Bitcoin ETFs are spot-based and therefore must own the underlying Bitcoin to match their NAVs (Net Asset Values). This makes them far more attractive as investments that represent actual Bitcoin, especially important for investment advisors and institutions that cannot otherwise buy them for their clients or portfolios.
As such, there is a huge amount of capital that's been waiting on the sidelines for this development and will use these new Bitcoin ETFs instead of the less desirable future-based ETFs that have been available.
Because of this, many people (including myself) expect a surge of capital inflows into Bitcoin over the coming weeks and months.
Tens of billions of capital, maybe even hundreds.
One of the best ways to judge the validity of this thesis is to look at the actual trading of the ETFs themselves on the first days of existence.
Just how much demand was there?
Let's talk facts not speculation.
With some analytical help from Bloomberg's Senior ETF expert Eric Balchunas (@EricBalchunas on Twitter/X), we can extrapolate some findings.
First, looking at the total volume of trading in the first two days, we can see the level of actual activity in these ETFs.
The total trading volume for the ten ETFs that launched this week was $7.85B.
Whoa.
But we have to do a small adjustment here to get closer to the actual demand volume. And so, we are going to subtract GBTC's volume from the total.
Just trust me for a moment, we will get to why in a few minutes.
So, the total volume we will assume was actual new interest was $2.32B on Day 1 and $1.35B on Day 2, for a total of $3.67B in the first two days of trading.
Still a whoa at first glance.
Not shown in the schedule above, IBIT traded 37 million shares on Day 1 and 23 million on Day 2, FBTC traded 17 million and 11 million.
That's almost 90 million shares between those two ETFs in two days.
And these are not penny stocks, with IBIT trading at $25 and FBTC at $38.
As Eric pointed out in a Tweet re: first day trading: "By all metrics: volume, # of trades, flows, media coverage it was smashing success, historical." And the volumes in WisdomTree's BTCW, the tiniest of the crew, was larger than 95% of over 500 ETFs launched in the past year.
OK, so volume and attention was there. But what about actual investment?
Is there more capital in the Bitcoin ecosystem as a result of the ETFs yet?
In the wise words of Jerry Maguire, Show me the money!
Peeking at the Asset Flows, i.e, the capital coming into each of these ETFs over the first two days, we see some substantial activity.
Again subtracting GBTC from the mix, what this shows us is that $625 million entered the Bitcoin ETF market on Day 1, and $193 million entered on Day 2, for a total amount of new capital in the Bitcoin ETFs of $819 million.
Solid.
Disappointing for many, as we were all looking for multiple billions of dollars to arrive on Day 1, but there are a number of factors we must consider that we may not have anticipated prior to the launch of these ETFs.
We will outline those, too.
One more metric that is less scientific but still quite significant and telling, in my opinion, is the actual market making of these ETFs and the ability to move in and out of them with low levels of trading or investment friction.
Watching these trade for the first tow days, as expected, I noticed that virtually every single one of the ETFs had wide and volatile Bid/Ask spreads in the early hours of trading.
This, however, decreased by both measures substantially over the curse of the first two days.
In fact, by the end of trading on Friday, I noticed that IBIT and FBTC each held just a penny or two spread in the Bid/Ask of their respective markets.
Pretty remarkable, IMO.
Why?
We will keep this very high level and simple for our purposes today, but basically, when ETFs trade in the market, we have market makers (known as Authorized Participants) and actual investors who are buyers and sellers.
What this also means is that the APs (market makers) were extremely comfortable with the ability to manage the liquidity inflow and outflow to keep spreads tight and allow for entry and exit fees (trading friction of buying and selling) quite low.
Looking further, we also see that the NAVs of each of these ETFs ended the second day extremely efficiently when compared to the underlying amount of Bitcoin they represent.
Huh?
What I mean is that the buyers of these ETFs are now sitting on an asset that accurately represents the amount of Bitcoin it is supposed to, rather than trading at a large premium or discount to the underlying Bitcoin price.
This means the launch was highly successful for all of these ETFs, with just Invesco and Valkyrie holding slight premiums to the underlying amount of Bitcoin held in each of their ETFs.
What's important here is the substantial benefit these ETFs now provide to those wanting exposure to actual Bitcoin rather than the paper-settled futures version of BITO, which was expensive and lagged performance significantly over longer periods of time.
And even more importantly, it nearly completely closed the gap that holders of GBTC had to endure, where the GBTC discount to actual Bitcoin held in that trust fluctuated widely and was over 25% for long periods of time.
In other words, a terrible proxy for Bitcoin itself.
On that, let's talk about GBTC for a moment.
😡 Unlocking GBTC
It's difficult to understand this week's activity without understanding the picture regarding GBTC.
See, GBTC is now an ETF that was converted from a publicly traded Trust.
Long story short and in essence, many of the original holders of this GBTC Trust have been sitting on shares that were priced at a discount on the NYSE to actual Bitcoin for years. They were locked into the ownership with the original issuance of the shares. And so, they have been waiting for GBTC conversion to a Spot ETF in order to sell their shares for full value.
As a result, much of the volume in GBTC this week was selling, not buying.
This is why we extracted it from the calculations above.
Now, some of you may be saying, wait, even of they were selling in the market, there had to be buyers on the other side of those sales, right? So wouldn't they count?
Enter the Authorized Participants (APs).
In order to create a competitive market and an attractive security for investment, the APs will buy and sell on behalf of the ETF manager (i.e., Blackrock, Fidelity, Valkyrie, Grayscale, etc.). Then they will either create or redeem ETF shares in order to match the total dollars that remain in that ETF by buying (or selling) the actual Bitcoin to match that amount.
The ETF's Total Net Asset Value or NAV.
And so, as most GBTC trades were sellers of the shares who have been unlocked by the ETF conversion.
As the net ownership of GBTC fell in the last two days, the APs redeemed shares and sold underlying Bitcoin, reducing the GBTC ETF Net Asset Value.
Many of the sellers of GBTC shares then (likely) turned around and bought one of the other ETFs instead.
Maybe it was out of frustration with GBTC, having been locked up for so long with a terrible discount to Bitcoin.
Or maybe it was the fact that Grayscale decided to keep a 1.5% annual fee on its shares, even though many of the others discounted their fees to zero for an introductory period and will keep them extremely low after that.
Because DEFI never converted, the next closest fee to GBTC is HODL, which is still 1.25% cheaper than GBTC annually.
I mean, what is Grayscale thinking?!?!
My guess is that they figure they will retain enough unsuspecting or ignorant investors that it won't matter, and the internal cost/benefit analysis showed that keeping fees high would work out in the long run.
For them, that is.
See, when new investors come into the space, just like with gold ETFs, they often ask: which is the largest ETF in the space? What has the most liquidity?
And, assuming those are the safest, then they just blindly buy them.
Ignorance at its best.
Perhaps Grayscale ends up winning at this fees game, we will see. As of now, they are the largest ETF in NAV terms by a factor.
Over 50X larger than either IBIT (Blackrock) or FBTC (Fidelity).
But things change fast in markets and lighting fast in Bitcoin markets.
And with almost $4B of trading activity in those top two ETFs in two days, they are virtually matching the activity in GBTC. So I'll be watching that ratio closely.
And it's no surprise that the negative selling pressure on GBTC weighed on its NAV, keeping it below water and, once again, trading at a discount, albeit much smaller than before the conversion. (See the chart above, GBTC is at -1.1% to NAV)
But what about the rest of the space? Why didn't more money come into the ETFs, net of GBTC?
Where are all the billions and billions and billions of new institutional dollars?
😣 Chokepoint 3.0?
For those of you who don't remember, a very short history of banking-led Chokepoints here in the US.
The original Operation Chokepoint was an Obama-driven initiative of the DoJ, back in 2013, which investigated US banks who did business with firearm dealers, payday lenders and other online companies (read: online porn).
Basically, bending to the will of the DoJ, and to avoid them crawling up their wazoos, banks terminated many relationships with companies who were on these DoJ red flag lists.
Chokepoint 2.0 began a couple of years ago, and in much the same manner, banks began terminating relationships with any company who was red-listed due to cryptocurrency transactions or activity.
In the words of U.S. Senator Bill Hagerty: “'Operation Choke Point 2.0' refers to the coordinated effort by the Biden administration's financial regulators to suffocate our domestic crypto economy by de-banking the industry."
I can attest that this was real, as I experienced it with my hedge fund and large banks. We resolved all the chokes, though it was time and energy consuming to say the very least.
Onto the next Chokepoint 3.0 or maybe Chokepoint 2.1, as it is also directly related to cryptocurrency, though just Bitcoin here.
In any case, with the Bitcoin ETFs now available, hundreds of trillions of dollars that otherwise not had access to Bitcoin can now jump into the asset class and begin allocating accordingly.
After all, the superhighways are there. The volume and trading and settlement and custody is all taken care of, using the same traditional rails as institutional investors and investment advisors are extremely knowledgable about and comfortable with.
The Bitcoin superhighway is ready.
One problem.
A number of large and important brokerage firms have blocked the on-ramps to this superhighway for their customers.
Vanguard being the worst and loudest offender, issuing a statement: “Spot Bitcoin ETFs will not be available for purchase on the Vanguard platform.…Our perspective is that these products do not align with our offer focused on asset classes such as equities, bonds, and cash, which Vanguard views as the building blocks of a well-balanced, long-term investment portfolio."
Wow.
Strange, considering their mission statement: Our core purpose is simple—to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success.
Also strange as Vanguard is a top holder of Microstrategy (MSTR), which is little more than a Bitcoin proxy these days.
And Vanguard also allowed their customers to buy and hold futures-based Bitcoin ETF, BITO. A terrible long-term proxy for Bitcoin, IMO.
Though they have apparently vowed to pull that access now. 🤨
Vanguard is not alone, however.
FOX Business reported that Merrill Lynch, owned by Bank of America, is also not allowing customers to buy spot ETFs.
UBS is only offering Bitcoin ETFs to eligible wealth management clients, according to the WSJ.
Citigroup only provides Bitcoin ETF access to institutional clients, but says is 'exploring options for high-net-worth individuals'.
Of course there are many more banks and brokerages doing the same thing, preventing tens of trillions of dollars of access to these new SEC-approved ETFs that trade and settle on highly regulated exchanges through SEC-approved measures and tight exchange oversight.
Just see the reactions to one of my posts on X, two days ago:
Now. Before we get too worked up and frustrated with legacy banking and controls over how you use your own money, we must consider a few things.
First, this SEC approval process was a mangled and messy process.
We had countless filings and amendments to filings and, though we had whispers of probable approvals, we got virtually zero publicly disclosed insight from the SEC itself along the way.
Imagine Amazon or Apple trying to initiate an IPO and the SEC refusing to approve them for years and years and then finally, in a set of fits of capitulation, requiring them to file amendment after amendment after amendment and then...
Allowing a fake Tweet to be posted that they were approved.
Only to remove it and insist the opposite.
And then...
Posting the approval notice on the SEC website.
Only to remove it and insist the opposite.
And then...
Finally approving them a few hours later.
With a short and salty statement that reeked of reluctance.
What a 💩-show to say the least.
So, it is no surprise that some brokers were not even set up properly to handle trading and compliance of these new ETFs that began trading the next morning.
It normally takes weeks and weeks to get all this in order and set up.
I cannot blame some of the trading houses and brokerages for not being quite ready yet.
The SEC sure didn't help with the process and anticipation. Only those who were extremely well positioned and eager to handle the new business were ready.
Thank you Fidelity.
And for those who were not, they may lose some customers who are unwilling to wait and want access now.
As for the Vanguard and Merrill Lynch customers, yes it is extremely frustrating if you want immediate access. It was quite a surprise to me that both of these firms completely shut out their clients to the ETFs.
But this is still a free country (for now), and you can simply take your investment business elsewhere.
I had a great experience with Fidelity (no surprise, as they have been in the crypto space with Bitcoin and Etherium for a long now), and I know of many people fleeing Vanguard for Fidelity.
I don't blame them
This is America, after all. You can vote with your feet and your wallet.
I personally think you should have access to all publicly listed securities and assets, regardless of what your broker or bank believes.
This is called freedom.
That said, where is all of this going, will the ETFs, in fact, have an impact on Bitcoin itself in the long run?
🥵 Long-Term Verdict
As we now see, this stuff is messy and complicated and takes time to shake out.
Between GBTC settling down, brokers getting organized and putting the plumbing in place for their customers (other than Vanguard and Merrill, for now 🙄), and investment advisors (RIAs) having conversations with their clients, this is going to take some time.
Again, there is a ton of capital that has never had true access to Bitcoin until now.
But there are many pipes and roads and onramps that still need to be built.
Even if all the roads and on-ramps were ready, capital like this does not typically all flood in at once.
It trickles at first.
And then it flows.
Eventually.
And as it does, the ETFs will have to buy the underlying Bitcoin to match the NAVs of their ETFs. Investors buy the ETFs and the APs go buy Bitcoin to match.
Bottom line, Bitcoin has been, and will likely continue to be, an asset that is phenomenal at testing patience.
Volatility Champ.
And for the OGs, you know better than anyone else: Bitcoin rarely does what 'everyone' expects it to do.
And so, just when you think the ETFs have fizzled out.
When Bitcoin grinds sideways for a bit.
Frustrating newcomers, and shaking them out.
That's when, in my personal opinion, it happens.
That is when we get the eyeball-piercing, face-melting, short-sale-obliterating...
God Candle.
Or a series of smaller Demi-God candles.
Until then, be patient, my friends.
This is not a sprint. It is not a marathon, or even triathlon.
This is more like a Triple Deca Ultratriathlon.
Go ahead and look it up. If you've been a Bitcoin investor for a while, you'll know what I mean.
I truly believe we will all be rewarded for it.
That’s it. I hope you feel a little bit smarter knowing about the Bitcoin ETF launch and what to expect going forward.
If you enjoyed this newsletter and found it helpful, please share it with someone who you think will love it, too!
Talk soon,
James✌️