For more than a decade, Bitcoin supporters have been fighting for mainstream recognition.
More than eight years have passed since Cameron Winklevoss and Tyler Winklevoss began to apply for the Bitcoin Exchange Trading Fund ( BTC ETF) in 2013 . the first US BTC ETF ProShares Bitcoin Strategy ETF ($ BITO) last year received SEC approval of the Securities and landed in New York October 19 Exchange (NYSE).
BITO although not the world’s first BTC ETF, but the encryption industry is still a huge victory, because the US investment can now more easily get a bit more money investment products, which also contributes to the US Securities and Exchange Commission clear whether the encryption money into the traditional capital markets. Many people believe that the launch of the BTC ETF will drive the market “rising”, but the actual situation is far more complicated than imagined.
Now that BITO has been on the market for more than 60 days, let us analyze in depth how this innovative product affects the encryption industry.
How does the BTC ETF work in the United States?
Although BITO and other subsequent BTC ETFs are tracking the price of Bitcoin, they are actually based on derivatives-namely, ETFs of Bitcoin futures, and the funds do not actually hold Bitcoin. More specifically, the fund purchases and holds standardized, cash-settled Bitcoin futures contracts (BTC futures contracts) traded on the Chicago Mercantile Exchange ( CME ). CME Group is usually the first choice for BTC ETFs in the United States because of its strong liquidity, and it is also one of the few exchanges that has obtained regulatory approval for BTC futures contracts by the U.S. Commodity Futures Trading Commission (CFTC).
Source of the above image: CoinGecko Research
In order to maintain exposure to the BTC futures contract, the BTC ETF must sell the bitcoin futures contract it holds when it is about to expire and replace it with a new futures contract with a later expiration date. This operation is also called “rolling purchase” ( Rolling).
In the case of BITO, the fund adopts the purchase method of shifting monthly futures, which means that the ETF will roll over futures contracts on a monthly basis. In fact, most funds like this method of operation because it is a futures contract with the shortest expiry date between CME Group and CME Group.
What impact will BTC ETF have on the crypto market?
One of the most obvious impacts brought about by the BTC ETF is that Bitcoin has gained the “embrace” of traditional institutional investors and retail investors who may have been too risk-averse to try or find the private key. From this perspective, The approval of the BTC ETF by the US Securities and Exchange Commission is of great significance. For many years, the US Securities and Exchange Commission has always been unclear about the BTC ETF, and now there is an “approval seal”, which is undoubtedly crucial to the wider adoption of BTC in the future.
Source of the above image: TradingView
It can be clearly seen from the above picture that although the US BTC ETF has been on the market for a short time, there are significant differences in regional demand. After all, the US has the world’s largest ETF market, and its scale will account for the total global asset management in 2020. (AUM) of nearly 75% (approximately US$5.6 trillion).
As of November 22, 2021, the total asset management of BTCC, Canada’s largest Bitcoin exchange-traded fund, was “only” US$1.4 billion, which is in sharp contrast with the US BITO, which has a total asset management of US$13.7 billion. , Almost ten times that of BTCC. Overall, in the global Bitcoin exchange-traded products (including ETN), the US market share accounts for 69%.
In addition to the benefits of regulatory approvals, the success of the BTC ETF can also be attributed to the growing appeal of Bitcoin and cryptocurrencies in the investor community. In addition, compared with other products such as Grayscale Bitcoin Trust (as shown in the picture above), the trading slippage of BTC ETF is very small. This is because the exchange-traded fund itself has a position opening/redemption mechanism, which helps to maintain the price At a level close to its net asset value. In any case, this price difference should be regarded more as a function. After all, if other variables are introduced into the derivatives-based BTC ETF, price equilibrium seems to be difficult to achieve.
Derivatives-based BTC ETF exacerbates the effect of mispricing
For BITO and other US BTC ETFs, the adoption of a “rolling purchase” model means that regardless of the price, they must sell and buy new futures contracts when the existing BTC futures contracts are about to expire. In other words, these BTC ETFs must bear any premium or discount on price differences. These price deviations are called “contango” and “spot premium” (backwardation). When the price of a futures contract with a longer expiration period is higher than the price When a futures contract with a shorter expiration period, there will be a futures premium. On the contrary, when the price of a futures contract with a longer expiration period is lower than a futures contract with a shorter expiration period, a spot premium will occur.
If we look at the deviation of the closing price of the CME BTC futures contract, we will find that this indicator number is often large and often occurs, as shown in the above figure (source: TradingView).
Over the entire 1-year period, the average premium is 4% and the average discount is 3%. On average, investors may have 56% of the time to pay a premium. It is worth noting that the price tends to soar above 5% (15%) compared to days when the discount is lower (7%).
When contracts are farther from the expiration date, they are usually more speculative and cheaper. And the closer to maturity, the higher the price usually becomes, because the certainty premium is higher. Since BTC ETFs traditionally sell their contracts at the end of the month when they are close to expiration (CME futures expire on the last Friday of each month) in order to make room for the next batch of futures contracts, the possibility of futures contracts is higher.
Impact on Bitcoin spot prices
The impact of ETF on the spot price of Bitcoin does exist, but it is impossible to fully summarize it. The main reason is that there are many market variables that affect the spot price of Bitcoin.
Of course, we can also perform analysis and evaluation based on the basic mechanism of ETF.
Spot ETFs can be regarded as a channel for obtaining Bitcoin. Just like the way a company operates, the wider the marketing channels, the greater the possibility of distribution. In this case, spot ETFs provide greater distribution opportunities for traditional investors. In turn, this will lead to higher demand, which translates into further acquisitions of Bitcoin (as the underlying asset of the ETF) and pushes up its price.
If we look back at Canada’s first spot BTC ETF: BTCC (as shown in the figure below, source: Coingecko), we will find that the situation seems very similar to the one described above.
According to data provided by Eric Balchunas, a senior ETF analyst at Bloomberg, one day after the launch of BTCC, the closing price of Bitcoin rose by US$3,000, while BTCC’s first-day trading volume also reached US$200 million. One month later, the total asset management scale of the BTC ETF reached USD 1 billion, which means that in just one month, Bitcoin worth USD 1 billion was “locked” in the ETF.
But it is worth remembering that on March 18, 2021, the market value of Bitcoin was approximately $1.1 trillion. Taking into account the price influence variables such as liquidity, slippage, and macroeconomic factors, it is extremely unlikely that the accumulation of 1 billion U.S. dollars worth of bitcoin in a month will be the only factor in the price increase. Therefore, a more reasonable assumption is that the first BTC ETF listing is Promoted the market rise.
On the other hand, futures ETFs are quite different. For Bitcoin futures-based ETFs such as BITO, they actually did not purchase physical Bitcoins, so they cannot directly push up the price of spot Bitcoins.
However, as we have seen on BTCC, ETFs are very good “marketing tools”, especially when the United States is participating in this ” game “.
Source of the above image: CoinGecko
One week before BITO’s listing (October 11-18), due to rumors that the U.S. Securities and Exchange Commission would approve the first U.S. BTC ETF, the price of Bitcoin rose sharply during this period, from $54,700 to $61,600. The increase was as high as 12.6%. After BITO went public on October 19, 2021, the price of Bitcoin closed at US$62,000, and two days later, it closed at US$66,200, a record high.
However, in addition to the FOMO inducing effect, it is worth noting that futures ETFs can indirectly affect prices. If there is a significant difference between spot and futures prices, traders can use cash arbitrage trading (also known as basis trading), which involves short/long BTC futures contracts while buying and selling bitcoins, that is, arbitrageurs can Use pricing inefficiencies to obtain risk-free profits.
Source of the above image: Te55racT �?TradingView)
During the listing of BITO, the price of CME Group’s BTC futures contract soared, resulting in a significant premium relative to the spot price of Bitcoin. However, this situation was quickly corrected as traders entered arbitrage. More specifically, arbitrageurs are incentivized to buy Bitcoin while selling BTC futures contracts.
It is undeniable that the BTC ETF (whether it is spot/futures) is a historic milestone for the crypto community, because it shows that Bitcoin has successfully passed regulatory review, at least it is now part of the globally recognized ETP.
Many people are still pushing the US Securities and Exchange Commission to approve spot BTC ETFs, because Canada, and even Brazil and other countries/regions have approved spot BTC ETFs. However, out of concerns about potential fraud and manipulation in the cryptocurrency field, the US Securities and Exchange Commission There is no positive response to the spot Bitcoin ETF.
In this case, the approval of futures-based BTC ETFs such as BITO is usually seen as a temporary solution to appease investors, but this is unlikely to last for a long time. Spot-based ETFs have many advantages over futures-based ETFs, and for the US Securities and Exchange Commission, there is actually no clear reason why one should be approved and not the other. That being said, the crypto industry should not regard ETFs as the ultimate goal, but as the first step towards the market. We should soon see the emergence of more traditional investors (whether retail or institutional) friendly capital market products, some of which will also enter the traditional financial market, bringing new audiences to the cryptocurrency industry.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/listed-60-days-inventory-how-bitcoin-etf-affects-the-crypto-industry/
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