Is a Spot Bitcoin ETF Already Priced?

summary

• It’s been a chaotic week for Bitcoin investors as the U.S. Securities and Exchange Commission successfully approved ten new spot Bitcoin ETF products.

• Bitcoin prices hit a multi-year high before falling to year-to-date lows, with an 18% market sell-off over the weekend driven by derivative leverage and spot profit-taking.

• Multiple indicators reached levels that encountered significant resistance in past cycles, with long-term holders taking profits at a cost of approximately 75,000 Bitcoins.

In just two weeks, 2024 has proven to be a real roller coaster ride for Bitcoin investors. The U.S. Securities and Exchange Commission approved 10 spot Bitcoin ETF products to trade in the U.S. market, arguably the most significant financial product launch in history.

In many ways, Bitcoin has successfully pulled the traditional financial world and U.S. regulators into the notoriously chaotic and volatile world it is in. On January 9, the ETF approval event went awry after the SEC’s X account was hacked and a false positive approval notice was issued. The BTC price surged to $47,200, but then quickly fell back to $44,500.

The second mistake occurred on January 10, when the real SEC approval document was leaked from the SEC website before the US market closed. Ultimately, all 10 ETF products were approved and began trading on January 11.

BTC prices thus hit a new multi-year high, reaching just under $48,800. The market then dropped 18% over the weekend, hitting a new year-to-date low of $40,000 when traditional markets closed. Bitcoin has once again welcomed Wall Street into its world.

Spot ETF Listing

In the first two days of trading, the spot ETF saw total volume of $7.823 billion, with inflows of over $1.4 billion in AUM. This outweighed the $579 million of outflows that have now been converted to the GBTC ETF product as investors reallocated after years of underperformance during its time as a closed-end fund (ETF fees dropped from 2.0% to 1.5%).

Despite these outflows, GBTC remains the ETF giant in the market, with a two-day trading volume of $4.166 billion, accounting for about 57% of the total. It is likely that funds will continue to shuffle within GBTC in the coming weeks.

Source: James Seyffart (Bloomberg)

The sheer size of GBTC relative to other ETF products can be seen in the chart below from bitcointreasuries.net. Despite GBTC outflows, their massive holding of 617,080 BTC dwarfs their competitors, and the associated liquidity profile remains attractive for any liquidity and depth-sensitive trader and investor.

Source: bitcointreasuries.net

After just two trading days, U.S. spot ETF products now hold a total of 644,860 BTC ($27.2 billion), accounting for 29.7% of global ETF holdings.

Overall, the volume and AUM make this one of the largest and most significant ETF launches in history, and in many ways marks the end of an early phase in Bitcoin’s maturation and development.

Source: bitcointreasuries.net

Selling news events?

Whether it’s the halving or the launch of an ETF, Bitcoin investors love to debate whether the event is priced in. Despite the large swings along the way, BTC prices are essentially flat year-to-date, suggesting this particular event is perfectly priced in.

Of course, there are key drivers behind medium-term volatility, with open interest (OI) in both futures and options markets rising significantly since mid-October:

BTC futures OI increased by $7 billion (+66%), with $1.1 billion flushed out this week.

BTC options OI increased by $6.6 billion (+70%), with $2.3 billion liquidated this week due to contract expiration and liquidation.

Open interest in both markets remains near multi-year highs, suggesting leverage has risen and is becoming a more dominant force in the market.

Live Chart

The chart below shows an oscillator of futures open interest percentage changes. This tool can be used to spot periods of rapid changes in overall market leverage.

A high value indicates an increase of +2 standard deviations in OI. (Red)

Low values ​​indicate a decrease in OI of -2 standard deviations. (Blue)

We can see that on January 3rd there was a major deleveraging event, with almost $1.5 billion of open interest being liquidated in a single day. Conversely, between January 9th and 11th, as ETF speculation peaked and prices approached $49,000, there was a significant increase in open interest.

The following weekend, prices fell back to $40,000 as new ETF unit holders entered Bitcoin’s all-day trading environment.

Live Chart

Perpetual funding rates also maintain a strong positive bias, indicating that leveraged traders are net long and are paying shorts over +50% annualized returns at times. We can also see a clear phase shift that occurred in mid-October, with funding rates moving from a structure that oscillated around neutral to persistently positive values.

The money market interest rate cooled down this week, but remained positive overall.

Live Chart

Options implied volatility has also reversed since mid-October, surging during this week’s chaotic events. Implied volatility has been declining for years since May 2021 as interest waned during the bear market. It is also worth noting that options market infrastructure, liquidity and depth have matured significantly in 2023, with open interest now on par with futures markets (see WoC-51-2023).

This downward trend appears to have reversed in the short term, with IV more than tripling since October’s low of around 30%, reaching over 97% this week. As spot ETF products open new doors for institutional and retail capital, it is likely that Bitcoin’s volatility will begin to evolve as well.

Old Bitcoin, Newbie

It is common for holders of long-dormant tokens to react during major market events. This includes periods when the market sets new ATHs, around cycle tops and bottoms, and during times when there are major shifts in market structure (e.g. Mt Gox, halvings, and now the launch of spot ETFs).

The extent of unrealized gains and losses held by these long-term holders can be measured by LTH-NUPL. This indicator reached 0.55 this week, a meaningful positive number, giving long-term investors an average unrealized profit of 55%.

This is also a level where Bitcoin bulls have encountered meaningful resistance in previous cycles.

Live Chart

The supply held by long-term holders is also slightly below its ATH, having dropped by about 75,000 BTC since November as old Bitcoin is used to take profits.

While 75,000 BTC is a meaningful number, it should also be viewed in the context of LTH’s total supply accounting for 76.3% of the circulating supply. As this spending is happening, the opposite metric, short-term holder supply, has only just recovered from all-time lows.

Live Chart

That being said, the amount of spending by these veterans is statistically significant, resulting in a +1 standard deviation increase in restored supply (tokens older than 1 year old).

As the chart below shows, such events occur relatively rarely but often coincide with uptrending markets encountering meaningful resistance.

Live Chart

As these old Bitcoins were put back into liquid circulation, they facilitated the largest profit-taking event since the ATH in November 2021. The peak realized profit for this cycle was set on January 4th, with more than $1.3 billion in profits locked in each day as tokens changed hands at a higher cost basis.

Profit-taking is normal in an uptrend market, the real question is whether the inflow of new demand will be sufficient to absorb it all.

Live Chart

Summarize

Last week was historic both literally and figuratively. These new spot Bitcoin ETFs set new records for size, and a decade of industry effort finally paid off. After more than a decade of work and against a backdrop of significant political, regulatory, and financial headwinds, the spot ETF ball has finally reached the finish line.

Somewhat poetically, this spot Bitcoin ETF has been trading for 15 years since Hal Finney first tweeted “Run Bitcoin” on January 11, 2009. The first Bitcoin transaction between Satoshi and Hal took place the next day, on January 12, 2009.

Multiple indicators both on-chain and in the derivatives space suggest that a significant portion of Bitcoin investors did see this as a sell-off news event. The key question going forward is whether demand inflows from ETFs, or in anticipation of the April halving, or from humble but reliable holders, will be enough to break through this resistance.

The ETF may be priced in, but for how long?