When Bitcoin Spot ETF Finally Launches, Is It Time to Sell?

Upcoming Bitcoin ETFs: Buy before the rumor begins, buy before the fact emerges

There has been a lot of discussion about a spot Bitcoin ETF potentially being approved soon.

There is an old saying on Wall Street: "Buy on the rumor, sell on the fact." The theory is that if most investors expect something to happen and buy, then when the event actually happens, it is naturally the time for sellers to sell, and many buyers have been exhausted.

The launch of a physical Bitcoin ETF is blockchain’s worst-kept secret. So, when the news finally arrives, will it be time to sell?

Before we share our thoughts on the future, let’s take a look back at the past.

This adage has played out perfectly during the two recent major regulatory overtures in the crypto space.

CME launched Bitcoin futures in 2017

At one of our investor summits, Chris Giancarlo, former chairman of the Commodity Futures Trading Commission (CFTC), pointed out a crazy fact that I had never noticed before. Throughout 2017, the market had been rising and the slogan at the time was "When CME Lists Bitcoin Futures, Bitcoin Price Will Go to the MOON!!!"

Until the day Bitcoin futures were launched, the price of Bitcoin had indeed risen by 2,448% compared to 12 months ago. That was the top. That day also marked the beginning of a major bear market with a 84% drop.

Coinbase Public Listing in 2021

Before Coinbase went public, the market repeated the exact same cycle. The entire industry was excited about Coinbase's upcoming direct listing. On the day of the listing, the price of Bitcoin rose 848% from its highest level 12 months ago. Bitcoin peaked at $64,863 that day, and a 76% bear market began.

We quipped in 2021: “Can someone please remind me the day before the Bitcoin ETF officially launches? I might want to take some chips off the table.”

ETF

I believe a Bitcoin ETF will be seen as a major step forward in digital asset adoption. Before discussing the product and its impact on the industry, let’s take a moment to think about how far the industry has come.

A brief history of buying Bitcoin

Getting Bitcoin has changed dramatically over the past decade. In the early days, people would give away free Bitcoin through so-called “Bitcoin faucets.” When I first got into Bitcoin, Gavin Andresen had BitcoinFaucet — you could get free Bitcoin just by signing up. My brother sent me some free Bitcoin at the time.

Soon people needed a place to trade bitcoins. A poker trading site called Magic The Gathering Online eXchange allowed enthusiasts on the site to trade a digital currency called bitcoin, with the acronym Mt. Gox.

Bitstamp was launched in August 2011, making it the oldest exchange still in operation. There was also LocalBitcoins – a marketplace that matched buyers and sellers for face-to-face transactions. Those were the days of yore.

We now have hundreds of exchanges. However, many are offshore, opaque exchanges that are more similar to FTX than to the New York Stock Exchange. Many institutions are reluctant to trade and custody with these entities. IRA accounts and other types of financial accounts are generally not able to access cryptocurrency exchanges.

The future comes from the past

Futures haven’t had much of an impact. I’ve been trading currencies for thirty-five years and know that traditional fiat currencies rarely use futures. The FX market is almost entirely cash/spot.

Although it may sound contradictory, Bitcoin futures are actually a step backwards.

Bitcoin futures miss the whole “thematic nature” of Bitcoin (as my friend Andrew Lawrence puts it). The elegant beauty of Bitcoin is that Bitcoin trading is “t-minus zero” — the trade is settled. The hassle of rolling (say, March to June) when Bitcoin is already settled is unnecessary.

There is no “T+2” settlement, collateral, monthly futures rollovers, or cash-settled market manipulation on sketchy exchanges. When we go back to monthly cash-settled futures, all the charm of Bitcoin disappears.

Don’t get me wrong — I think futures are a good thing. They’ve brought in thousands of new traders who wouldn’t have been able to access Bitcoin any other way. CME and CBOE listings and CFTC regulation of Bitcoin futures are huge positive steps forward for protocol token authentication.

Bitcoin futures market and cash/spot market trading volume and relative share data: The average daily trading volume of Bitcoin futures in October 2023 was approximately US$38 million, theoretically 13,300 contracts Vs. Bitcoin spot trading volume was US$6.169 billion, with a relative share of 0.4%.

The Impact of ETFs

While it’s usually not an auspicious way to start a prediction with “This time it’s different…”, I believe this time it is different.

The two previous Bitcoin price peaks were:

• CME futures peaked at $20,000 on the day they went live (December 18, 2017), and the price immediately dropped 65%, and ultimately fell 84% to its low.

• On the day Coinbase went public on April 14, 2021, the price was $65,000, and the price immediately fell 54%, falling 76% to its final low.

None of these events had any impact on the real-world use of Bitcoin.

Everything is "buy when rumors arise, sell when facts come out".

Bitcoin futures are not opening up any significant new investor groups. They are of interest only to a small group of major arbitrageurs. Net new buying is not significant.

Coinbase’s product is more clearly defined. Coinbase’s website worked fine when it was privately held. The next day, when it was publicly listed, the website worked just the same. The change in Coinbase’s stockholders did not increase people’s chances of getting Bitcoin.

Bitcoin ETFs are very different. The BlackRock ETF fundamentally changes how Bitcoin is acquired. And it will have a huge (positive) impact.

We firmly believe that many spot Bitcoin ETFs will be approved. We also believe that this will happen in a month or two, not years.

I was at Goldman when they did the Goldman index. Now everyone is looking at commodities as an asset class. I was very active in emerging markets in the 90s. Now, everyone is looking at emerging markets as an asset class. Blockchain will be the same. The Bitcoin spot ETF is a very important step for them to become an asset class. Once the Bitcoin spot ETF exists, if you don't have exposure, then you are actually shorting Bitcoin.

“Buy when the rumor starts, sell when the fact comes out.”

Gold ETFs: Digital Gold and Traditional Gold

Many market observers believe that the best analogy for launching a “digital gold” ETF is the impact of launching a physical gold ETF. The first gold ETF was launched outside the United States in 2003, and the first U.S. ETF, GLD, was launched in 2004. This analogy may be a good one because holding physical gold was difficult for many investors in the early 2000s, and custody of crypto assets is a challenge for many investors today. In addition, the ease, low cost, and trusted nature of the issuer will almost certainly attract new investors to the gold market that would not have participated before.

We expect the same to happen when Bitcoin ETFs are launched. When investors have this choice, the demand function for Bitcoin may change permanently. The launch of ETFs has another important effect on Bitcoin and cryptocurrencies. Twenty years ago, the launch of ETFs had a legitimizing effect on the idea of ​​allocating commodities in portfolios. We expect the presence of the most respected brands in consumer finance in the first wave of Bitcoin ETFs to have a similar impact.

We should also expect a small number of ETFs to gain the majority of market share. The larger an ETF is, the more efficiently it can be priced, which kicks off a virtuous cycle that makes the larger ETFs more popular. SPDR Gold Trust (GLD) ($54.6 billion) and iShares Gold Trust (IAU) ($25.3 billion) account for almost 90% of the value of U.S. gold ETFs, with no other competitor exceeding $10 billion.