NewBloc: Analyzing the impact of Bitcoin ETF issuance on Bitcoin prices

Author: NewBloc Strategy Analyst Barry, 5 years of foreign exchange and gold market trading experience

With the Toronto Stock Exchange welcoming the listing of its first Bitcoin ETF last Thursday, the current daily trading volume has reached 9.65 million shares, ranking in the top 10 of the exchange's trading volume, with a total of $165 million worth of shares traded. Its issuer, Purpose Investments Inc., said in a statement that the Purpose Bitcoin ETF (ticker BTCC) aims to provide the world's largest cryptocurrency exposure by directly investing in physical or digital Bitcoin, and supports purchases in two legal currencies: Canadian dollars and U.S. dollars.

Obviously, with the launch of BTCC, the threshold for retail investors to buy Bitcoin has been lowered a lot. Without BTCC, individual investors may face problems such as loss of digital currency keys, hacker attacks, and cumbersome procedures. The issuance of BTCC solves this series of problems, and investors can enter the cryptocurrency market more efficiently and easily.

Generally speaking, the launch of BTCC will significantly increase the liquidity of Bitcoin, and the increase in liquidity will lead to a continuous increase in trading volume, which will also have a short-term impact on asset prices. In this case, the sharp change in prices in the short term will increase the speculative attributes, which will cause further fluctuations in asset prices in the short term. The continuous rise in asset prices will attract OTC funds to continue to enter the market, thus the continuous increase in trading volume, the sharp fluctuations in short-term prices, and the increase in speculative enthusiasm will form a continuously strengthened positive feedback: the launch of BTCC is conducive to the formation of this positive feedback mechanism.

As for ETFs, we have already had a deep understanding from the 2020 crude oil treasure incident that crude oil ETFs are not equivalent to crude oil prices. Similarly, Bitcoin ETFs may not be equivalent to Bitcoin prices, especially in extreme market conditions.

As for the current market, a small number of people hold the vast majority of Bitcoins, and due to the limited total amount of Bitcoins, there are even fewer Bitcoins circulating in the market (as shown in Figure 1 below, the turnover rate is obtained by comparing the past 24-hour trading volume with the total market value, which can be verified by comparing it with the current popularity of BTC)

Figure 1

Therefore, whenever there is off-market capital entering the market, the price of BTC is easily pushed up. However, we need to note that there is a funding rate between spot and perpetual contracts to link them. The deliverable contract and spot can be traded on the delivery date. If the price of BTC is simply anchored, the funds flowing into BTCC will not flow into the BTC spot and thus cannot impact the BTC price. According to the announcement, BTCC is also investing directly in spot (as shown in the official website description in Figure 2 below).

Figure 2

In other words, the funds entering the Bitcoin ETF will flow directly into the BTC spot, which will directly impact the BTC spot price.

As BTC continues to rise, its market value has exceeded one trillion US dollars. It is difficult to imagine how much room BTC has in the future. As shown in Figure 1, even within 24 hours after setting a new high, BTC's network-wide turnover rate (trading volume/market value) was only 6%, and in recent days it has averaged about 5%. On the one hand, a small number of people hold a large amount of BTC, and these people may be optimistic about the digital currency market in the long term, so most of the digital currencies are stored, and the actual circulation in the market may be less than 10%. A large amount of liquidity is chasing the small amount of BTC circulating in the market, which will naturally greatly push up the price of BTC. For a trillion market value, 165 million incremental funds are insignificant, but based on an average turnover rate of 5%, the transaction volume is nearly 5 billion, and the 165 million incremental funds account for about 3% of the 5 billion market value. When some people in the market expect that the entry of incremental funds will drive up the price of BTC, they will be reluctant to sell BTC or go long on BTC, which makes the circulation of BTC in the market less and the buying more, driving the price of BTC up under the effect of expectations.

What is more important for speculation is whether more people will buy after the purchase. This issue is particularly important under the new round of fiscal stimulus of the Biden administration. Especially in the current context of strong speculative atmosphere, it is difficult to say how much of the new round of fiscal stimulus will enter the financial market for speculation. Therefore, at least for speculation, it is relatively safe to buy before the new round of fiscal stimulus comes out.