The first Bitcoin ETF and the market: lovers to nemeses?

The US Securities and Exchange Commission (SEC) has approved the launch of the Bitcoin Strategy ETF. The exchange-traded fund (ETF) buys cryptocurrency (in this case, bitcoin), and sells shares to stock exchange investors.

The first U.S. exchange-traded bitcoin fund has been listed on the New York Stock Exchange since October 19. Investors now have access to BTC investments without registering on cryptocurrency exchanges. Following the news, the bitcoin price has approached $ 63,000 in just a few hours.

The Bitcoin Strategy ETF is available on the New York Stock Exchange under the ticker BITO and is based on Bitcoin futures. The bitcoin fund has been regularly applying for registry since 2013, but the commission rejected them every time. Now, however, the SEC seems to have adopted the “If you can’t beat something, lead it” tactic. Although in this case, the more accurate term would be “regulate”, of course.

Still, it resulted in Bitcoin hitting a new peak and having the best week in the history of the first cryptocurrency. The total volume of open positions in the Bitcoin futures market exceeded $ 23 billion.

In fairness, it must be said that the long-awaited launch of the first bitcoin ETF in the United States wasn’t the only driver of cryptocurrency growth, as it happened against the background of accelerated inflation. A further rally in the world’s leading cryptocurrency is still under question.

In any case, congratulations are in store for ProShares, the investment fund (managing over $ 50 billion) behind the Bitcoin Strategy ETF. “BITO will open Bitcoin to a wide range of investors with brokerage accounts that have mastered stock and ETF transactions but are cautious about entering the cryptocurrency market due to concerns over the lack of regulation and security risks”, –ProShares CEO Michael Sapir said in a statement.

Simply put, the Bitcoin Strategy ETF provides a way to invest in crypto for people who really want to make money in the increasingly popular sector but don’t really understand how the blockchain works or the essence of cryptocurrencies. And by the way, there are more people like that than we used to think.

Since 2017, US funds have filed at least a dozen Bitcoin ETF applications, but none have been approved until now. There are currently three more similar applications upcoming – from the Valkyrie, Invesco, and Van Eck funds.

List of Bitcoin ETFs with expected launch dates in the US.

Bitcoin price has grown by more than $ 5,000, or 7.3%, up to $ 62,459 at the time of this article. Analysts predict a “very strong” fourth quarter for cryptocurrencies. The BTC once again sees the $ 100,000 figure on the horizon, and for Ethereum, there is potential for $ 10,000-12,000 doubling and quotations.

The reason is that bitcoin ETFs can drive money into a limited asset, which will only mean market growth. But it may also have the opposite effect. Many investors live by the “buy on hearsay, sell on the facts” principle, so the BTC price could experience a short-term drop in the immediate aftermath of the Bitcoin ETF launch.

Then, however, everything will depend both on the anticipated arrival of mass retail investors in bitcoin and on the behavior of the “whales” – large players holding the asset and limiting the market supply. They now possess more than half of all bitcoins.

Institutional investors prefer bitcoin as well. Bitcoin investment products have been leading in inflows for five weeks in a row, according to the 51st weekly report by institutional asset manager CoinShares.

A futures ETF’s approval levels and subsequent launch show that professional investors have become more serious about the crypto asset. However, the futures ETF only holds the derivative, not the bitcoins themselves. The difference is significant, as it is even further from the underlying asset than the spot ETF, which may appear in 2022-2023. Futures ETFs are best suited for intraday trading and cash-and-carry arbitrage.

A test on all the data over the past year shows that holding a permanently extended position in a Bitcoin Futures ETF would have generated 35.78% less profit than simply keeping spot BTC. However, the gain would still be over 360%, which is perfectly acceptable for many investors.

Crucially, the emergence of the first exchange-traded fund that allows investing in bitcoin (albeit through futures) is an important bridge between the independent world of cryptocurrencies and the traditional financial system. The next step could be SEC approval for funds that directly own cryptocurrency. Movement in this direction creates new growth points for the crypto exchange rate in the future but is yet to make it less volatile.

It’s pretty clear, though, that the first “direct” crypto ETF to be approved by the financial regulator will also only be tied to Bitcoin. As to when we may see the first US altcoin ETF, I prefer not to even think about it.

Another interesting dynamic created by expectations for a futures ETF was an increase in the investment funds’ share in the total holdings of BTC – in September and October, it grew to 4.3% of the cumulative circulating supply. More than 5,364 BTC have already flown into Bitcoin-based financial products in the first half of October alone. At the same time, financial flows in gold ETFs, considered an essential signal for institutional demand, have been declining since August, accompanied by a rise in Bitcoin-related tools.