The digital assets space has been fixated since BlackRock
The mere possibility of the world’s largest asset manager creating a bitcoin ETF led to a 96% price rally up to the Securities and Exchange Commission’s approval on January 10. Therefore, it is pretty clear that bitcoin ETFs can at least indirectly affect the price of bitcoin. Yet, now we have nine newborn spot bitcoin ETFs in the U.S., will there be a more direct impact on the bitcoin price?
When investors buy or sell bitcoin on a centralized exchange like Coinbase or Binance, each trade directly affects bitcoin’s price, with the exchange’s order book matching buyers with sellers 24/7. The displayed bitcoin price is the average of what buyers are willing to pay and what sellers are prepared to receive for their bitcoin. Therefore, whether an investor buys $10 or $1,000 worth of bitcoin on an exchange directly impacts the price in real time.
These prices are then curated across all exchanges and trading pairs to give a global bitcoin price. Global combined order books allow investors to identify potential arbitrage opportunities when prices differ across exchanges. These traders help ensure prices ultimately diverge toward a single value.
However, when it comes to bitcoin ETFs, things get more complicated. While the new spot bitcoin ETFs are designed to track the bitcoin price directly, they do not impact it in the same way. Buying a share of an ETF has no real-time impact on bitcoin’s price through direct means. In fact, the bitcoin represented by the share is not even purchased until the next trading day.
Bitcoin ETF Share Creation And Bitcoin Purchases
Shares of the ETFs can only be created by organizations authorized in the issuer’s prospectus. These Authorized Participants for BlackRock include JP Morgan and Jane Street. APs submit an order for new shares to the ETF along with cash. The bitcoin reference rate is then set between 3 p.m. and 4 p.m. EST and used to calculate the number of shares to issue. Once this is complete, the shares are delivered to the AP, and it can either offer them to the market or hold them on its balance sheet.
When ETF shares are subsequently bought or sold, the price fluctuates like any other fund, but there is no direct impact on bitcoin. Shares can trade at a premium or discount to the net asset value when the correlation becomes decoupled. However, similar to how arbitrage opportunities across bitcoin exchanges help keep the price within a set range, bitcoin futures are often used to help keep bitcoin ETF shares in line. Whenever there is a substantial discount or premium to NAV for a bitcoin ETF, traders purchase or sell bitcoin futures on platforms such as CME to counteract the spread and collect the futures premium.
Finally, to fulfill the APs’ orders, bitcoin is bought and sold over the counter with the institutional trading platform Coinbase Prime. These trades are less transparent as they are not included in the global combined order book. While transfers in and out of Coinbase Prime can be traced on-chain, internal off-chain transactions are not made public. The trades are peer-to-peer, with entities exchanging large amounts of bitcoin at a mutually agreed price.
Long-term Effects On Bitcoin Price
Public awareness of large bitcoin sales, such as those made recently by Grayscale, can make investors wary. However, the opaque nature of these large OTC trades and their lack of integration into global order books reduce their overall market impact on the bitcoin price.
While there is sufficient liquidity at present to manage ETF demand within OTC desks, this may change in the future. The absolute maximum supply of the Bitcoin network is set at 21 million coins, and thousands of bitcoins enter ETFs daily. Conversely, only 900 BTC is mined every day, which will fall to 450 BTC within the next 80 days, following the next halving.
If demand continues, the fixed supply of bitcoin may make it harder to create new ETF shares. At this point, the ETFs could substantially affect the bitcoin price, as ETFs may have to source bitcoin directly from exchanges.
Ultimately, the effect on the bitcoin price will play out over months and years, not hours and days. The short-term anticipation and excitement for a spot bitcoin ETFs was perhaps overstated. However, the long-term impact may have been wildly understated.