Bitcoin ETF declines instead? The subsequent trend is not as simple as we think

Author: Mu Mu, Plain Language Blockchain

Recently, the long-awaited Bitcoin spot ETF has finally been approved, and both domestic and international media have used striking terms such as "milestone," "historical record," and "major announcement" to describe the sensational nature of this event. However, the crypto market reacted rather blandly, even starting to decline two days later, leaving many people puzzled. Is the approval of the Bitcoin ETF a positive or negative development? What are the substantial short-term and long-term impacts? Today, let's analyze the changes that need to be understood following the approval of the Bitcoin ETF…

Spot ETF: Don't Overestimate or Underestimate Its Impact

The market is always influenced by emotional capital, with all directions based on overwhelming consensus. When an event occurs, people often overestimate its short-term impact while underestimating its long-term effects, or misjudge due to information asymmetry. So, from a rational perspective, what kind of impact does the approval of the spot ETF actually bring?

1) Is the Good News Only Followed by Bad News? Not Necessarily

There has been a saying that "good news landing only leaves bad news." The approval of the Bitcoin spot ETF is a long-awaited positive development. Overall, the expectations have largely been released before the approval, as evidenced by Bitcoin's strong performance over the past year.

However, saying that good news landing equates to bad news is not necessarily true. Aside from short-term profit-taking and corrections, we have already seen that the trading volume on the first day of the spot ETF's opening reached about $4.6 billion, which is quite impressive compared to various newly launched ETFs before, aligning with the expectation of new capital inflows through traditional financial channels, potentially forming a strong new buying trend over time.

2) The Crypto Market Gains a Major Indicator

The Bitcoin spot ETF actually has a very similar reference point, which is the gold ETF. Taking the world's largest gold ETF, "SPDR Gold Trust," as an example, its holdings account for a significant proportion, and it is often used as a data reference for judging gold price trends based on whether it increases or decreases its gold holdings, making it a strong indicator.

From the past holdings of hundreds of thousands of BTC in GBTC, it is expected that the Bitcoin spot ETF will only increase its holdings, gradually becoming one of the major indicators in the crypto market, influencing its direction. The following historical patterns of gold ETF holdings affecting gold prices will then have reference significance:

• Increased trading volume, decreased ETF gold holdings, price rises, indicating that the price may soon drop;
• Increased trading volume, decreased ETF gold holdings and prices, indicating that prices may rebound;
• Increased trading volume, increased ETF gold holdings, price rises, indicating that prices may continue to rise;
• Increased trading volume, increased ETF gold holdings, price drops, indicating that prices may drop in the short term;
• Increased trading volume, decreased ETF gold holdings, price drops, indicating that prices may continue to decline in the short term;
• Increased trading volume, decreased ETF gold holdings, price rises, indicating a short-term upward price movement, but may soon fall back;

Similarly, when the holdings of the Bitcoin spot ETF reach a certain level, it will have a similar impact on the crypto market.

3) Beware of Grayscale GBTC Transitioning to ETF

Among the 11 approved spot ETFs, most are newly entering the market with net buying status, while Grayscale's GBTC is definitely an exception. This is because Grayscale's GBTC trust has long been in a state of negative premium, and a portion of the over 600,000 holdings has been stuck for quite some time. After a round of bear market, many investors chose to take profits, which is understandable. Thus, we see a short-term outflow of funds from GBTC, and the amount is not small.

However, it is fortunate that the inflow of other spot ETFs far exceeds the outflow of the "rebellious" GBTC. Bloomberg ETF analyst Eric Balchunas stated on platform X that in the two days since the Bitcoin spot ETF was launched, nine issuing institutions have absorbed $1.4 billion in funds, surpassing GBTC's outflow of $579 million, resulting in a net inflow of $819 million.

Translation: As of now, Nine Newborns has attracted $1.4 billion in new funds, far exceeding GBTC's outflow of $579 million, with a net inflow of $819 million. Currently, IBIT leads with $5 billion, followed closely by Fidelity. The new trading volume reached $3.6 billion, involving 500,000 individual trades (the total trading volume, including GBTC, is 1.2 million trades), which is impressive, with an average premium rate of 20 basis points.

4) Has Bitcoin Become Centralized, Controlled by Wall Street, and Held Hostage by ETFs?

Some people oppose the spot ETF, believing that while it has pushed Bitcoin from an alternative asset to a mainstream asset, it has also weakened Bitcoin's decentralized characteristics. They argue that the massive influx of traditional capital brought by the ETF will dominate the Bitcoin market, and its pricing power will be controlled by Wall Street.

I believe this concern is not without merit, but it may overestimate the volume of the spot ETF. Compared to the tens of billions in trading volume of the spot ETF and the hundreds of millions in holdings, mainstream crypto asset trading platforms see daily Bitcoin trading volumes reaching $10-20 billion. The main battlefield for Bitcoin trading still lies on these platforms. Currently, the new funds entering through ETFs are often unfamiliar with Bitcoin's characteristics and have concerns about compliance, which is why they haven't entered directly through trading platforms. With the approval of the ETF, platforms will also be under stricter scrutiny, and the compliance and stability of the Bitcoin trading market will be better ensured.

Currently, the funds for the spot ETF are all managed by centralized platforms. If it is the same centralized platform managing the funds, why not directly choose a crypto platform with no management fees, lower costs, and more flexible management? Therefore, as some new funds become familiar with the characteristics of Bitcoin and other crypto assets, they are likely to switch and diversify into compliant and regulated crypto asset platforms around the world. This makes it difficult for the spot ETF to form an overwhelming advantage. As these funds further advance, they may even gain more freedom in asset management and appreciation experiences through DeFi.

Of course, the U.S. stock market's free market is inherently a battleground, and smaller targets are often manipulated. However, the larger the size, the harder it is to control arbitrarily. Compared to the strictly regulated traditional financial market, the crypto market has been completely unregulated in the past, where the jungle law made it easier to influence the market without regard for regulation. Now, with the SEC's strict oversight, many things have been standardized.

As for the so-called "rich taking over Bitcoin" in the future, this is something we cannot change, but it does not affect Bitcoin's operation according to its original principles of openness and transparency. Only in this way can the interests of the wealthy be safeguarded.

There is no absolute decentralization in this world. The term "decentralization" never appeared in the Bitcoin white paper; it is a concept that people later understood. Its original meaning is about decentralizing power, sufficient dispersion, anti-fragility, and transparency, preventing concentrated power from acting maliciously in the financial system.

In fact, even gold, which has strong physical attributes and is materially decentralized, is similar. The main mining of gold relies on centralized gold mines, and mining rights are often held by a few institutions. However, due to the sufficiently dispersed global holdings, the impact of large gold ETFs on gold prices is also very limited. Moreover, the rebalancing of gold ETFs is often lagging behind market reactions. This means that after the market is affected by major events such as macroeconomic changes, leading to fluctuations in gold prices, gold ETFs are sold or bought in large quantities, and only after the market closes on that day will they rebalance.

Therefore, rather than saying that ETFs will influence the market, it is more accurate to say that the market influences ETFs, and ETFs follow the market.

5) The Impact of ETFs on the Bitcoin Ecosystem

The approval of the spot ETF undoubtedly provides a "reassurance" for the crypto industry, including the Bitcoin ecosystem. Bitcoin assets may become increasingly stable in the future, with reduced volatility.

In simple terms, in the past, during periods of high volatility, bear markets often hindered the development of ecological projects, leading to a lack of confidence among entrepreneurs and users, resulting in reduced funding and talent loss.

As a native asset of the Bitcoin ecosystem, a steadily rising Bitcoin price is beneficial for ecological development, avoiding the impact of extreme market conditions on ecosystem growth.

Overall, the approval of the spot ETF allows the Bitcoin ecosystem to develop with more confidence and gain greater recognition.

Next, will the market focus shift to Ethereum spot ETFs?

1) Expectations for Ethereum ETFs

Regarding the sudden market movement of Ethereum before and after the approval of the Bitcoin ETF, many explanations suggest that funds are beginning to focus on the next Ethereum spot ETF that has been applied for and is about to be approved. This includes funds that have already taken profits and those that missed the Bitcoin ETF's expected rally this round, hoping to "get a piece of the action" through the Ethereum ETF.

This kind of strategy is common; when good news lands for one asset, similar assets often see an immediate rise in expectations. So how long can the expectations for the Ethereum ETF last? BlackRock's application for the Ethereum ETF will receive a response by May at the latest. Will it be delayed like Bitcoin?

Currently, regarding the SEC's attitude towards Ethereum as a crypto asset, it is viewed as a gray area between commodities and securities. In other words, it has not been precisely classified as a commodity like Bitcoin, nor has it been definitively determined that Ethereum is a security. Previously, the SEC almost clarified that Ethereum is not a security, but this was mainly due to the transition from the POW consensus mechanism to the POS consensus mechanism.

Additionally, for the Ethereum ETF to be approved, it needs to be less susceptible to control by certain specific institutions, making the conditions relatively strict. The approval of the Bitcoin ETF was facilitated by the decline in the market share of the world's leading trading platform and the large number of institutions (capital) applying for the ETF. If it were not approved, it could lead to legal troubles.

Overall, the good news for the Ethereum ETF is that there are still a few months left, which is enough time for Ethereum to gain market attention. Currently, there is no need to worry too early about the negative impacts of non-approval or delays, but the probability of approval may not be high.

The main variable lies in whether the SEC has a sufficient understanding and confidence in the POS version of Ethereum, and whether external pressure from large financial institutions applying due to investor interest can be met. This again depends on whether the Bitcoin spot ETF can operate stably. If the overall crypto market performs well and attracts strong interest from global investors, capital driven by profit motives will be eager to promote the approval of the Ethereum spot ETF.

2) The Medium to Long-Term Expectations for Ethereum Are Not Just ETFs

In fact, compared to the short-term focus on whether the Ethereum spot ETF can be approved, what is more worth paying attention to is the series of upgrades, including the recent major upgrade "Cancun." Ethereum remains the largest application ecosystem infrastructure in the crypto industry. Compared to the Bitcoin ecosystem, the Ethereum ecosystem has come a long way, with better infrastructure and superior deployment plans. Currently, Layer 2 has been successfully implemented and is being steadily adopted, while Layer 3 is also set to launch soon. Overall, the Ethereum ecosystem is already preparing to deploy large-scale applications across various tracks, and large-scale applications are likely to be one of the main foundations for the next major market movement.

Ethereum and Bitcoin are still different. The most important attribute of Bitcoin is its concept as an asset of "digital gold," making ETFs very important for it. In contrast, Ethereum derives its value from innovative applications. In the medium to long term, Ethereum's expectations mainly come from its innovation. After the Cancun upgrade, there will be more significant innovative upgrades on the way. Therefore, rather than focusing on the Ethereum ETF, we should pay more attention to its subsequent technological innovations and upgrades.

Summary

The approval of the Bitcoin ETF is not just the end of a positive development but a milestone beginning that brings many changes and impacts, which we should approach rationally. Both the Bitcoin ecosystem and the Ethereum ecosystem are among the main narratives of the future crypto industry. It is certain that in 2024, we will see crypto assets grow at a visibly accelerated pace.