Original Title: STABILIZING FORCES : HOW BITCOIN ETF INFLOWS COUNTER PRICE VOLATILITY

Original Author: SHANE NEAGLE

Original Compilation: Luccy, Frost, BlockBeats

Editor’s Note:

As of March 14, according to Farside Investors data, Bitcoin spot ETFs have seen a cumulative net inflow of $11.8288 billion since their launch. Among them, IBIT has a cumulative net inflow of $12.0278 billion; FBTC has a cumulative net inflow of $6.7033 billion; GBTC has a cumulative net outflow of $11.4026 billion.

In this bull market driven by ETFs, the inflow of ETFs constantly affects the price trends of cryptocurrencies. Shane Neagle, editor-in-chief of The Tokenist, points out that higher trading volumes create higher liquidity, which can smooth price fluctuations. Additionally, from the perspectives of capital inflow and historical context, after 15 years of skepticism and scrutiny, Bitcoin's credibility has reached its peak and may become a safe-haven asset to replace gold. BlockBeats compiles the original text as follows:

The eleven approved Bitcoin ETFs add new legitimacy to this groundbreaking cryptocurrency. By gaining official recognition from the SEC, the barriers to institutional investment have been eliminated.

With this obstacle removed, financial advisors, mutual funds, pension funds, insurance companies, and retail investors can now easily gain exposure to Bitcoin without the need for direct custody. More importantly, the previous negative perceptions of Bitcoin being compared to "tulip mania," "poison," or "money laundering indicators" have been washed away.

After an unprecedented wave of bankruptcies in the cryptocurrency market in 2022, Bitcoin's price returned to the level of $157,000 by the end of the year, equivalent to the level in November 2020. Following those massive panic sales, Bitcoin gradually recovered in 2023 and reached the level of $45,000 in early 2024, a level first achieved in February 2021.

With the fourth Bitcoin halving set to take place in April and ETFs establishing new market dynamics, what can Bitcoin investors expect? To determine this, one must understand how Bitcoin ETFs have increased Bitcoin's trading volume and effectively stabilized Bitcoin's price volatility.

Understanding Bitcoin ETFs and Market Dynamics

Bitcoin itself symbolizes the democratization of currency. Unconstrained by central authorities like the Federal Reserve, Bitcoin ensures that its limited supply of 21 million tokens cannot be tampered with through its decentralized network of miners and algorithmically determined monetary policy.

For Bitcoin (BTC) investors, this means they can access an asset that will not naturally depreciate, contrasting sharply with all existing fiat currencies in the world. This is the foundation of Bitcoin's value proposition.

ETFs provide another avenue for democratization. The purpose of an ETF is to track asset prices, represented by shares, and unlike actively managed mutual funds, they can be traded around the clock. The passive price tracking of ETFs ensures lower fees, making them an easily accessible investment tool.

Of course, custodians of Bitcoin, such as Coinbase, need to implement adequate cloud security measures to enhance investor confidence.

In the ETF space, Bitcoin ETFs have already demonstrated a high demand for a decentralized asset that resists centralization dilution. In the past 15 days, they have generated a total trading volume of $293 billion, while the selling pressure from the Grayscale Bitcoin Trust (GBTC) reached $149 billion.

Image Source: James Seyffart, Bloomberg Intelligence

This is not surprising. As the hype around Bitcoin ETFs drives the price of Bitcoin up, 88% of Bitcoin holders entered the profit zone in December 2023, eventually reaching 90% in February. Consequently, investors in GBTC began to cash out, exerting a selling pressure worth $5.6 billion on Bitcoin's price.

Additionally, GBTC investors took advantage of the lower fees of the newly approved Bitcoin ETFs, shifting funds away from GBTC's relatively high fee of 1.50%. Ultimately, BlackRock's iShares Bitcoin Trust (IBIT) emerged as the volume winner with a fee of 0.12%, which will rise to 0.25% after a 12-month exemption period.

In the broader context of the ETF space, IBIT and FBTC surpassed the iShares Climate Conscious and Transition MSCI USA ETF (USCL), which launched in June 2023, in trading volume over the course of a month.

Image Source: Eric Balchunas, Bloomberg Intelligence

Given that Bitcoin's history is filled with attacks from sustainability directions, this is particularly noteworthy. It is worth mentioning that due to environmental concerns, Bitcoin's price dropped by 12% after Elon Musk tweeted in May 2021 that Tesla would no longer accept Bitcoin payments.

According to a Morningstar report, in January, IBIT and FBTC ranked 8th and 10th respectively among ETFs with the largest net inflows, with the top two being the iShares Core S&P 500 ETF (IVV). Approximately 10,000 Bitcoins flow into ETFs daily, indicating a massive demand for around 900 Bitcoins each day.

Looking ahead, as the outflow pressure from GBTC decreases and the inflow trend increases, a pattern has emerged where the funds flowing into Bitcoin ETFs stabilize BTC prices.

Stabilization Mechanism

With 90% of Bitcoin holders entering the profit zone, the highest level since October 2021, selling pressure may come from various sources, including institutions, miners, and retail investors. The upward trend in capital inflows into Bitcoin ETFs serves as a defensive fortress, especially with another hype event, the fourth Bitcoin halving, approaching.

Higher trading volumes create higher liquidity, smoothing price fluctuations. This is because larger transactions between buyers and sellers can absorb temporary imbalances. In January, a report from CoinShares indicated that Bitcoin's capital inflow reached $1.4 billion, compared to $7.2 billion from newly issued U.S. funds, while outflows from GBTC amounted to $5.6 billion.

Total inflow of Bitcoin was $1.4 billion, accounting for 96% of total inflows in the U.S. Image Source: CoinShares

Meanwhile, large financial institutions are setting new liquidity benchmarks. As of February 6, Fidelity Canada established a 1% Bitcoin allocation in its All-in-One Conservative ETF fund. Given its "conservative" name, this suggests that future non-conservative funds will have a higher Bitcoin allocation.

Ultimately, if Bitcoin captures 1% of the $749.2 trillion in various asset classes, Bitcoin's market cap could grow to $7.4 trillion, pushing the Bitcoin price up to $400,000.

Bitcoin's current market cap ranges from $85 billion to $90 billion. Image Source: Blockware Solutions

Given that Bitcoin ETFs provide a consistent and transparent market price reference point, large trades reduce the potential impact of miner sell-offs on the market. FalconX research shows a significant increase in daily total volume, rising from an average of 5% to a range of 10% to 13%.

In other words, the market system triggered by the new Bitcoin ETFs is reducing overall market volatility. So far, Bitcoin miners have been the main price suppression factor on the other side of the liquidity equation. In Bitfinex's latest weekly on-chain report, miner wallets accounted for an outflow of 10,200 Bitcoins.

This aligns with the aforementioned inflow of approximately 10,000 Bitcoins into Bitcoin ETFs, resulting in relatively stable price levels. As miners reinvest and upgrade their mining equipment before the fourth halving, another potential stabilizing mechanism is options.

Although the U.S. SEC has not yet approved options on spot Bitcoin ETFs, this development would further enhance the liquidity of ETFs. After all, a broader range of investment strategies around hedging would increase bilateral liquidity in trading.

As a forward-looking indicator, implied volatility in options trading can measure market sentiment. However, with the launch of BTC ETFs, we will inevitably see a more mature market, making it more likely to see more stable pricing for options and derivatives.

Analyzing Capital Inflows and Market Sentiment

As of February 9, 2024, the Grayscale Bitcoin Trust ETF (GBTC) holds 468,786 BTC. Last week, BTC price rose by 8.6% to $46,200. Consistent with previous forecasts, this suggests that BTC sell-offs may spread during the fourth halving and subsequent rebounds.

According to the latest data provided by Farside Investors, as of February 8, 2024, Bitcoin ETFs have cumulatively inflowed $403 million, totaling $2.1 billion, while GBTC's total outflows amount to $6.3 billion.

Image Source: Farside Investors

From January 11, 2024, to February 8, 2024, GBTC outflows gradually decreased. In the first week, their average outflow was $492 million. In the second week, the average outflow was $313 million, and in the third week, it averaged $115 million.

Image Source: Bitcoin Magazine

Calculating on a weekly basis, this means that the selling pressure decreased by 36% from the first week to the second week, and by 63% from the second week to the third week.

As of February 9, 2024, with the unfolding of GBTC FUD, the cryptocurrency fear and greed index reached 72, rising to the "greed" level. Looking back to January 12, 2024, the day after Bitcoin ETFs were approved, the fear and greed index at that time was 71.

Looking ahead, it is noteworthy that Bitcoin's price relies on global liquidity. After all, it was the Federal Reserve's interest rate hike cycle in March 2022 that led to a massive wave of bankruptcies in the cryptocurrency space, culminating in the collapse of FTX. Current federal funds futures expect this cycle to end in May or June of this year.

Moreover, the Federal Reserve is unlikely to change its money-printing trajectory. In this scenario, Bitcoin's price may follow suit.

M2 money supply measures how much currency is available in an economy. Image Source: LookIntoBitcoin.com

Considering that $34 trillion is a significant amount of national debt, while federal spending continues to exceed revenue, Bitcoin positions itself as a safe-haven asset, a currency waiting for capital inflows into its limited supply of 21 million tokens.

Historical Context and Future Implications

Gold-backed securities (GBS) are similar safe-haven assets, with the first gold ETF listed on the Australian Securities Exchange (ASX) in March 2003. In 2004, SPDR Gold Shares (GLD) was listed on the New York Stock Exchange (NYSE).

From November 18, 2004, within a week, GLD's total net assets rose from $114,920,000 to $1,456,602,906. By the end of December, this figure had dropped to $1,327,960,347.

Although not adjusted for inflation, this may indicate that market sentiment towards Bitcoin is superior to that of gold. Bitcoin is digital, based on a globally distributed proof-of-work mining network, and its digitization indicates portability.

In 1933, President Roosevelt issued Executive Order 6102, requiring citizens to sell their gold bars. Unlike Bitcoin, new gold mines are frequently discovered, but Bitcoin's supply is limited.

In addition to these fundamentals, Bitcoin ETF options have not yet been launched. Standard Chartered analysts expect the size of Bitcoin ETFs to reach $5 billion to $100 billion by the end of 2024. Furthermore, large companies have not followed MicroStrategy's lead in converting stock sales into depreciating assets.

Even a 1% BTC allocation in mutual funds could lead to a surge in BTC prices. For example, Advisors Preferred Trust has allocated 15% of its range to indirect Bitcoin exposure through futures contracts and BTC ETFs. The Bitcoin allocation in mutual funds is bound to lead to a surge in Bitcoin prices.

Conclusion

After 15 years of skepticism and defamation, Bitcoin has reached the peak of credibility. The first wave of sound money believers has ensured that its blockchain will not disappear into the annals of coding history.

With confidence in Bitcoin, so far, Bitcoin investors have formed two waves. The approval of Bitcoin ETFs may be a milestone for the third wave. Central banks around the world continue to undermine confidence in cryptocurrencies, as governments cannot control themselves and are addicted to spending.

With so much noise introduced into value exchange, Bitcoin represents a return to the roots of sound money. Its appeal lies in its digital nature, born from physical proof of work. Unless the U.S. government takes extreme actions to undermine institutional risk exposure, Bitcoin may replace gold as the traditional safe-haven asset.