Spot Bitcoin exchange-traded funds are still essentially new, but they are already changing the way cryptocurrencies are traded, according to industry insiders.
US Securities and Exchange Commission approved 10 Spot Bitcoin in January
BTCUSD
ETFs allow investors to gain exposure to the largest cryptocurrencies by market capitalization without directly owning digital coins.
However, while Bitcoin can be traded 24 hours a day, 365 days a year, ETFs that invest in cryptocurrencies follow U.S. stock market trading hours, Monday through Friday from 9:30 a.m. to 4:00 p.m. Eastern Time.
Improving liquidity
Bitcoin ETFs have brought more liquidity to the cryptocurrency market, said Desislava Ober, an analyst at cryptocurrency data provider Kaiko Research.
Aubert said in a phone interview that after the collapse of cryptocurrency exchange FTX in November 2022, Bitcoin liquidity declined by more than 60% and recovery has been “very slow.” But things started to change after the introduction of Bitcoin ETFs, Aubert said.
According to data from Kaiko, Bitcoin's 2% market depth (which measures the sum of buys and sells in Bitcoin's order book) has risen more than 20% since late November last year and is more than 30% year-over-year. Rose.
Meanwhile, the SEC approved a proposal by Grayscale Bitcoin Trust GBTC in January.
Convert the largest Bitcoin fund from a closed-end fund to an ETF.
According to Doug Schwenk, CEO of Digital Asset Research, this move further increases liquidity in the Bitcoin market.
In closed-end funds, shares are typically bought and sold by investors in the open market, but are not purchased or redeemed by the issuer. In other words, the market price of a fund may deviate significantly from the value of the assets held by that fund. The discount to Grayscale's net asset value disappeared upon approval of its conversion to an ETF.
Compared to closed-end funds, ETFs are structured so that specific financial institutions, known as authorized participants, can issue and redeem shares to match the value of the fund with the value of the assets it holds. It has become. Investors can buy and sell ETFs just like stocks.
Since GBTC was converted into an ETF, it has seen $7.3 billion in outflows, and as of last Friday had $22.8 billion in assets under management, according to Dow Jones market data.
Increased US concentration
Oberle said the rise in Bitcoin liquidity is primarily being driven by U.S. platforms. Bitcoin's market depth share on US exchanges has increased from less than 40% in November to nearly 50%, according to Kaiko data.
Bitcoin trading volume during U.S. trading hours has also increased since the debut of the Spot Bitcoin ETF, according to Austin Reed, global head of revenue and operations at crypto brokerage firm FalconX.
Reed said Bitcoin trading patterns have started to resemble stocks, especially between 3pm and 4pm Eastern Time, when Bitcoin trading volume spiked. ETFs tend to have their highest trading volume before the stock market closes as market makers create and redeem shares.
Before the introduction of Bitcoin ETFs, Bitcoin trading volume between 3pm and 4pm accounted for about 5% of total trading volume on US crypto exchanges. Now, that number has risen to 10% to 13%, Reed said by phone.
Weekday and weekend trading
According to data from Kaiko, the proportion of Bitcoin traded on weekends has declined significantly over the past six years, dropping from 24% in 2018 to 17% in 2023.
Aubert said this is partly due to the deterioration of market infrastructure following the collapse of two crypto-friendly banks, Silvergate Capital and Signature, in 2023. Aubert said that could also be due to increased institutional participation.
The approval of Bitcoin ETFs further strengthens this trend. So far this year, only 13% of Bitcoin transactions have been executed on weekends, Kaiko said.
“As ETFs gain momentum and market structure shifts, the weekend-weekday gap could deepen further,” Silkworm analysts said in a note Monday.
New participants
According to FalconX's Reed, Bitcoin ETFs are bringing new participants to the cryptocurrency market, including some asset management companies and individual investors who have been reluctant to trade on cryptocurrency exchanges. .
However, Reid said he has noticed that the majority of institutions already actively trading cryptocurrencies are not moving their Bitcoin holdings into ETFs. These institutions include hedge funds, private trading companies, venture funds, asset management companies, etc., and most of their strategies are built around crypto markets that do not close.
“If you're trading cryptocurrencies and you're active in the crypto space and that's kind of your core competency, ETFs may not be the best wrapper.” said Reed.
Demand for Bitcoin futures declines
Digital Asset Research's Schwenk said market participants have also seen a rotation in demand from Bitcoin futures to physical Bitcoin since the approval of ETFs that invest directly in cryptocurrencies.
“In the past, professional investors may have been constrained by the need to invest in securities or regulated products. Historically, such products have been limited to Bitcoin futures in the United States; , we now have access to spot Bitcoin ETFs that are cheaper and easier to trade and have deeper liquidity available,'' Schwenk said by phone.
