Summary: The size of ETF inflows can provide sufficient demand-side trading volume to offset price swings caused by rising prices and increased selling volume.

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 data from Farside Investors, Bitcoin spot The ETF has accumulated net inflows of US$11.8288 billion since its launch. Among them, the cumulative net inflow of IBIT is US$12.0278 billion; the cumulative net inflow of FBTC is US$6.7033 billion; the cumulative net outflow of GBTC is US$11.4026 billion.

In this bull market caused by ETFs, the inflow of ETFs is always affecting the price trend of cryptocurrency. In this regard, Shane Neagle, editor-in-chief of The Tokenist, pointed out, Higher trading volumes generate higher liquidity, which can smooth out price fluctuations. In addition, from the perspective of capital inflows and historical background, Bitcoin’s credibility has reached its peak after 15 years of doubts and scrutiny, and it may become a safe-haven asset that replaces gold. BlockBeats compiled the original text as follows:

Eleven approved Bitcoin ETFs add new legitimacy to the groundbreaking cryptocurrency. By becoming officially recognized by the SEC, the barriers to institutional investment have been removed.

With this barrier removed, financial advisors, mutual funds, pension funds, insurance companies, and retail investors can now easily gain exposure to Bitcoin while No need for direct custody. More importantly, Bitcoin has previously been compared to "tulip mania", "poison", or "money laundering indicators", and this negative impression has been washed away.

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

With the fourth Bitcoin halving looming in April and ETFs setting 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 fluctuations.

Understanding Bitcoin ETFs and market dynamics

Bitcoin itself symbolizes the democratization of currency . Not subject to a central authority such as the Federal Reserve System, Bitcoin ensures that its limited supply of 21 million coins cannot be tampered with through its decentralized network of miners and algorithmically determined monetary policy.

For Bitcoin (BTC) investors, this means they have access to an asset that does not naturally lose value, unlike all current currencies in the world. There is a stark contrast to fiat currencies. This is the basis of Bitcoin’s values.

ETFs offer another avenue for democratization. ETFs are designed to track asset prices, expressed in shares, and, unlike actively managed mutual funds, can trade around the clock. The passive price tracking of ETFs ensures low fees, making them an accessible investment vehicle.

Of course, Bitcoin custodians, such as Coinbase, need to have adequate cloud security measures in place to bolster investor confidence.

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

Image credit: James Seyffart, Bloomberg Intelligence

This is not surprising. As Bitcoin ETF hype drove Bitcoin prices higher, 88% of Bitcoin holders entered profitable territory in December 2023, eventually reaching 90% in February. As a result, GBTC investors began cashing out, putting $5.6 billion worth of selling pressure on the Bitcoin price.

Additionally, investors in GBTC took advantage of the lower fees on the newly approved Bitcoin ETF, moving funds away from GBTC’s relatively high 1.50% fee transferred out of the rate. Ultimately, Blackstone’s iShares Bitcoin Trust (IBIT) was the volume winner with a 0.12% fee that will rise to 0.25% after the 12-month exemption period.

Putting this in the context of the broader ETF space, IBIT and FBTC outperformed iShares, launched in June 2023, in a month of trading Climate Awareness and Transformation MSCI US ETF(USCL).

Image source: Eric Balchunas, Bloomberg Intelligence

Considering that the history of Bitcoin is one full of attacks from the direction of sustainability, This is particularly noteworthy. It should be reminded that it was precisely because of environmental concerns that in May 2021, after Elon Musk tweeted that Tesla would no longer accept Bitcoin payments, the price of Bitcoin fell by 12%.

According to the Morningstar report, in January, IBIT and FBTC ranked 8th and 10th respectively among the ETFs with the largest net asset inflows. The top two were iShares Core S&P 500 ETF (IVV). Around 10,000 Bitcoins are flowing into the ETF every day, which means there is a huge demand for around 900 Bitcoins per day.

Looking to the future, as the outflow pressure of GBTC weakens and the inflow trend increases, the trend of funds flowing into Bitcoin ETFs to stabilize BTC prices has taken shape.

Stability Mechanism

As 90% of Bitcoin holders enter the profit zone, This is the highest level since October 2021, and selling pressure could come from many sources, including institutions, miners, and retail investors. The rising trend of inflows into Bitcoin ETFs is a bulwark against this, especially as another hyped event, the fourth Bitcoin halving, is approaching.

Higher trading volume generates higher liquidity, smoothing price fluctuations. This is because larger volumes of transactions between buyers and sellers can absorb temporary imbalances. In January, CoinShares reported that Bitcoin inflows reached $1.4 billion, compared with $7.2 billion in new U.S. funds, while outflows from GBTC were $5.6 billion.

Bitcoin inflows totaled $1.4 billion, accounting for 96% of the total inflows in the United States. Image source: CoinShares

At the same time, large financial institutions are setting new liquidity benchmarks. As of February 6, Fidelity Canada established a 1% allocation to Bitcoin in its All-in-One Conservative ETF fund. Given its “conservative” designation, this suggests that future non-conservative funds will have a higher allocation to Bitcoin.

Ultimately, if Bitcoin captures 1% of the $749.2 trillion in various asset classes, Bitcoin’s market capitalization could grow to $7.4 trillion, putting Bitcoin price pushes to $400,000.

Bitcoin's current market capitalization is in the range of $85 million to $90 million. Image source: Blockware Solutions

Given that Bitcoin ETFs provide a consistent and transparent reference point for market prices, block trades reduce the impact of potential selling from miners on the market. Influence. FalconX research shows a significant increase in daily totals, rising from a previous average of 5% to a range of 10% to 13%.

In other words, new The market regime triggered by the Bitcoin ETF is reducing overall market volatility. Bitcoin miners have so far been the main price inhibitor on the other side of the liquidity equation. In Bitfinex’s latest weekly on-chain report, miner wallets were responsible for 10,200 BTC outflows.

This is about 10,000 as mentioned above The inflow of Bitcoin into the Bitcoin ETF is consistent with the situation, resulting in a relatively stable price level. As miners reinvest and upgrade mining equipment ahead of the fourth halving, another stabilization mechanism that may come into play is options.

While the U.S. SEC has not yet approved options on a spot-traded Bitcoin ETF, this development will further expand the ETF’s liquidity. After all, a wider range of investment strategies around hedging increases the bilateral liquidity of the trade.

As a forward-looking indicator, implied volatility in options trading can measure market sentiment. But with the launch of the BTC ETF, we will inevitably see a more mature market and more likely to see more stable pricing of options and derivative contracts.

Analyzing inflows and market sentiment

Grayscale Bitcoin Trust ETF as of February 9, 2024 (GBTC) holds 468,786 BTC. Last week, BTC price rose 8.6% to $46,200. In line with previous predictions, this means that the BTC sell-off is likely to spread through the fourth halving and multiple rallies afterward.

According to the latest data provided by Farside Investors, as of February 8, 2024, Bitcoin ETF has accumulated inflows of US$403 million, totaling US$2.1 billion, and GBTC outflows The total is $6.3 billion.

Image source: Farside Investments

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

Image source: Bitcoin Magazine

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

As of February 9, 2024, as GBTC FUD unfolded, the cryptocurrency fear and greed index reached 72, rising to the "greed" level. Back on January 12, 2024, the day after the Bitcoin ETF was approved, the Fear and Greed Index stood at 71.

Looking ahead, it is worth noting that Bitcoin prices are dependent on global liquidity. After all, it was the Federal Reserve’s March 2022 rate hike cycle that caused massive crypto bankruptcies, culminating in FTX’s collapse. Current fed funds futures predict the cycle will end in May or June of this year.

In addition, the Fed is unlikely to change its course on money printing. In this case, Bitcoin price may follow suit.

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

Considering that $34 trillion is a relatively large amount of national debt, and federal spending continues to exceed revenue, Bitcoin positions itself as A safe-haven asset, a currency awaits the inflow of capital into its limited supply of 21 million coins.

Historical background and future impact

Gold Bullion Securities (GBS) are similar to Bitcoin A safe-haven asset, the first gold ETF was 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).

In one week starting November 18, 2004, GLD's total net worth rose from $114,920,000 to $1,456,602,906. By the end of December, that number had dropped to $1,327,960,347.

Although not adjusted for inflation, this may indicate that market sentiment for Bitcoin is better than that for gold. Bitcoin is digital, it is based on a global proof-of-work mining network, and its digital nature means it is portable.

In 1933, President Roosevelt issued Executive Order 6102 requiring citizens to sell gold bullion. Unlike Bitcoin, where new veins of gold are discovered frequently, Bitcoin's supply is limited.

Beyond these fundamentals, Bitcoin ETF options have yet to be launched. Standard Chartered analysts expect Bitcoin ETFs to reach $50 to $100 billion by the end of 2024. Additionally, major companies have yet to follow MicroStrategy's lead and convert stock sales into depreciating assets.

Even a 1% BTC allocation in a mutual fund could cause BTC prices to surge. As an example, Advisors Preferred Trust has a 15% allocation to indirect Bitcoin exposure via futures contracts and BTC ETFs. Mutual fund allocations to Bitcoin are bound to cause Bitcoin prices to surge.

Conclusion

After 15 years of doubt and slander, Bitcoin has reached the pinnacle of credibility. The first wave of sound money believers ensured that its blockchain would not disappear into coding history.

With confidence in Bitcoin, Bitcoin investors have formed two waves so far. The passage of a Bitcoin ETF may be a milestone in the third wave. Central banks around the world continue to erode confidence in cryptocurrencies as governments cannot control themselves and indulge in spending.

With so much noise introduced into the exchange of value, Bitcoin represents a return to the roots of sound money. Its saving grace is that it is digital, born from physical proof of work. Unless the U.S. government takes extreme action to disrupt institutional risk exposure, Bitcoin could replace gold as the traditional safe-haven asset.

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