As a crypto investor with some experience in the market, I share Jim Bianco’s concerns regarding the impact of Bitcoin ETFs on on-chain liquidity and adoption. Although ETFs have attracted institutional investors and facilitated new investment into Bitcoin, they may also be pulling liquidity away from decentralized exchanges and wallets, potentially hindering the growth of a truly decentralized financial system.
Although pledging to increase Bitcoin participation among baby boomers, US-listed Bitcoin ETFs might pose a larger threat to on-chain acceptance and market fluidity instead.
One major issue surrounding Exchange-Traded Funds (ETFs) is the potential impact they may have on market liquidity, as expressed by Jim Bianco, the founder of Bianco Research, in his May 19 blog post.
“Pulling money off-chain into the Tradfi world in the form of an orange FOMO poker chip will not get digital assets to the promised land of a new decentralized financial system. If anything, it is getting in the way of this goal.”
During a pivotal week for Bitcoin’s (BTC) price, which currently hovers below a significant resistance level, an expert warning emerges. If Bitcoin successfully surmounts the $67,500 threshold, it may reach new peak prices, according to Markus Thielen, the head of research at 10x Research.
As a crypto investor, I’ve noticed that the introduction of Bitcoin and other cryptocurrency ETFs has been a double-edged sword. While these financial instruments have certainly brought more mainstream attention and institutional investment to the space, they also have the potential to draw significant liquidity away from on-chain markets and into traditional finance (TradFi) platforms. This was a concern I’ve had as a macro researcher, given the importance of maintaining a healthy balance between these two ecosystems for the long-term growth and sustainability of the crypto market.
The Q1 financial data from Coinbase reveals that even though retail trading volume was only halfway last year’s level, revenue still amounted to a substantial $1.64 billion. Conversely, institutional trading activity surged significantly, reaching $256 billion in the first quarter compared to $215 billion during the same period in 2021.
Based on Bianco’s perspective, this indicator represents Coinbase’s effort to counteract the decrease in retail trading activity with increased institutional growth.
“Above is $COIN telling us that retail still thinks on-chain is too hard, and $COIN is too limiting? They would rather own BTC in a Tradfi brokerage account? In other words, are they content with a receipt (ETF) that trades on the NYSE that they own BTC in a regulated account rather than adopting the new financial system directly?”
The discoveries might pose a challenging query for Bitcoin’s story as a decentralized substitute to the traditional fiscal system. (Bianco put it this way:)
“If the goal is to develop a new financial system, an ETF dragging money back into the Tradfi world is not getting to that promised land.”
Additionally, ETFs have struggled to draw in baby boomers as investors. Approximately 85% of the Bitcoin held within these ETFs is owned by retail investors, while hedge funds account for only 10%. (Bianco’s findings)
“Throughout the quarter, we were confidently told boomers were calling their wealth managers and telling them to get into BTC. This is not the case for 95+% of the Spot BTC ETF holdings.”
During the week of May 6, there was a reversal in the flow of bitcoin from U.S.-based exchange-traded funds (ETFs), moving from net outflows to net inflows after three consecutive weeks of negative flows. Approximately $200 million in total inflows were recorded for these ETFs based on data from Dune Analytics.
Bitcoin ETF price combined with average purchase price indicates retail trading behavior
The cost to buy an average Bitcoin ETF unit on the market hovered around $58,000 to $59,000. A significant number of sales occurred when Bitcoin dipped below $60,000 in early May, indicating that individual investors likely drove these price fluctuations.
“When the price went to this level on May 1, these ETFs had record outflows. Now that the price is well above this average price, outflows stopped. This is Degen behavior,” Bianco said.
The influx of institutional funds from Bitcoin ETFs played a substantial role in fueling the recent surge in Bitcoin prices to record-breaking highs above $50,000 by mid-February. Approximately 75% of new investments in Bitcoin can be attributed to these ETFs.
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2024-05-20 15:13