The idea of a US-based Bitcoin ETF has been around since 2014, but the SEC has been declining all proposals for various reasons, up to the most capricious one as of late given the SEC chair having been very vocal against cryptocurrencies for a while. But it eventually happened 2 days ago, after almost 10 years of drama, and one can sense that the approval decision has been somewhat “forced” onto the SEC… but that’s another debate.
Let’s review the Bitcoin ETF launch from late 2023 and what to expect going forward.
Back in late December 2023, everybody was expecting an approval of the new vehicle by SEC by January 10th, 2024, which has been front-run by market participants from mid-October 2023 to early December 2023, taking BTC from $27k to $44k over that period, leading to a 63% gain in 7 weeks.
Then markets were very quiet in the last 2-3 weeks of December 2023 as most active managers reduced trading and exposure in order to lock their yearly PnL.
On December 29th, 2023, we wrote that with Bitcoin at about $43k on that day:
“This leads to the classic ‘buy the rumor/sell the news’ event where Bitcoin has already been pumped up proactively from mid-October to mid-December on the ‘rumor’ and could correct shortly after approval of the Bitcoin ETF news breaks,” he (David Lifchitz) warned. “However, a last pump could take place in the very early days of 2024 from $43k at the time of writing to $45k-$47k on New Year fund inflows. A ‘sell the news’ event could take it back down to $38k-$40k afterward.”
This is basically what happened in the following two weeks with some unexpected twists:
- On January 1st, 2024 (J-9 before SEC decision deadline), Bitcoin jumped 4.5% (from $42,3k to $43.4k) straight out of the gate on New Year’s inflows but also because active managers had locked in their 2023 yearly PnL and were now more free to take risks.
- On January 2nd, 2024 (J-8 before the SEC decision deadline), Bitcoin pushed up to $46k before pulling back to close just a tad below the round level of $45k.
- On January 3rd, 2024 (J-7 before SEC decision deadline), Bitcoin flash crashed from $45.5k down to $43,4k intraday (-4.8%) before closing at $42,850, coincidently with the publication of a report from some analysts from MatrixPort that were warning about the highly probable rejection of the spot Bitcoin ETF approval by the SEC the following week. They argued that some critical requirements imposed by the SEC to the applicants of the spot Bitcoin ETF were not met, and strongly advised to load up on BTC puts and BTC short positions in order to benefit from the expected downside move due to the upcoming ETF rejection.
It is worth mentioning that the same MatrixPort company was expecting just 2 days prior to their doom’s day report, Bitcoin above $50k…
Unfortunately, carbon traders and news reading algos sold on the report first and began to think afterward…
Did MatrixPort have some insider information from the SEC that had been leaked somehow (and potentially a “fake news” leaked on purpose by the SEC to knock off their nemesis…), or did they just decide to gamble their reputation by taking a strong stance against consensus: if indeed the SEC were to reject the ETF approval, they would be seen as “geniuses” for having been right despite being against the general expectation, or otherwise lose all credibility going forward.
MatrixPort was not the only firm to come up with such a daring warning. 10x Research, led by the same analyst who left MatrixPort made the same analysis...
The spot Bitcoin ETF having been approved as expected, everybody will come to their own conclusions regarding the future credibility of these “analysts” who were so convinced of the fate of the ETF launch...
But what is more puzzling is that they could also have “talked their book” by having taken (directly or indirectly) a short position in the market before publishing the news, which they knew would shake the highly nervous market, and profit from the orchestrated move. But we digress…
Finally, to set the record straight, we do welcome critical thinking and contrarian views and like to read market analysis as long as these views and analysis are expressed with a certain degree of hypothesis, but when such firms wrote that an event is so likely to happen, whereas they have strictly no clue about it, it is another story!
- January 4th and 5th, 2024, Bitcoin bounced back up to $44k, having somewhat discarded the MatrixPort Cassandra news.
- January 6th and 7th, 2024, were weekend days, so no decision could be announced by the SEC on these days and Bitcoin didn’t move.
- January 8th, 2024 (J-2 before SEC decision deadline), Bitcoin rallied 7% up to $47k on real news about the final interactions between the ETF providers and the SEC, with back and forth between them during the day, which has been unheard of by whoever has dealt with the SEC in the past, which has been perceived as the confirmation of an upcoming positive decision by the SEC.
- January 9th, 2024 (J-1 before SEC decision deadline), a tweet from Gary Gensler's X (formerly Twitter) account broke out announcing at 4:11 pm EST the approval of the spot Bitcoin ETF. Bitcoin immediately jumped on the news up to $48.2k… then collapsed about 16% down to $40.3k a few minutes later as the tweet appeared to be fake news before closing at $42.8k, resulting from the SEC Chair’s X account being compromised, not due to some X security failure as some pundits were quick to claim without any knowledge about the real cause, (it appeared to be a compromised phone number without 2FA authentication enabled which allowed some hackers to post the fake tweet).
- January 10th, 2024 (SEC decision day), the SEC eventually announced the approval of all providers of spot Bitcoin ETF, but to most surprise, didn’t lead markets to much higher right after the announcement (however the price of BTC swang in a 7% range on the day prior to the announcement).
- January 11th, 2024 (BTC ETF trading day 1), after some initial selling pressure until 9 am UTC, i.e. Asia selling as usual, Bitcoin moved up from 46.2k to 47.3k at 2 pm UTC, the time at which the various ETFs began to trade on various US exchanges. The price of BTC zoomed up from 47.3k to 49k (+3.6%) in just 15 minutes, before beginning to slide steadily for the remainder of the day, closing at $46.3k (i.e. down -0.7% on the day and -5.5% from the high of the day).
- January 12th, 2024 (BTC ETF trading day 2), BTC felt about -1% from $46.3k to $45.8k (Asia selling again) right before the US trading ETF trading session opened at 2 pm UTC, but it was when the US session opened, that hell broke loose… with uninterrupted selling all day down to $43.2k (-6.7% from the open) at 9 pm UTC, which is 4 pm EST time, the end of the regular trading US session. Then in order to add insult to injury, BTC prices went down to $42.8k (-7.5% from open) at the close of the day after having reached a low of $41.3k (-10.8% from open). This extra leg down was the result of 2 massive instantaneous “flashcrashesque” sell orders, one at 10:03 pm UTC and another one at 10:21 pm UTC.
- January 13th, 2024 (the day of writing this note) is a Saturday and therefore US exchanges are closed: no ETF trading. The crypto markets are back to their usual Saturday lull.
Thus our December 29th, 2023 expectations (see above) played out as expected:
- “However, a last pump could take place in the very early days of 2024 from $43k at the time of writing to $45k-$47k on New Year fund inflows.
⇒ BTC was at $47k before BTC ETF trading began.
- A ‘sell the news’ event could take it back down to $38k-$40k afterward.”
⇒ BTC went down as low as $41.3k before stabilizing around $42.8k for now, but we expect more downward pressure to come.
But what we didn’t anticipate was the January 9th, 2024 fake news due to a hack of the SEC Chair X account… nor the reason for the sell event.
The sell event was expected in a typically Wall Street-esque “Buy the rumor, Sell the news” fashion as speculative positions are taken in anticipation of a news and when it breaks, profit is taken and then afterward prices move according to the news (good news = up, bad news = down).
We indeed saw some material profit taking on ETF launch day after it hit a high of $49k on January 11th, 2024, but that was followed by an ongoing selloff that took place on the next day, which at that point, was not only profit taking from speculators that “bought the rumor” in October 2023. There was something else at play, and understanding it is mandatory to anticipate what may come next in order to position accordingly.
So what was the reason behind the Friday, January 12th, 2024 Bitcoin selloff? Is there any more to come on Tuesday 15th, 2024? Will that turn around any time soon?
This is what we are going to try to explain now, with as much confidence as possible as we have no crystal ball to tell what will exactly happen.
There are actually several sources of selling. We have identified 4 main ones:
- Asia selling
- Speculators' short-term profit taking
- Miners pressure
- Grayscale GBTC closed-end fund conversion into an ETF
1) Asia selling
In early December, Bloomberg highlighted that South Korea had been a large purchaser of Bitcoin by watching won exchanged for Bitcoin for trading activity in 42.8% over the month of November.
Since mid-December, we have observed a day pattern in Bitcoin trading, with selling taking place during Asian hours, and recovery during the US trading hours, while not being that much moved around during the European market hours, which take place between Asia and the US hours.
Selling pressure during Asian hours has also been observed on the few days prior to the announcement as well as after it.
However, this selling pressure hasn’t moved Bitcoin down more than 2% on a given day.
2) Speculators short term profit taking
Another source of selling pressure came from the short-term speculators who heavily bought Bitcoin from 10 am UTC on January 11th, 2024 at $46.2k and sold it from 2 pm UTC shortly after BTC ETF began to trade after having zoomed to $49k, pocketing a quick 5%-6% on that trade.
3) Miners pressure
April 2024 is the next halving of Bitcoin, when its mining reward will be cut in half again. This means 50% less revenue for BTC miners going forward, with smaller ones about to go out of business or being acquired by larger ones, as the small ones won’t be able to remain profitable with profits cut in half.
On January 12th, 2024 (the 2nd day of trading of the BTC ETF when Bitcoin plunged close to 8% on the day), Bitcoin miners' outflow hit a six-year high as more than $1B worth of Bitcoin was sent to exchanges according to Bitcoin News.
Miners send their Bitcoin rewards to exchanges in order to monetize them in fiat currencies, and they too found it compelling to sell their stash of Bitcoin as it was approaching the $50k mark and the highest price over the last 2 years.
4) Grayscale GBTC closed-end fund conversion into an ETF
Before detailing this point, let’s review what the Grayscale GBTC closed-end fund was.
A closed-end fund is an investment vehicle that emits a defined number of shares at its inception that are sold to investors (like a company IPO), but no more shares can be created afterward. The only way for an investor to sell their shares is to find another investor willing to buy them from him, and vice-versa for an investor wanting to buy in. This supply/demand mechanism leads to a share price that can be disconnected from the intrinsic value of its underlyings: the higher the perceived value of a share, the higher its value compared to its underlying instrument's net asset value - the share price is considered selling at a premium: sellers are willing to sell their share to an outside investor at a premium. And vice-versa, the lower the perceived value of a share, the lower its price compared to its underlying instruments: the share price is considered selling at a discount.
Grayscale launched GBTC closed-end fund in September 2013, allowing Institutional Investors and Accredited Investors to access Bitcoin in the most convenient way for them rather than having to deal with managing crypto wallets and keys, especially back in 2013.
Grayscale GBTC held about 27B$ worth of BTC at the end of 2023, and its premium was as high as 130% in December 2017 (when Bitcoin reached its first historical high, investors were willing to pay 2.3 times more than the intrinsic value of BTC in order to get into the closed-end fund as none of the existing holders were willing to sell their shares as Bitcoin was then on fire) to as low as -49% in December 2022 (at the low of the last bear market, when existing investors in GBTC were desperate to get out as the price of Bitcoin was going down and they couldn’t sell their shares unless another investor were willing to buy them, and they tried to lure some by giving up to 50% of the value of BTC just to get out).
Then in August 2023, Grayscale was eventually authorized to convert its Bitcoin closed-end fund into a spot Bitcoin ETF, which began to trade on January 11th, 2024.
Therefore from January 11th, 2024 onward, holders of GBTC closed-end fund shares were converted into the GBTC ETF at a rate of 1,116.31 GBTC worth 1 BTC which led to a price of about $42 per GBTC share when the ETF began trading at around $47k.
The GBTC ETF is the most expensive of all as it charges 1.5% of assets to investors on an annual basis, whereas the other providers propose the exact same vehicle for about 0.20%, i.e. 7.5 times less expensive.
On January 11th, 2024, at the ETF trading inception, Bitcoin was trading at about $47k. There were then 4 types of investors holding Bitcoin through the Grayscale closed-end fund converted into an ETF:
- Investors who bought GBTC in the early days, when Bitcoin was trading at $133 to an average of $500 in 2014, and who are still invested in GBTC. These investors are looking at a huge unrealized gain but also looking at a huge tax liability of capital gains if they decide to sell their holdings.
- Investors who bought GBTC near its recent high of $65k in 2021 (let’s say investors who bought Bitcoin at a value between $50k and $65k) and who are still invested in GBTC. Contrarily to the previous category of investors, these are nursing an unrealized loss. If they were to realize this loss, they could use it to offset gains in other investments and thus reduce their overall tax liability.
- Investors who bought GBTC between $35k and $45k and who are still invested in GBTC are facing only a small tax liability if they were to sell their holdings now, which could be manageable for them to get back their freedom should they want to invest elsewhere.
- And finally, Investors from the 3 previous categories who just want to get out of Bitcoin NOW at any price for various reasons.
On January 11th, 2024, at the ETF trading inception, holders of GBTC among the 4 types described above had the possibility to freely sell their holdings:
- Investors of the first category had in the majority decided to keep their investment in GBTC ETF in order to avoid the big tax liability, but are therefore obliged to pay a hefty price for that (1.5% of assets value on an annual basis whereas competitors offer the exact same service for 0.20%).
- Investors of the second category had in majority sold their holding of GBTC, realizing a loss that they could use to offset pending or future investment gains, while also being able to get into the same Bitcoin ETF vehicle but for much less than with Grayscale.
- Investors of the third category had to decide whether it was more beneficial for them to take a small tax liability and then be able to move into a cheaper Bitcoin ETF. It was really a case-by-case decision for them to make.
- Investors of the fourth category exited anyhow.
All of these investors having an opportunity to sell at the same time, created heavy selling pressure on the market, which contributed to the other selling factors described previously.
Over the first 4 days of trading of the Bitcoin ETF, $1.24B came into the different ETFs and $1.62B came out of the GBTC Bitcoin ETF (as explained above, given the exorbitant fee Grayscale Bitcoin ETF is asking for compared to its competitors, it made no sense for a new investor to come into the GBTC ETF, hence only outflows):
Also as a reminder, the FTX liquidator is sitting on 22.2m shares of GBTC as of the latest court filings and is legally able to sell them all.
22.2m shares of GBTC worth $42 each at the time the ETF trading started (BTC @47k) represented $932m. With BTC now trading at about $43k this still represents $855m.
FTX liquidation is definitely part of investors of category 4 above.
So the question is: how much value of the GBTC converted closed-end fund is held by the investors of the 4 categories above, in order to get a sense of how much total selling pressure that represents on top of the $1.62B already out?
Given the FTX liquidation of about $900m worth of GBTC and the $579m of GBTC already out, it means that there is still a minimum of $320m (=~ $900m - $579m) of GBTC to be sold if we assume that all of the selling of GBTC came from FTX liquidator only, but which obviously is not, meaning that there’s more than that that the FTX liquidator has to sell, on top of investors from the other categories who haven’t sold yet everything they wanted.
Thus there’s basically a stock of GBTC to get rid of, which will put pressure on the Bitcoin price for some time, and that time will depend on the urgency of GBTC holders to sell: if they want to exit as soon as possible, they will probably crash the price of BTC down to $35k or less… but if they are willing to unload less brutally, in order to maintain Bitcoin price, the price of Bitcoin will not get to new highs until they are all done with their selling as each time the price of Bitcoin will improve from its current level, the GBTC holders willing to sell will take advantage of the increased price to sell.
However, when the stock of GBTC to sell is fully liquidated, the Bitcoin ETF should receive considerable inflows, pushing up this time the price of Bitcoin.
Finally a last remark: this situation is Bitcoin-specific. Indeed, even if Bitcoin is the crypto market bellwether, it is the only digital asset to be impacted by the GBTC situation. We have witnessed other major digital assets losing less than Bitcoin on January 11th and 12th, and recovering as early as the 13th while Bitcoin didn’t move.
Grayscale has also a smaller Ethereum (ETH) closed-end fund, which should it be converted into an ETF sometime this year, could suffer the same fate as Bitcoin, and would provide a clear way to trade ETH ahead of this.
That actually began on January 10th, 2024: when spot Bitcoin ETF was eventually approved after almost 10 years of shenanigans from the SEC, ETH immediately jumped in price as a clear path has been shown for future crypto ETF to be created: buying ETH up to its launch as an ETF and then short 15mn after it begins to trade until Grayscale ETH closed-end funds investors are done with their selling.
In any case, in the very near future (i.e. by the end of January 2024), given that overhanging stock of selling pressure over Bitcoin, each bounce may be sold, so one could tactically front-run the big sellers by getting long when the selling pressure abate and the price of Bitcoin recovers, and then short it when a new wave of selling pressure starts.
Another option is to stay clear of Bitcoin until the situation is resolved and focus on other major coins that are less impacted.
Good luck and happy trading!