As liquidity grows, institutional investors and options strategies could fuel the long-term expansion of the bitcoin ETF market.
As institutional investors continue to flock to the newly launched bitcoin exchange-traded funds (ETFs), a burning question arises: what's next for these ETFs and the broader crypto market?
With the massive success of these ETFs in attracting a record-breaking total net inflow of $18.9 billion this year, and nine newborn ETFs (excluding Grayscale Bitcoin Trust) now holding a substantial 646k BTC, several key points emerge.
Firstly, these ETFs have played a significant role in the broader ETF market, with IShares Bitcoin Trust (IBIT) and Fidelity Wise Origin Bitcoin Fund (FBTC) ranking among the top 10 in terms of biggest assets this year, according to Eric Balchunas, Senior Bloomberg Analyst.
However, despite this success, the ETF market still comprises a relatively small fraction of the overall bitcoin trading volume. For instance, on Oct. 11, the last full trading day, the bitcoin futures market traded $53.4 billion, the spot market traded $4.5 billion and the ETFs traded $2 billion, according to checkonchain data. This indicates that ETF trading volume on that day constituted only around 3% of the total bitcoin market volume.
Another crucial aspect to consider is the role of the "basis trade" in the overall inflows into the ETFs. This market-neutral strategy, which involves going long on the underlying asset (e.g., bitcoin) while simultaneously shorting the futures contract, aims to capture the premium between the spot and futures price. As the futures contract approaches its expiration, its price converges with the spot price, presenting an opportunity for arbitrageurs to close their positions and realize the spread.
This strategy is particularly relevant in the context of bitcoin ETFs due to the premium that typically exists between the ETF's net asset value (NAV) and the prevailing spot price of bitcoin. As a result, a portion of the inflows into these ETFs are likely attributable to this type of trade.
While the precise percentage of inflows that can be linked to the basis trade is challenging to determine, an examination of IBIT's largest holders, as disclosed in the 13-F filings, provides some insights. According to Fintel, these large holders include authorized participants (APs) involved in the creation and redemption of the ETF shares, as well as hedge funds that are likely utilizing the ETF for the basis trade.
As we look ahead, Bernstein, a private wealth management firm, has previously highlighted the potential of these institutional basis trades to serve as a "Trojan horse for adoption." The firm's analysis suggests that as liquidity grows in the ETF market, these trades could ultimately contribute to net long positions.
Moreover, as ETFs become a larger part of the overall market, they are expected to drive further participation and liquidity in the crypto space. Another anticipated development is the approval of physically settled options tied to IBIT, which could open up new avenues for advanced investors to generate passive income through strategies like covered calls or for miners to hedge their positions. As ETF adoption continues to unfold, these factors are expected to play an increasingly influential role in the market.