Insight
January 26, 2024
After an initial flurry of inflows into the spot ETF complex (10 in total), the tide has turned in trading days 6 – 10, with the ETFs now showing net outflows in aggregate. Leading the way has been the Grayscale Bitcoin Trust (GBTC), which has now processed $4.8B of redemptions. While inflows to the challenger funds have been good, 9 in total led by the iShares Bitcoin Trust and Fidelity Wise Origin Bitcoin Fund, the daily flows out of GBTC are now overwhelming flows into the new challenger funds. Cumulative daily flows into spot ETFs peaked on day 6 of trading at $1.26B, but they now sit at $733M since launch.
Flows out of GBTC, the behemoth in the spot ETF space, have been highly topical given the sponsor fee differential between the fund, 1.5%, and the challenger funds, many of which have waived fees for certain time frames and/or AUM amounts. Since the start of trading for the spot ETFs (and conversion of GBTC into an ETF), investors have redeemed $4.8B out of GBTC. It is possible that most of that went into the challenger funds, but given the first observation we made, that the entire spot complex was now seeing net outflows, those outflows aren’t entirely landing in the challenger funds.
When do the GBTC outflows stop? While the daily outflows seem to be slowing down, a clear answer to that question is not knowable given our seat. One would need to know costs basis, holdings time horizons, tax situations, and investor preferences to make an accurate assessment. JP Morgan had initially estimated $2.7B (we are unclear on the methodology) of outflows, but given the data so far, appears to be a significant underestimate. In some sense, Grayscale is in charge of its own destiny in that it can stem outflows to challenger funds by reducing its fee. The fact that Grayscale hasn’t responded to the competitive threat with fee reductions yet implies to us that losses are within its range of acceptability. Given how low challenger fees are even without the fee breaks (0.25% and 0.30% for iShares and Fidelity respectively), Grayscale may accept losses until the calculus dictates that it lowers fees in an effort to maximize revenue.
Every trading day, around 10 AM, on-chain data sleuths identify and publish the number of bitcoins moving out of GBTC as a measure of redemptions. Unfortunately, misunderstandings about how the ETF functions under the hood have led to some misconceptions about what the information means. First off, we applaud the work of the community and data providers for identifying these addresses and to Bitwise for self-reporting its custody address. Unfortunately, the on-chain movements, however, reveal little consequential information, and relying on them for forward looking information will lead to incorrect conclusions.
Simply put, the on-chain movements associated with GBTC’s addresses represent the settlement for trades that already occurred two days (sometimes one day) prior. They do not represent a “rebalance” (there is no such notion here), and they purely reflect trading actions undertaken in the past. They do not represent coins being sent to an exchange or a trading venue for liquidation. This is because the settlement mechanism associated with cash redemption orders has coins moving to the bitcoin Liquidity Provider on a T+2 (or sometimes T+1) basis.
What is happening is that on trade date (T=0), the Liquidity Providers (JSCT, Virtu, Flow Traders, and Flowdesk as the initial named LPs, but there are likely more) execute spot sales to most closely replicate the CoinDesk XBX Index at 4 PM ET. They are now short coins and long cash raised from sales. Two days later (T+2), on settlement, the LPs send the cash to the Liquidity Administrator (BNY) and are sent the commensurate coins from the custodian (Coinbase) to cover their short. That movement from Coinbase to the LPs is what on-chain sleuths are seeing but is purely settlement from trades 2 days prior and therefore is backwards looking. If one wanted to get a more concurrent look (one cannot get a look ahead from outside the trading ecosystem) of GBTC redemptions (there are only redemptions right now), we suggest to look at trading volume right around the 4 PM close.
The differences between the major ETF NAV indexes have created some peculiar trading patterns in the last hour of the traditional market, from 3 PM ET to 4 PM ET. At a high level, the indexes for funds that have been a source of funds inflows (spot buying) rely on prices weighted over an hour (TWAP – time weighted average price or VWMP – volume weighted mean price), while funds (GBTC) that have been a source of outflows (spot selling) rely on a 4 PM snap price. Because LPs in aggregate are attempting to replicate the index prices via spot markets, they are in the market buying for most of the 3 PM – 4 PM window, but then engage significant selling right at 4 PM. We have observed some interesting volume and price dynamics because of these index differences.
Earlier this week, it was reported that FTX’s bankruptcy estate had liquidated its holdings of GBTC shares, which could have accounted for a large portion of the outflows thus far. FTX, which had tapped Galaxy Asset Management to liquidate its holdings, held 22.3M shares of GBTC worth about $900M as of the market close prior to the conversion to an ETF. There are two other big GBTC positions, the fate of which are unknown. There are 30.9M shares ($1.1B at current price) of GBTC likely held at Gemini as a result of the foreclosure of collateral posted by Genesis under the Earn program borrowings. There are another 36.1M shares ($1.3B at current price) owned by Grayscale affiliates such as its parent, Digital Currency Group (DCG), most of which is held at Genesis. 31.2M shares (of the 36.1M held by affiliates) were pledged as further collateral under the Gemini Earn program but never foreclosed upon and are subject to an unresolved legal battle between Genesis and Gemini (as well as the 30.9M shares already foreclosed upon). Those shares may have been sold in the market in the past few weeks, but that is far from a sure thing given the ongoing nature of the litigation.
As the ETF launches recede into the rearview (it has been over 2 weeks now), there are a couple of things we are on the lookout for. First, we would like to see outflows from GBTC normalize or slowdown. While the daily outflows are slowing, there is no consensus at what point or AUM this will happen. Watching trading volume (Coinbase is usually the principal exchange) at the 4 PM ET close should give real time insights into those outflows. Second, we continue to watch inflows into the challenger funds, which also continue to slow down. Fidelity and BlackRock (iShares) have been the main challengers to watch. Finally, we are on the lookout for the launch of options trading. All of the exchanges have filed for approval for options trading with the SEC. The public comment period on their request ends on February 15th.
Bitcoin fell 2.2% on the week on as the hangover from the ETF launches continues. Bitcoin briefly broke through the $40K barrier, but as of this morning has rebounded a bit, perhaps on hopes that the GBTC redemptions are starting to subside. Equities are off to a good start this year as price stability (inflation), economic expansion, and a more benign rate environment into an election year have provided a solid investment backdrop. The S&P 500 was up 2.4% on the week and the Nasdaq Composite was up 3.0%. Bonds were also up on the week against that backdrop, with investment grade corporate bonds up 0.3%, high yield corporate bonds up 0.7%, and long term US Treasuries up 0.2%. Commodities were mixed as procyclical oil rallied 4.4% while gold dropped 0.2%.
FTX Sold About $1B of Grayscale's Bitcoin ETF - CoinDesk
Bitcoin Wallet Address Disclosed by Bitwise - CoinDesk
Sotheby's Auction Nets $254K for 'Genesis Cat' From Taproot Wizards - CoinDesk
SEC Shut Off Extra Security on X For 7 Months, Opening it to False ETF Hack - CoinDesk
FINRA Provides Update on Targeted Exam: Crypto Asset Communications - FINRA
Stolen Crypto Falls In 2023, But Hacking Remains a Threat - Chainalysis
US Files Intent to Dispose $117 Million In Bitcoin Seized from Silk Road Drug Dealer - The Block
Mt. Gox Bitcoin Payments Move Closer - CoinDesk
Core Scientific Emerges from Chapter 11 - Core Scientific
Jan 31 - FOMC interest decision
Feb 13 - January CPI reading
Feb 15 - End of comment period for options on bitcoin ETFs
Feb 23 - CME expiry
Mid-April - Bitcoin block reward halving
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