Bitcoin ETFs See Strong Inflows, But Bitcoin Price Falls

JPMorgan: Grayscale ETF Sell-Off to Blame for Bitcoin Decline

Large Sales by Grayscale Investors May Be Impacting Crypto Market, Analysts Say

In the first week of trading, U.S. spot bitcoin exchange-traded funds (ETFs) attracted significant volumes. BlackRock's fund had over $1 billion in assets by January 19, and the combined assets under management of all 11 funds exceeded the assets of all existing silver ETFs in dollar terms. Bitcoin fell 11% over the same period. Market analysts see the reason for this in the actions of investors in the Grayscale ETF and predict their continued impact on the price of the first cryptocurrency.

Grayscale Bitcoin Trust (GBTC), which has existed as a closed-end fund for accredited investors since 2013, had accumulated about $25 billion in assets. Only in January did the U.S. Securities and Exchange Commission (SEC) allow it to convert into a full-fledged spot ETF, while BlackRock, Fidelity Investments, and eight other companies that launched spot bitcoin funds effectively opened them from scratch.

Since the appearance of new ETF shares on the exchanges, outflows from GBTC have already exceeded $1.5 billion. This was largely due to the fact that investors took advantage of the opportunity to exit their positions in GBTC. They held the fund's shares at a significant discount to the cost of bitcoin as the underlying asset for a long time, paying a relatively high commission and not fixing the loss in anticipation of the fund receiving ETF status. "Now they have made a profit and, possibly, have completely left the bitcoin market, instead of switching to more profitable bitcoin ETFs," JPMorgan analysts note.

Based on JPMorgan's estimates, which were made before the SEC approved the ETF, Panigirtzoglou believes that another $1.5 billion could leave GBTC in the coming weeks. This will put additional pressure on the price of bitcoin, the report says.

The sale of shares of spot funds implies the sale of the underlying asset, and public information about outflows in general affects the actions of traders in the global market. GBTC shares also held a significant share in the portfolios of large companies and funds that went bankrupt in 2022, including FTX and Three Arrows Capital. Their liquidators have openly stated that they will extract the maximum income from the available assets to settle with creditors.

Analytical services have been recording the movement of significant blocks of bitcoin from Grayscale's public addresses to the Coinbase exchange for several days in a row, but it is impossible to say with certainty that the coins are then sold on the market.

High Fees

"Whatever the reasons for the outflow of $1.5 billion from GBTC in recent days, it is putting additional pressure on GBTC, forcing the fund to lower fees," the JPMorgan report notes in the paragraph on the fund's fees for investors at 1.5%.

Grayscale charges clients a much higher management fee than its competitors. Ark Invest launched a fund with a zero fee in the first year and 0.21% in subsequent years. BlackRock, the world's largest asset manager with $10 trillion under management, charges 0.12% in the first year or from the first $5 billion, after which the fee increases to 0.25%. Invesco, which filed an application to create a bitcoin ETF together with Galaxy Digital's Mike Novogratz, said it intends to waive the 0.59% fee for the first six months of the fund's operation. The Valkyrie fund charges a slightly higher fee of 0.8%.

"Investors place great importance on such things as liquidity, track record, and who is actually the issuer behind the product. Grayscale is a cryptocurrency specialist. And she really paved the way for many such products," Grayscale CEO Michael Sonnenschein said in an interview with CNBC at the World Economic Forum in Davos.

According to him, the reason for the lower fees of other ETFs is that these products "have no track record" and issuers are trying to attract investors by stimulating them with fees.

"From our point of view, this can sometimes cast doubt on their long-term commitment to the asset class," Sonnenschein said. Two or three of the spot bitcoin ETFs "may gain some critical mass" of assets under management, but the rest may simply be squeezed out of the market. "I don't think all 11 spot products will ultimately remain on the market," Sonnenschein said.

Transfers from Grayscale wallets to Coinbase. Source: Arkham Intelligence