The cryptocurrency market, full of incredible promises and speculation, sometimes seems to fail to meet investors’ expectations, especially in the context of the impact of ETFs (Exchange-Traded Funds) on Bitcoin’s price. Despite significant capital inflows into new Bitcoin ETFs, the expected positive impact on Bitcoin’s price has not yet materialized. We will take a closer look at how ETF mechanisms work and how they affect Bitcoin’s valuation.
The introduction of Bitcoin ETFs was supposed to be a breakthrough in the cryptocurrency market. However, despite huge investments into these funds, the expected rise in Bitcoin’s price was not observed. The key to understanding this situation is the mechanics of how ETFs work and their impact on Bitcoin’s valuation.
Bitcoin ETFs, such as those offered by BlackRock, do not buy and sell Bitcoins in real-time. Instead, they represent the value of Bitcoin purchased at least a day earlier. Therefore, the impact on Bitcoin’s price is delayed and does not reflect current market activity.
Most ETFs use the “CF Benchmarks Index” to calculate the Bitcoin price on a given day. This price is determined based on the average price from several major cryptocurrency exchanges. This is significant because the Bitcoin price for ETF purposes does not always correspond to its current market price.
It’s worth noting that OTC (Over-The-Counter) transactions play a key role in the mechanism of Bitcoin ETFs. These are transactions conducted privately, outside of the main exchanges. Although they do not directly affect the market price of Bitcoin, they set a precedent for prices on the exchanges.
Despite the current discrepancy between inflows into ETFs and Bitcoin’s price, there is a likelihood that the limited supply of Bitcoin in the market may lead to price increases. ETFs may be forced to acquire Bitcoin from the open market, which could affect prices. This is particularly relevant given that a large portion of Bitcoin is locked in long-term investments or in lost wallets.
The current market situation, with large inflows into Bitcoin ETFs without a proportional price increase, results from the delayed and averaged pricing mechanics of ETFs. Questions arise about market efficiency and potential ‘manipulation’. However, understanding the operation of regulated ETFs is crucial for investors.
Although currently off-exchange trading and price averaging mechanisms dominate the scene, the evolving market landscape suggests that Bitcoin’s limited supply and increasing demand from ETFs may lead to significant market changes.
“Hodling” Bitcoin (i.e., buying and “holding”) may now be a strategic move, impacting the availability and price of Bitcoin for institutional buyers who may soon exhaust coins to purchase at these ‘average’ prices.
Photo by André François McKenzie on Unsplash
