When the SEC finally approved spot bitcoin ETFs, bullish investors anticipated a flow of new money into bitcoin. Instead, it appears that investors have been more interested in reshuffling their money.
A cursory view of trading activity in the newly-listed bitcoin ETFs could give the impression that they are quite popular. Within three days, trading volumes exceeded $10 billion — far outpacing transactions of any other ETFs launched within the last 12 months.
The reality, however, is that money has actually flowed out of bitcoin since the approvals, and bitcoin’s market capitalization has declined by over $60 billion.
As sophisticated investors who bought the rumor sold the news, most Bitcoiners simply rotated existing bitcoin investments into the ETFs.
Record trading volumes in spot bitcoin ETFs
According to Bloomberg analysis, as of this week, the combined trading volume of 500 non-bitcoin ETFs that launched during 2023 was $450 million. That compares to $1.8 billion across just 10 bitcoin ETFs.
Institutions prominently disclosed their capital rotation intentions in SEC filings. For example, Cathie Wood’s Ark Invest sold off the bitcoin futures-based BITO in order to buy its own, newly-approved spot bitcoin ETF, ARKB. All of that volume — selling one ETF to buy another — is double-counted.
Dan Morehead’s Pantera Capital disclosed weeks ago in Bitwise’s S-1 SEC filing that the firm would be buying $200 million of Bitwise’s ETF. Morehead often endorses Bitwise’s Matt Hougan on X and elsewhere. This capital infusion caused Bitwise’s ETF to top the leaderboard of spot bitcoin ETF inflows for day one. Had it not been for Morehead’s $200 million, Bitwise’s ETF would have ranked fifth.
GBTC capital rotation
Grayscale’s GBTC is by far the largest source of double-counted volume. Approximately $1.17 billion flowed out of GBTC from Thursday through Monday. Much of that capital immediately flowed into one of the nine other spot bitcoin ETFs.
Similarly, many bitcoin investors sold MicroStrategy and other bitcoin companies like Riot Platforms and Marathon Digital in order to buy spot bitcoin ETFs. Michael Saylor’s MicroStrategy, for example, shed over $1 billion in market capitalization since the SEC approvals.
Of course, this type of capital rotation is commonplace. Every day, trillions of dollars wash across securities, commodities, and currencies as traders optimize their portfolios. A single US clearinghouse processes quadrillions of dollars worth of transactions, most of which is arbitrage, market-making, rebalancings, and quant trades. In other words, there’s nothing necessarily problematic with capital rotation and double-counted volume in bitcoin ETFs.
Rotating $36 billion of existing bitcoin investments
Indeed, a JP Morgan report estimated $20 billion worth of capital rotation from crypto exchanges into spot bitcoin ETFs plus another $16 billion from other bitcoin products into ETFs. With world-class custody and legal and fiduciary obligations to safeguard the bitcoin, many investors prefer ETFs to uninsured, omnibus bitcoin platforms.
With so much bitcoin-related investment shuffling from equities, trusts, crypto exchanges, futures-based funds, and other products, it’s impossible to determine the precise net inflows into the newly-approved spot bitcoin ETFs. We do know, categorically, that the value of bitcoin has declined since they gained SEC approval.
In summary, the approval of spot bitcoin ETFs didn’t lead to any watershed of new money into bitcoin. Although trading volumes in the new spot bitcoin ETFs are impressive, most of that money is existing investors moving money around. For tax, portfolio, brokerage, or other wealth planning reasons, many investors prefer spot bitcoin ETFs over the prior offerings.