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The bitcoin exchange-traded funds (ETFs) are here…
Yet bitcoin is down 18% since their launch on January 11.
What gives? Was it all for nothing?
Before I get to what’s behind this pullback… I just want you to know I find all the gnashing of teeth about bitcoin’s price drop amusing.
My goodness, you’d think the world was coming to an end if you read crypto Twitter (now X).
Forget that bitcoin had run up 193% before the launch of these new ETFs. People are losing their marbles over an 18% pullback.
Friends, remember this is bitcoin. It loves to scare the heck out of you before it starts blowing up to higher prices.
This is its very nature.
So today I’ll explain what’s driving the current volatility… how I see it shaping up moving forward… and how you can take advantage of it.
This Catalyst Is Driving Down Bitcoin’s Price
On January 11, we finally saw spot bitcoin ETFs come to the market.
The Securities and Exchange Commission approved 11 of them… including listings from BlackRock, Fidelity, and Grayscale.
Combined, these firms manage $11 trillion in assets. And they’ve seen record inflows of $4.1 billion into these funds.
But they’re not the first products for regular investors that made it to market.
The main driver behind the current pullback in bitcoin’s price is selling pressure on the new ETFs from the Grayscale Bitcoin Trust (GBTC).
Digital Currency Group launched GBTC in 2015. So it’s one of the first funds to give everyday investors exposure to bitcoin through a traditional investment vehicle.
However, there are two major problems with GBTC. (And I had to deal with both firsthand because I owned a large number of shares…)
The first problem is GBTC originally traded as a closed-end fund (CEF).
I won’t get into all the differences between a CEF and an ETF. But as a CEF, GBTC shares could trade at a discount or premium to their underlying value.
At times, GBTC traded 50% below the value of the BTC held in the fund. And there was no way to profit from that discount until it converted to an ETF earlier this month.
Once GBTC converted to an ETF, the discount collapsed, and the price of the ETF started to mirror the value of the bitcoin it holds.
The second problem for GBTC is the huge 2% annual fee Grayscale charged to manage the fund. The average fee for the other bitcoin funds is about 0.33%. So you can see the problem.
Many investors believed GBTC would lower its fee once it converted to an ETF. And it did lower the fee – to 1.5%.
However, BlackRock and Fidelity – two of the most respected and trusted names on Wall Street – both charge fees of 0.25% on their bitcoin ETFs.
That means Grayscale is charging six times more to own GBTC shares than BlackRock is charging for IBIT and Fidelity for FBTC.
This is insane…
That’s why folks are selling their GBTC and buying IBIT or FBTC – to get the lower fees.
But here’s where it gets a little tricky…
This Will Take Some Time to Even Out
Because these are brand-new ETFs, the inflows and outflows don’t match up evenly.
Let’s say investors sell $1 billion worth of GBTC and purchase $700 million worth of IBIT. That would leave a $300 million gap between the two.
The problem is the bitcoin ETFs aren’t structured to cross-sell with one another.
If GBTC gets $1 billion worth of redemptions, it must sell $1 billion of actual bitcoin on the spot market. And all the other bitcoin ETF providers must buy BTC on the open market. They can’t do in-kind transactions.
Now think about this…
If you’re a market maker, and you know there’s huge volume of bitcoin coming in…
And you know those flows won’t necessarily match up in the beginning, meaning there could be more sell-side pressure than buy-side pressure…
What are you going to do?
If you’re a smart market maker, you’ll drop your bid.
You’re not just going to sit there and let some guy smack you in the face with $1 billion worth of bitcoin at $48,000, which BTC was trading at earlier this month.
You see the order book… You see where all the selling is coming from… And you walk down your bid.
That’s exactly what they did.
We saw bids drop down all the way down to $38,000 – which was shocking.
I even said to myself, “This is getting a little crazy. I need to go buy a bit more bitcoin,” which is what I did.
Friends, this process will take a bit of time to work itself out. Until those flows even out, you might see some more selling pressure.
Here’s the key thing I want you to take away from all of this, though…
Bitcoin is still relatively young. So we’ll continue to see volatility. That’s just the nature of a new asset class.
There’s a chance that we see bitcoin drop below $38,000. We could see it go all the way to $32,000. I don’t think it will… But it’s a possibility you need to be emotionally prepared for.
But in the long run, that’s not necessarily bad news.
Take Advantage of the Volatility
There’s one more thing I believe is behind some of the selling pressure. And that’s investor sentiment.
A lot of people had this weird idea in their mind that as soon as the ETFs were in place, we’d see bitcoin 4x overnight.
The market just doesn’t work like that.
There’s an education process that has to take place first.
And we’ll see this happen as BlackRock and Fidelity turn on their marketing machines and go out and start promoting their respective bitcoin ETFs to fund advisers and registered investment advisers.
It’ll start as a slow trickle at first… Then it’ll get bigger and bigger. Eventually, you’ll see an ocean of new money come into bitcoin.
That’s why I urge you to use this pullback to position yourself now… or if you already own bitcoin, to continue dollar-cost averaging.
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