Record-breaking inflows of $2.45 billion flooded into digital asset products in the week ending February 17, propelling Bitcoin’s managed asset to reclaim a hefty $67.1 billion by December 2021. According to a CoinShares blog post on February 19, most of the investment activity occurred in the US through Bitcoin ETF funds. However, some data suggests that the Bitcoin ETF inflow isn’t driven by new participants, which is much less optimistic than previously thought.
With the success of ETF launches, one has to question whether the 21.8% price surge on February 19 met investor expectations. Despite this feat, Bitcoin’s price remains nearly 25% lower than its all-time high of $69,000, and previous instances of billion-dollar Bitcoin buybacks have triggered much stronger price reactions. Therefore, much higher impact is expected from the $4.93 billion ETF net inflow since its launch on January 11, as shown by BitMEX Research data.
There are plausible explanations for Bitcoin’s limited performance, though it’s unclear how each market participant evaluates their position or the underlying reasons for selling pressure. However, it’s certain that if nearly $5 billion ETF net flows poured into Bitcoin ETF spot funds, those holding similar scales previously sold off. Some analysts and investors confuse daily issuance with available supply for trading, but that doesn’t necessarily have to align.
Currently, the Bitcoin network issues 900 BTC daily as miner rewards, roughly $328 million weekly. To put it in perspective, Bitcoin’s daily adjusted volume has exceeded $10 billion, so ultimately, mined amounts don’t necessarily represent price impacts, as over 93% of the 21 million maximum supply is already in circulation. In essence, miner flows may not be the culprit limiting Bitcoin’s price surge post ETF spot launch.
Tesla announced a $1.5 billion Bitcoin purchase on February 8, 2021, followed by a 48% surge in 14 days, further demonstrating how US ETF spot launches may have less influence on price action.
There are many advantages for Bitcoin holders when shifting their positions to an ETF spot fund. In that sense, part of the inflow may be from investors who’ve sold equivalent positions. Reasons include tax efficiency, simpler financial reporting, easier asset planning, and reduced self-custody risk. Certainly, some investors appreciate the benefits of direct cryptocurrency investments, but that’s not the reality for many.
Furthermore, rising open interest rates in Bitcoin CME futures contracts suggest that some portion of ETF spot flows may match equivalent short positions. The spread between fixed-month contracts and regular spot prices, often referred to as the basis rate or insurance fee, is where arbitrage profits arise.
Therefore, some of the 26,500 BTC open interest increase at CME in 14 days until February 19 – over $1.3 billion at current prices – might have been tied to ETF spot flows, though offset by short positions in futures contracts.
Despite that, there’s no way to draw a definitive price decrease picture from Bitcoin ETF spot data, and as inflows continue, the likelihood of a supply shock pushing Bitcoin above $60,000 grows.