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05 Sep 2022

In tune with the flow: Summer BTC ETP Recap

- Global BTC holdings by ETPs have declined by 20,168 BTC over the last three months. The most substantial downfall coincided with a huge 24,510 BTC redemption in Purpose.
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June-August: Key takeaways
  • Bitcoin flows remain slow after the June chaos, and activity has been muted throughout the summer. The U.S. flows suggest that the bearish sentiment is ruling the market.
  • Global BTC holdings by ETPs have declined by 20,168 BTC over the last three months. The most substantial downfall coincided with a huge 24,510 BTC redemption in Purpose.
  • The latter part of August saw the newly launched U.S. short BTC ETF gain traction, while long-ETFs experienced outflows, leading August to become the second-worst month in U.S. BTC ETFs since launching in October 2021
  • Outside of Canada and the U.S., ETP flows remains slow, with no noteworthy developments over the last three months.
  • Overall, while negative U.S. flows and a huge Canadian liquidation have reduced the BTC ETP holdings, the relatively muted activity suggests that BTC ETP owners are willing to hold onto exposure in this bear market.
BUM declining to October levels
Exchange-traded bitcoin products held 176,465 BTC by the end of August after seeing net monthly flows of -5,455 BTC. It’s three months since we last covered the ETP flows, and June was a frantic month in the ETP scene following a massive redemption in Purpose amounting to 24,545 BTC amid the crypto credit crash. June also saw the introduction of ProShares’ short BTC ETF, BITI. BITI’s exposure is included in our BTC metric, but with an inverse impact, i.e., inflows to the ETF will negatively impact the aggregated BTC exposure. The aggregated BTC exposure across all exchange-traded BTC vehicles has now fallen to its lowest level since October 2021.
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Source: Bytetree, VanEck, Proshares, Hashdex, StatusInvest, ETF Securities
Since the massive net outflow of 20,124 BTC in June, BTC ETPs have seen muted activity, in line with tendencies witnessed in the rest of the market. July saw promising inflows, which were offset by outflows in August. Nevertheless, the last two months have mostly remained flat. While this indicates that the demand to add BTC exposure is low at the moment, it also indicates that investors with BTC ETP allocations tend to seek to hold onto their exposure, leading the BTC under management to behave rather sticky.
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Source: Bytetree, VanEck, Proshares, Hashdex, StatusInvest, ETF Securities
Stable flows in Europe and Brazil
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Source: Bytetree, VanEck, Proshares, Hashdex, StatusInvest, ETF Securities
Looking into the various regions. European ETP flows have stabilized over the summer, seeing small net positive flows in the last three months. The Canadian flows have been more volatile, with June being a massive outlier caused by the Purpose liquidation and substantial outflows from CoinShares’ ETF. The consistency of Brazilian inflows remains strong, and BTC ETPs in Brazil have yet to experience a month of negative flows since they launched last summer. U.S. flows have been the most interesting flows to gauge over the summer. ProShares dominate the U.S. ETF flow, and with the introduction of a short-BTC ETF, we now have a new data point to assess short-term market bias between longs and shorts through structured products. While ProShares’ long ETF saw strong inflows in June and July, August saw net outflows. Meanwhile, the short-ETF saw growing inflows, leading August to become the second-worst month in terms of BTC exposure development in the U.S. BTC ETFs. Further down in this report, I discuss the U.S. flows in detail while also commenting on opportunities related to GBTC’s huge discount to its NAV.
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Source: Bytetree, VanEck, Proshares, Hashdex, StatusInvest, ETF Securities
Overall, negative flows dominated in August. U.S. net BTC exposure declined by 9% this month, while Canadian exposure declined by 5%. Australian ETFs experienced a 16% growth, but do not be mistaken: Australian BTC ETFs are a very small part of the market, holding 162 BTC by the end of August.
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Source: Bytetree, VanEck, Proshares, Hashdex, StatusInvest, ETF Securities
U.S: Short ETF gaining traction, and GBTC discounts representing an opportunity
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Source: Bytetree, ProShares, VanEck
U.S. BTC ETFs have seen a poor month, leading the net BTC exposure to decline by 2,879 BTC. This has made August the second-worst U.S. ETF month since launching in October. The poor August performance is two-fold and is caused by outflows from BITO and inflows to BITI. Both negatively contribute negatively to the BTC equivalent exposure of U.S. BTC ETFs. These flows have direct implications on the CME BTC futures and have likely contributed to the negative basis seen in CME’s BTC futures lately.
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Source: Proshares
The short BTC fund now holds a short exposure equivalent to 4585 BTC after seeing inflows near 2,000 BTC since August 12th. In the same period, BITO, the by far largest U.S. BTC ETF, has experienced outflows of 2,890 BTC. Both flows point in the direction of a cautious sentiment among U.S. BTC ETF investors. Bets on further downside prosper, while allocations to more upside decline, i.e., these flows clearly indicate a bearish bias from U.S. BTC ETF traders. It's worth noting that ETFs based on futures, particularly short-ETFs, are structured for short-term exposure. Long ETFs involve rolling costs, while short ETFs seek to return -1x the daily return of BTC. Compound effects related to upside volatility will lead to underperformance of a short BTC-ETF compared to their index.
Grayscale remains close-ended at huge discounts, a massive opportunity
The 3AC collapse had massive knock-on effects on GBTC, and GBTC discounts have stabilized at new lows. ETFs offer daily redemptions, enabling prices to align with their NAV through arbitrage dynamics. Grayscale attempted to convert its fund into an ETF this summer but was denied, like all other U.S. spot-ETF attempts. Grayscale has since sued the SEC for the denial, battling to sway the regulator and setting the stage for U.S. spot-based ETFs. Still, it’s very unclear what the outcome will be in the short to medium term. Nevertheless, regardless of what happens in the next year(s), Grayscale’s 33% discount to spot represents a very nice opportunity for long-term BTC investors. Here’s why:Grayscale has a two percent yearly management fee. At a 33 percent discount, the prices implies that Grayscale will have to run as is for 20 years to justify the current discount.
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Source: Grayscale
If you have a long-term bullish outlook on BTC, you should consider allocating some capital to GBTC. The previous bull cycles have introduced tradfi access to bitcoin in steps. December 2017 saw the launch of BTC futures on CME and CBOE. October 2021 saw the launch of U.S. futures ETFs. If adoption cycles ensue as they have prior, we will experience more BTC owners, higher BTC prices, and a clearer regulatory environment. This will most likely generate a pattern for U.S. spot-based ETFs to be granted approval by the SEC. The current discount of 33% seems far too steep and has been exaggerated by an over-crowded “Grayscale arbitrage” trade in the back-end of 2020 and the sobering crash in June. Now seems like a good time to take advantage of the Grayscale hangover and add exposure at bargain prices, betting that you would be able to sell at par if Grayscale successfully converts within the next 20 years.
Grayscale trade consideration
A GBTC approval would create Ragnarok in the market, caused by enormous arbitrage flows. At its current discount and size, we would see huge arbitrage flows in the market driven by redemptions, selling of BTC, and bidding of GBTC, which may negatively impact the market short term. I believe this will have a short-term negative impact on the crypto market whenever this happens. However, an approval will likely not come as a sudden shocker for market participants. Discounts will likely narrow as the likelihood of a successful conversion increases. The short-term negative impact due to arbitrage dynamics of such an approval will have far more devastating effects on BTC spot than on GBTC, which will be bid up due to the arbitrage it represents.
Canadian BTC ETFs exposure plunges to 17-month low
The largest Canadian bitcoin ETF, Purpose, saw its AUM plunge 50% on Friday, June 17th, indicating a massive capitulation from one or more forced sellers. This is by far the most severe redemption we’ve seen in the relatively short-lived BTC ETF history. It contributed to shrinking Purpose’s bitcoin under management down towards lows not seen since October 2021. The enormous outflows were likely caused by a forced seller in a huge liquidation, and the deployment of these 24,000 BTC may have triggered BTC’s move down towards $17,600 over the following weekend.
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Source: Bytetree
The Purpose liquidation coincided with sharp outflows from 3iQ CoinShares Bitcoin ETF. In June, the fund’s bitcoin under management fell by 7,439 BTC. Coinshares and Purpose were, and are, the two largest BTC funds in Canada. The massive June outflows dramatically impacted aggregated bitcoin balance of Canadian BTC ETFs, and Canadian BTC ETFs haven’t held less bitcoin since April 2021, when they held 42,179 BTC in total.
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Source: Bytetree
In sum
Bitcoin flows remain slow after the June chaos, and activity has been muted throughout the summer. The U.S. flows suggest that the bearish sentiment is ruling the market.
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