Liquidity and Options Pave the Way for Bitcoin ETF Market Expansion

Bitcoin

(BTC)
exchange-traded
funds
(ETFs)
have
attracted
vast
amounts
of
media
attention
in
2024,
and
rightly
so,
for
being
the
most
successful
ETF
launch
of
all-time.

Since
their
launch
on
Jan.
11,
bitcoin
ETFs
have
attracted
a
total
net
inflow
of
$18.9
billion,
according
to

Farside
data.
The
nine
newborn
ETFs
excluding
Grayscale
Bitcoin
Trust
(GBTC)
hold
646k
BTC.
GBTC
itself
holds
an
additional
223k
BTC,
according
to

heyapollo
data.
In
total,
bitcoin
ETFs
now
hold
869k
BTC,
representing
approximately
4%
of
the
circulating
bitcoin
supply.

Bitcoin
ETFs
have
achieved
several
significant
milestones
this
year.
Most
notably,
this
decade
has
seen
the
launch
of
2,000
ETF
launches,
with
iShares
Bitcoin
Trust
(IBIT)
and
Fidelity
Wise
Origin
Bitcoin
Fund
(FBTC)
among
the
top
10
in
terms
of
biggest
assets,
according
to

Eric
Balchunas,
Senior
Bloomberg
Analyst.

However,
the
ETF
market
remains
a
small
fraction
of
the
overall
bitcoin
trading
volume.

According
to
checkonchain
data,
on
Oct.
11,
the
last
full
trading
day,
the
bitcoin
futures
market
traded
$53.4
billion,
the
spot
market
traded
$4.5
billion
and
the
ETFs
traded
$2
billion.
This
means
ETF
trading
volume
accounted
for
roughly
just
3%
of
the
total
bitcoin
market
volume
that
day.

It
is
difficult
to
know
the
exact
percentage
of
inflows
into
the
ETFs
that
are
tied
to
the
“basis
trade”,
which
is
also
known
as
the
cash
and
carry
trade.
This
strategy
involves
investors
going
long
the
underlying
asset
while
simultaneously
shorting
the
futures
contract,
which
typically
trades
at
a
premium.
The
goal
of
the
trade
is
to
capture
the
premium
between
the
spot
and
futures
price.
As
the
futures
contract
nears
expiration,
its
price
converges
with
the
spot
price,
closing
the
arbitrage
opportunity
and
allows
the
investor
to
capture
the
spread.

This
is
a
market-neutral
trade,
as
the
investor
is
both
long
and
short
the
same
asset.
The
futures
position
offsets
any
movement
in
the
underlying
ETF’s
spot
price,
allowing
the
investor
to
lock
in
the
arbitrage
premium
without
being
exposed
to
directional
market
risk.

Using

Fintel
data,
to
review
IBIT’s
largest
holders,
which
have
been
disclosed
in
the
13-F
filings,
where
institutions
with
over
$100
million
in
assets
under
management
(AUM)
must
report
ETF
purchases.
The
top
holdings
show
that
major
holders
such
as

Goldman
Sachs
and
Jane
Street
Capital
are
authorized
participants
(APs)
involved
in
the
creation
and
redemption
of
the
ETF
shares.
Additionally,
hedge
funds
such
as
Millenium
Management
and
Capula
Management
appear
to
be
most
likely
using
the
ETF
for
the
basis
trade.
The
only
significant
holding
that
doesn’t
seem
to
be
part
of
this
strategy
is
the
State
of
Wisconsin
Investment
Board.

Private
wealth
management
firm
Bernstein
previously
referred
to
the
institutional
basis
trade
as
a
“Trojan
horse
for
adoption.”
Bernstein
suggested
that
as
liquidity
in
the
ETF
market
grows,
these
trades
could
lead
to
net
long
positions.
As
ETFs
become
a
larger
part
of
the
overall
market,
liquidity
and
investor
participation
will
be
further
enhanced.

Another
potential
catalyst
for
the
ETFs
is
the
approval
of

physically
settled
options
tied
to
IBIT.
These
options,
favored
by
more
sophisticated
investors,
provide
opportunities
to
earn
passive
yield
through
strategies
such
as
covered
calls
or
allow
miners
to
hedge
their
position.
As
ETF
adoption
increases,
these
factors
are
expected
to
play
a
larger
role
in
the
market.