Bitcoin ETFs were supposed to be a game-changer for the cryptocurrency market, bringing more liquidity, accessibility, and legitimacy to the digital asset. However, according to an analyst from Schwab Network, Bitcoin ETFs need to fulfill their promise of attracting mainstream investors. Instead, they are serving as an exit door for seasoned whales who want to cash out their profits. In this article, we will explore why Bitcoin ETFs fail to lure conventional investors and how they reflect the challenges and limitations of Bitcoin as an asset class.
The Stock Market Has Changed: Valuations Matter More Than Ever for Bitcoin ETFs
The stock market has changed – valuations, a key gain factor, have dropped from pandemic peaks. The market is split between large and small-cap stocks, with the latter underperforming despite a high S&P 500. This creates a complex scenario.
Outperformance is now driven by solid cash flow, profits, and dividends, leaving some assets behind.
One of the assets left behind is Bitcoin (CRYPTO: BTC), the world’s most popular and dominant cryptocurrency. Bitcoin has seen a sharp decline in its price since reaching an all-time high of nearly $65,000 in April 2021. As of January 2024, Bitcoin is trading at around $40,000, losing more than a third of its value in less than a year.
What are the reasons behind Bitcoin’s poor performance? And why are Bitcoin ETFs, which were supposed to be a catalyst for mainstream adoption, not attracting more investors? Oliver Renick, an analyst from Schwab Network, has some answers.
Bitcoin’s Distinct Market Position: No Cash Flows, Earnings, or Dividends for Bitcoin ETFs
According to Renick, Bitcoin stands out as an asset that behaves like stocks in market dynamics but lacks cash flows, earnings, or dividends. This makes it unique as doubts increase about unprofitable risk assets.
Unlike traditional stocks, which represent ownership in a company that generates revenue and profits, Bitcoin has no intrinsic value or cash flow. Bitcoin’s value is based solely on supply and demand, influenced by various factors such as network effects, innovation, regulation, sentiment, and speculation.
This makes Bitcoin a highly volatile and unpredictable asset, which can experience huge swings in price in a short period. For example, in May 2021, Bitcoin plunged by more than 50% in weeks after China cracked down on cryptocurrency mining and trading. Tesla CEO Elon Musk announced that his company would no longer accept Bitcoin as a payment method.
The launch of Spot ETFs for Bitcoin in October 2021 was a landmark event, signifying the full incorporation of cryptocurrency into the traditional financial system. Bitcoin ETFs are funds that track the price of Bitcoin and trade on stock exchanges, allowing investors to buy and sell Bitcoin without having to deal with the technical and security issues of owning and storing the digital currency.
However, this incorporation has yet to lead to a broad adoption by conventional investors, who are still wary of Bitcoin’s volatility, regulatory uncertainty, environmental impact, and lack of fundamentals.
Bitcoin ETFs: A Way Out for Whales, Not a Way In for Conventional Investors
Renick’s view from two years ago was that Bitcoin ETFs would be more of a way out for whales than a way in for conventional investors. This is happening.
While Grayscale’s Bitcoin Trust (OTC: GBTC) and other Bitcoin ETFs saw significant inflows, the overall price of Bitcoin has fallen. This shows a mismatch between the inflows into Bitcoin ETFs and the cryptocurrency’s price performance.
One possible explanation for this mismatch is that Bitcoin ETFs are being used by large and experienced investors, also known as whales, to exit their positions in Bitcoin and take profits rather than by new and retail investors to enter the market and increase demand.
Whales may prefer to use Bitcoin ETFs as an exit strategy because they offer more liquidity, convenience, and tax advantages than selling Bitcoin directly on cryptocurrency exchanges. Bitcoin ETFs also allow whales to avoid the risk of hacking, theft, or loss of their private keys, which are the codes that grant access to their Bitcoin wallets.
On the other hand, conventional investors may not be interested in Bitcoin ETFs because they do not offer the same benefits as owning Bitcoin directly. Bitcoin ETFs charge fees for managing the funds, reducing investors’ returns. Bitcoin ETFs also do not give investors total exposure to Bitcoin’s price movements, as they may trade at a premium or discount to the underlying asset. Bitcoin ETFs also do not grant investors the right to claim the Bitcoin held by the funds, nor the ability to use Bitcoin for transactions, lending, or staking.
Bitcoin’s Technical Hurdles and Weak Bullish Argument for Bitcoin ETFs
With possible technical support levels at $35,000 and $30,000, it is harder to argue strongly for Bitcoin’s bullish future.
The market’s attitude towards risk assets and Bitcoin’s limited function as a monetary agent add to the doubts.
The idea that Bitcoin would act like gold or provide portfolio diversification has been disproven by its high volatility and low correlation with traditional safe-haven assets.
Bitcoin’s volatility makes it a risky and unreliable asset for investors who seek stability and protection from market fluctuations. Bitcoin’s price movements are often driven by speculation, sentiment, and hard-to-find or control events. Bitcoin’s role as a store of value or a hedge against inflation is questionable, as it needs a stable and intrinsic value.
Bitcoin’s low correlation with safe-haven assets such as gold, bonds, and the US dollar means it does not offer diversification benefits for investors who want to reduce their portfolio risk. Bitcoin’s correlation with other assets can also change over time, depending on the market conditions and the nature of the events that affect them. For example, in March 2020, Bitcoin’s correlation with the S&P 500 spiked to a record high of 0.6, as both assets crashed due to the COVID-19 pandemic.
Bitcoin’s Volatility and Low Correlation with Safe-Haven Assets for Bitcoin ETFs
Bitcoin’s volatility and low correlation with safe-haven assets make it a challenging asset for investors who want to use Bitcoin ETFs to gain exposure to the cryptocurrency market. Bitcoin ETFs may not reflect the actual value of Bitcoin nor offer the same advantages as owning Bitcoin directly. Whales may also use Bitcoin ETFs as a way to exit the market rather than conventional investors as a way to enter the market.
Therefore, there may be better options for investors looking for a stable, profitable, and diversified investment than Bitcoin ETFs. Bitcoin ETFs may not be the catalyst for mainstream adoption but rather the market saturation and maturity indicator. Bitcoin ETFs may not be the solution for Bitcoin’s problems but rather the symptom of Bitcoin’s limitations.