(Base image generated using Nightcafe. Photo edits made using Paint 3D.)
The recent launch of various BTC and ETH based ETFs (Electronically Traded Funds) has driven crypto enthusiasts to become increasingly bullish about Bitcoin and cryptocurrency more generally; I would argue this bullishness is misguided.
I do not want to be the downer in the room, but at this point I think a lot of people are scratching their heads wondering why Bitcoin hasn’t mooned given all the recent ETFs that have hit the market.
Surely all these new crypto based investment products would create more demand for Bitcoin? In reality, these Crypto Futures based ETFs are probably doing the opposite.
The recent Bitcoin and Ethereum ETFs that hit the market are using Bitcoin and Ethereum futures contracts not actual Bitcoin or Ethereum. Now why does that matter? Well it would really depend on the type of future contract we are dealing with. Some futures are Physically Settled whereas some futures are Financially/Cash Settled. The main issue here is Bitcoin and Ethereum futures traded on the CME (Chicago Mercantile Exchange) are not physically settled but rather financially settled.
Physical Settlement means the actual good the future contract is based on must be delivered when the future contract expires.
Financial/Cash Settlement means cash worth the value of the good must be delivered when the future contract expires.
With Physical Settlement, the investors trading would want to hold some Bitcoin as collateral so if a contract expires they are able to send the good. With Financial Settlement, the investors only needs that much in cash as collateral; they only need to send cash when the contract expires.
This is one reason that Bitcoin future based ETFs have been approved while Spot ETFs have not. A Bitcoin future contract that is cash settled is really just a bet with cash being the only thing that changes hands. At no point in the process is Bitcoin purchased, there is no question of the wallet where the Bitcoin is stored.
So why would this do the opposite? Why would this suppress Bitcoin’s price rather than boost it? The main issue is Bitcoin futures that are cash settled do not impact the supply of Bitcoin. We could make more Bitcoin futures contracts than Bitcoin exists and this is not an issue as long as they are financially settled. So in effect what has happened, Bitcoin futures now have served demand for Bitcoin without impacting Bitcoin's supply. If Bitcoin futures did not exist, people would need to buy actual Bitcoin to get exposure to Bitcoin, which would presumably increase the price of Bitcoin because Bitcoin supply is limited. However, the opposite is happening, Bitcoin futures are being created, filling the demand investors have for Bitcoin exposure without impacting the fundamentals of Bitcoin.
Although this is a bummer, there are reasons to be optimistic for the future. These products are very popular, investors want exposure to Bitcoin and Ethereum. It is probably fair to say, at this point these currencies are here to stay.
To be clear, I myself am very bullish about Bitcoin, but it is not because of the recent group of crypto ETFs that hit the market. I am mostly excited about Bitcoin’s long term potential and I believe it has not been correctly interpreted by the majority of investors. In turn, this has created a gap between how much I believe BTC is worth and what it currently trades at. So longterm, I believe there is significant more upside potential, but in the short term that doesn’t give us much to work with. Bitcoin has traded from around $15.6k to around $31.8k in the last year which is a pretty volatile investment and not for the faint of heart.
(Screenshot from Coinbase)
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❤️ Hurt
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It was exciting when ETF was introduced because institutional investor would then be in the market. However like you said the supply was not impacted. With the volatility of Bitcoin it is so hard to make judgement calls about it - so I will only say time will be the arbiter.
Totally agree! Only time will tell!
Nice share.
!PIZZA
Thanks man!
!PIZZA
Hmm I agree with you. I think the long term potential is what makes BTC attractive, and with the halving cycle coming up, let's see what happens!
!PIZZA
Yep! Interesting times are ahead!
!PIZZA
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