In the short term, the spot Bitcoin exchange-traded fund (ETF) launch has failed to meet market expectations regarding the valuation of most assets. Indeed, the approval turned out to be a “buy the rumor, sell the news” event, with Bitcoin (BTC) briefly retesting the $49,000 mark before correcting amid an over $80 billion outflow in market cap.
In an X (formerly Twitter) post on January 15, reformed hedge fund manager and managing partner at the Bitcoin Opportunity Fund, James Lavish, outlined five insights into why the spot Bitcoin ETF failed to meet expectations. A significant portion of his assessment centered around the Grayscale Bitcoin Trust (GBTC).
Lack of ‘God Candle’ moment
According to Lavish, the absence of a significant surge in capital and the anticipated ‘God Candle’ moment may have contributed to the overall perception of the Bitcoin ETF launch as falling short of expectations. He pointed out that the lack of this moment failed to inspire an inflow of capital.
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“There was massive hype and fanfare leading up to the Bitcoin spot-ETF launch. Yet, the launch didn’t quite live up to expectations. There wasn’t a tsunami of capital inflow, and there was no ‘God Candle,’ he noted.
Long-standing discount on GBTC shares
Lavish highlighted that a significant portion of the original holders of the Grayscale Bitcoin Trust had been holding shares at a discount to actual Bitcoin on the New York Stock Exchange (NYSE) for years. These holders eagerly awaited the conversion of GBTC to a spot ETF, anticipating the opportunity to sell their shares at their full market value.
Selling pressure
At the same time, the manager pointed out that most of the trading volume in GBTC around the ETF launch was due to selling rather than buying. Original holders, waiting for the conversion, likely sold their shares to realize the full value.
Role of Authorized Participants
Considering that the initial launch of the ETF was characterized by selling, Lavish shifted his attention to the role of Authorized Participants (APs) in the process. APs, acting on behalf of ETF managers like BlackRock Inc. (NYSE: BLK), buy and sell to create an attractive investment security. They then create or redeem ETF shares to align the assets under management with the market value of the ETF.
“And so, with GBTC sellers of shares unlocked by the ETF conversion, APs redeemed shares and sold underlying Bitcoin, reducing the GBTC ETF Net Asset Value,” he added.
Shift to other ETFs
In his view, Lavish believes that sellers of GBTC shares, frustrated with the long-standing discount to Bitcoin, likely turned around and bought other ETFs instead. This shift may have been driven by dissatisfaction with GBTC and the desire to move funds to more favorable investment options.
“Many of the sellers of GBTC shares then (likely) turned around and bought one of the other ETFs instead. Maybe it was out of frustration with GBTC, having been locked up for so long with a terrible discount to Bitcoin,” he added.
Finally, he observed that despite the crypto market failing to witness a direct impact of the product, some ETFs, excluding Invesco and Valkyrie, succeeded. He concluded that the success of these ETFs lies in the fact that buyers are now holding an asset that accurately reflects the amount of Bitcoin it is supposed to represent rather than trading at a significant premium or discount to the underlying BTC price.
