Are we expecting too much from spot ETFs?

Authors: Jack Inabinet, Bankless;

Participants in the cryptocurrency market are hyped up like spider monkeys full of skittles and mountain deus.

They know that spot ETFs for cryptocurrency’s largest assets (ETH and BTC) are about to be approved and want outside investors to just wait to start deploying capital.

Analysts at legendary crypto investment firm Galaxy predict that the approval of a Bitcoin spot ETF will translate into $14.4 billion in demand and should drive a 74.1% increase in the price of Bitcoin in the first year, indicating the broader market’s bullish expectations for spot crypto ETF approval!

Today, we lowered some of these expectations, highlighting why the evidence does not support the current claim that the approval of a spot crypto ETF will bring such massive inflows.

I. The disappointment of Canadians

Launching a spot crypto ETF in the U.S. is far from a revolutionary feat; It’s been over two years in Canada!

Canadian spot Bitcoin instrument holdings are expected to grow if the US unleashes unprecedented demand following the approval of spot crypto ETFs. On the contrary, they have remained almost unchanged since July 2022.

Canadian investors face the exact same investment narrative as Americans. Their lack of demand for spot Bitcoin products is indicative of the underlying demand in the U.S. and suggests that the narrative of Bitcoin as a hedge against inflation and depreciation is insufficient to create asset inflows for non-crypto investors under the current market regime. **

Second, the form is not important

ETF experts may convince you that launching a better investment vehicle will lead to billions of dollars of money following your portfolio, but there is insufficient evidence to support this claim.

They claim that investors just don’t want crypto futures ETFs because they are the next best way to track the price of an asset compared to spot products – because rolling expiring futures contracts expose investors to contango and contanggo effects (i.e., next month’s contract price may be higher or lower than the expiring contract, respectively).

The truth is, however, that if the narrative is strong enough, investors simply don’t care about the form of the instrument they are investing in. No matter how bad the product is, an investment vehicle that offers a popular narrative will attract money inflows!**

A prime example of proof of this fact is the explosion experienced by the Grayscale Solana Trust (GSOL), which is currently trading at a ridiculous premium of 869%.

! [idBslCIpDi0WirnObcbj4YHor9UXZXwHvpYUwmFc.jpeg] (https://img-cdn.gateio.im/webp-social/moments-40baef27dd-037ec1d4d5-dd1a6f-cd5cc0.webp “7135708”)

来源: Grayscale

Grayscale’s trust products, such as GSOL and GBTC, are arguably much worse than existing crypto futures ETFs because there is no redemption mechanism, which means that the market value of the asset you buy can actually be traded at a discount to the underlying trust holdings.

Despite the flaws in GSOL, investors still managed to find Solana’s narrative convincing enough to mimic the instrument at a huge premium, leading to further confusion in the market price, as private placements (i.e., avenues for creating shares) are currently closed, meaning that supply cannot meet market demand.

Third, the demand for bitcoin futures has stagnated

**If the approval of a spot crypto ETF actually results in significant inflows into that asset class, then we expect to see continued inflows into futures products. **

Conversely, the outstanding shares of BITO, the largest BTC futures ETF, have remained largely unchanged since July 2022, deviating from the trends shown in June 2023 (the month in which BlackRock first applied for a spot BTC ETF) and early November 2023. A week later, the cryptocurrency market began pricing in spot bitcoin for approval.

! [1e1kP1yGYdvYH4HGBklj6NYxkk8Vpy5Md43QWCiY.jpeg] (https://img-cdn.gateio.im/webp-social/moments-40baef27dd-867b408118-dd1a6f-cd5cc0.webp “7135709”) BITO 股票已发行

Outside capital is using BITO to speculate on the launch of spot bitcoin ETFs in advance, and the increase in outstanding shares can be used as a proxy indicator of the market’s perception of spot bitcoin ETF approvals, but there does not seem to be actual external demand for bitcoin futures products, especially given that the number of outstanding shares had fallen below 60 million before the recent wave of speculation on spot ETF approvals.

Fourth, Summary

While the vision of preemptively approving spot crypto ETFs impacted prices in the second half of 2023, spot BTC ETFs are about to be listed, and the market’s theory of demand will be put into practice.

A few weeks ago, traders were caught off guard by failing to price in the potential impact of spot BTC ETFs, but when approval arrives, they could fall into the wrong trade again, and the resulting inflows are disappointing.

In the face of evidence of limited external capital willing to buy crypto assets amid an uncertain macroeconomic environment, which forces potential buyers to focus on their financial stability amid growing debt concerns, rather than chasing the next 100x speculative project, it doesn’t hurt to see if a spot ETF can actually live up to expectations before increasing crypto exposure. **