Understanding the Market | Bitcoin ETF is listed, why did Bitcoin fall instead?

The U.S. Securities and Exchange Commission (SEC) has made a rare compromise this month, approving the listing of a Bitcoin spot ETF for the first time in history, marking a milestone moment for the cryptocurrency market. This achievement would not have been possible without the significant participation of Grayscale Investments, a key player in the digital currency market.

In August of last year, Grayscale won a crucial lawsuit against the SEC. A judge from the U.S. Court of Appeals for the District of Columbia Circuit ruled that the SEC's decision to approve a Bitcoin futures ETF while rejecting Grayscale's proposal to convert GBTC into a spot Bitcoin ETF was "arbitrary and capricious."

This court ruling triggered a significant surge in the cryptocurrency market, as people speculated that the SEC would eventually have to compromise and give the green light to the growing demand for spot Bitcoin ETFs. And indeed, that's what happened. Recently, SEC Chairman Gary Gensler stated that last year's court ruling forced the SEC to change its stance, ultimately leading to the approval of spot Bitcoin ETFs.

However, Grayscale, as a leader in the field, is currently facing significant outflows of funds from its flagship spot Bitcoin ETF, GBTC. According to media reports, since January 11th, when Grayscale Bitcoin Trust converted into an ETF, a total of $2.8 billion has been withdrawn as of last Friday. On the other hand, the nine newly listed spot Bitcoin ETFs have attracted approximately $4 billion in inflows, with BlackRock and Fidelity Investments each attracting over $1 billion. Nevertheless, Grayscale's GBTC remains the largest in terms of scale, with assets totaling $22.9 billion.

The massive outflows from Grayscale can be attributed to its high fees. Currently, there is fierce competition among Bitcoin ETF issuers, with many lowering their fees to attract investors. Although Grayscale has reduced its management fee from 2% to 1.5%, it is still several times higher than its competitors. Some issuers even offer zero management fees as a promotion during the initial months of their Bitcoin ETFs. The CEO of Grayscale stated that considering the liquidity of their funds, minimal spreads, and their strong track record over the past decade, a 1.5% fee is reasonable.

However, despite the high fees, why do many investors still hold GBTC? One important reason is taxation:

GBTC, the predecessor of the Bitcoin Trust, was established in 2013 as a way for investors to gain exposure to Bitcoin without directly purchasing and holding it. However, investors in the Bitcoin Trust cannot easily convert their holdings into Bitcoin, resulting in relative premiums or discounts to the underlying asset.

Since the beginning of 2021, the GBTC Bitcoin Trust has been trading at increasingly higher discounts, reaching nearly 50% in December 2022. After the conversion of GBTC into an ETF, the discount has narrowed to almost zero.

Many investors holding GBTC are likely to be in a highly profitable state, especially those who bought it at a significant discount. They not only benefited from the rise in Bitcoin over the past year but also gained additional profits from the elimination of the discount. This may be the courage behind Grayscale's willingness to charge the highest management fee in the industry.

Since the launch of the Bitcoin spot ETF on January 11th, Bitcoin has entered a classic "sell the fact" trend. This Tuesday, digital currencies fell again, with Ether dropping more than 6% in 24 hours, and Bitcoin falling by about 2% and briefly dropping below $39,000.

According to analysts at JPMorgan, investors have taken profits after the rise in GBTC prices and turned to lower-cost competitors, which has dragged down the cryptocurrency market.

Another important reason is the sell-off mentioned by Wall Street News yesterday, regarding FTX. According to Coinglass data, the liquidation volume of Bitcoin long positions has been considerable since the launch of the Bitcoin ETF, but Tuesday's data was significantly lower, indicating that the initial sell-off may be slowing down.

Renowned American financial commentator Peter Schiff, on the other hand, dismisses the significance of the new Bitcoin ETF, stating:

"The new Bitcoin ETF did not create additional demand, it just changed the demand. Investors who may have already purchased actual Bitcoin or Bitcoin-related stocks simply switched to the new ETF. Rearranging deck chairs won't prevent the ship from sinking."