In a recent analysis, Fred Krueger, the former founder and chairman of Traffic Marketplace, offered a nuanced explanation for the seemingly paradoxical situation where the Bitcoin price has fallen despite the influx of over $5 billion in new assets through Exchange-Traded Funds (ETFs) by BlackRock and Fidelity. Since January 11, the first trading day of the ten spot ETFs, the Bitcoin price has currently plunged by 13% (over 21% at times).
Why Is Bitcoin Price Not Going Up?
Krueger’s insights, via X (formerly Twitter), delve into the complex dynamics of the market and its recent interactions with emerging financial instruments. Krueger’s analysis begins by highlighting a key strategy adopted by arbitrage traders in late June 2023, in anticipation of the ETF launch.
He stated, “In late June 2023, in anticipation of an ETF, arbitrageurs put on Long GBTC, short BTC Futures trades.” This maneuver, according to Krueger, initially had a negative impact on Bitcoin’s price. However, its effects were masked by the overall market rally at the time.
Crucially, this strategy began to close the discount on Grayscale Bitcoin Trust (GBTC) and simultaneously increased the open interest on the Chicago Mercantile Exchange (CME). With the approval of the ETFs, these arbitrage traders shifted their strategies. Krueger explains, “Once the ETFs were approved, the arbs unwinded the trade. This time they sold GBTC for BTC, and bought Futures.”
He describes this action as market-neutral. The selling of GBTC necessitated an actual sale of Bitcoin, which balanced against the futures purchase. This dynamic led to a decrease in the open interest on CME, a trend that was observed and reported.
There Was More At Play
Krueger also sheds light on the composition of the new ETF demand, noting that “about 1.5 billion of the 5 billion in new ETF demand was in fact recycled from GBTC in tax-neutral accounts, looking for lower fees.” This recycling of funds, while significant, did not represent fresh capital entering the Bitcoin market but rather a reallocation of existing investments.
The analysis further identifies external market pressures, notably the selling of $1 billion worth of GBTC by Sam Bankman-Fried (SBF), founder of FTX. Krueger comments, “This selling, and the headline selling of GBTC spoofed the market, and so people concluded the ETF was a failure.”
However, Krueger argues that this perspective overlooks the reality that the ETFs actually created net new buying pressure of over $3.5 billion. Despite the substantial buying activity spurred by the new ETFs, the broader market reaction was influenced by a combination of factors, including the FTX selling and the unwinding of arbitrage positions.
Krueger concludes his analysis by stating, “The relentless buying of the new ETFs was far bigger than anybody predicted, modulo the FTX selling and the arb unwinds.” Overall, Krueger is super :
Over the next 30 to 60 days, there are 20 to 40 trading sessions. I would bet this results in between 4 and 6 Billion new USD in inflows. At a market cap of 850 Billion, it’s pretty easy to see this *could* move the market 50% or to 64K. Basically at all time high.
At press time, BTC traded at $43,054.