Bitcoin spot exchange traded funds are still practically brand new, but they have already changed the way cryptocurrencies are traded, according to industry players.
The US Securities and Exchange Commission in January approved 10 BTCUSD spot bitcoins,
ETFs, which allow investors to gain exposure to the largest cryptocurrency by market capitalization without having to hold the digital currency directly.
However, while bitcoin can be traded 24 hours a day, seven days a week, ETFs that invest in the cryptocurrency follow the trading hours of the U.S. stock market, which run from 9:30 a.m. to 4 p.m., Monday through Friday.
More liquidity
According to Dessislava Aubert, an analyst at crypto data provider Kaiko Research, Bitcoin ETFs have brought more liquidity to the cryptocurrency market.
Bitcoin liquidity fell more than 60% after the collapse of cryptocurrency exchange FTX in November 2022, and the recovery has been “very slow,” Aubert said in a phone interview. However, the situation began to change after the introduction of bitcoin ETFs, Aubert said.
According to data from Kaiko, Bitcoin’s 2% market depth, which measures aggregate bids and asks on Bitcoin order books, has increased more than 20% since late November last year and more than 30 % every year.
Meanwhile, the SEC approved a proposal from Grayscale Bitcoin Trust GBTC in January,
the largest bitcoin fund, to convert from a closed-end fund to an ETF.
This move has unlocked more liquidity in the bitcoin market, according to Doug Schwenk, managing director of Digital Asset Research.
In a closed-end fund, shares are generally bought and sold by investors on the open market but are not purchased or redeemed by the issuer. This means that the market price of the fund may differ significantly from the value of the assets held. Grayscale’s discount to its net asset value disappeared after its ETF conversion was approved.
Compared to closed-end funds, ETFs have a structure that allows certain financial institutions, known as authorized participants, to create and redeem shares, to keep the value of the funds aligned with that of the assets they hold. Investors can buy and sell ETFs as if they were stocks.
Since GBTC converted to an ETF, it has seen an outflow of $7.3 billion, leaving its assets under management at $22.8 billion as of last Friday, according to market data from Dow Jones.
Greater concentration in the United States
The increase in bitcoin liquidity has been driven primarily by U.S. platforms, Aubert said. According to data from Kaiko, Bitcoin’s market share on US exchanges has increased from less than 40% in November to almost 50%.
Since the debut of spot bitcoin ETFs, bitcoin trading volume during trading hours in the United States has also increased, according to Austin Reid, global head of revenue and business at crypto brokerage firm FalconX.
In particular, bitcoin trading volume between 3pm and 4pm Eastern increased, making bitcoin’s trading pattern more similar to stocks, Reid said. ETFs tend to see the highest trading volume before the stock market closes, as market makers create and redeem shares.
Before the arrival of bitcoin ETFs, bitcoin trading volume between 3pm and 4pm represented approximately 5% of the total volume on US cryptocurrency exchanges. Now the percentage has risen from 10% to 13%, Reid said in a phone call.
Trading on weekdays and weekends
The share of bitcoin traded on weekends has declined significantly over the past six years, from 24% in 2018 to 17% in 2023, according to data from Kaiko.
According to Aubert, this was partly due to the worsening market infrastructure following the collapse of two crypto-friendly banks, Silvergate Capital and Signature, in 2023. It could also be attributable to growing institutional participation, Aubert said.
The trend strengthened after bitcoin ETFs gained approval. According to Kaiko, so far this year only 13% of bitcoin transactions have been executed over the weekend.
Kaiko research
“The gap between weekends and weekdays could deepen further as ETFs gain traction and change market structure,” Kaiko analysts wrote in a note on Monday.
New participants
According to FalconX’s Reid, Bitcoin ETFs are bringing a new group of participants into the cryptocurrency market, such as some asset management firms and individual investors who were not comfortable trading on cryptocurrency exchanges.
However, Reid said he noticed that most institutions that were already actively trading cryptocurrencies did not move their bitcoin holdings into ETFs. Such institutions include hedge funds, proprietary trading firms, venture funds and asset managers, with most of their strategies built around a non-closing cryptocurrency market.
“If you trade cryptocurrencies and you’re active in the crypto space, and that’s kind of your core competency, the ETF might not be the best fit,” Reid said.
Less demand for bitcoin futures
According to Digital Asset Research’s Schwenk, market participants are also seeing a rotation in demand from bitcoin futures to spot bitcoin, after ETFs that invest directly in the cryptocurrency were approved.
“In the past, professional investors may have been constrained by the need to invest in a regulated security or product, and historically, such products were limited only to bitcoin futures in the United States. But now they can access bitcoin spot ETFs, which are cheaper and easier.” to trade and there is more liquidity available to them,” Schwenk said on a call.