Are our expectations for futures ETFs too high?
Are our expectations for futures ETFs too lofty?
Author: Jack Inabinet, Bankless; Translation: Song Xue, LianGuai
Cryptocurrency market participants are being hyped up like rainbow candy and surfed-up spider monkeys.
They know that the spot ETFs of the biggest assets in crypto (ETH and BTC) are about to get approved, and they hope that external investors are just waiting to deploy their capital.
Analysts at legendary crypto investment firm Galaxy predict that the approval of a spot ETF for Bitcoin will translate into a demand of $14.4 billion and drive Bitcoin’s price up by 74.1% in the first year, demonstrating the bullish expectations of a wider market for the approval of spot crypto ETFs!
Today, we’re lowering some of those expectations and highlighting why the evidence doesn’t support the current claim that the approval of spot crypto ETFs will bring in such massive influx of funds.
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1. Canadian Disappointment
Launching spot crypto ETFs in the US is far from a revolutionary feat; Canada has had them for over two years!
If the approval of spot crypto ETFs in the US was going to unleash unprecedented demand, then the holdings of Canadian spot Bitcoin vehicles would be expected to grow. Instead, they’ve remained virtually unchanged since July 2022.
Canadian investors face the exact same investment narrative as Americans. The lack of demand for spot Bitcoin products in Canada indicates the potential demand in the US and suggests that the narrative of Bitcoin as a hedge against inflation and devaluation is not enough to attract asset inflows from non-crypto investors in the current market structure.
2. Form Doesn’t Matter
ETF enthusiasts might lead you to believe that launching better investment vehicles will result in billions of dollars flowing in to follow your investment portfolio, but there is insufficient evidence to support this claim.
They argue that investors just don’t want crypto futures ETFs because they are suboptimal in tracking the asset prices compared to spot products – due to rolling futures contracts that expose investors to contango and spot premiums (i.e., the next month’s contract prices may be higher or lower than the expiring contract).
However, the fact is, if the narrative is strong enough, investors don’t care about the form of the instrument they are investing in. No matter how bad the product is, investment vehicles that provide popular narratives will attract inflows!
A classic example proving this fact is the explosive run that Grayscale Solana Trust (GSOL) has experienced, with the trust currently trading at a whopping 869% premium, ridiculous.
Grayscale’s trust products, like GSOL and GBTC, can be considered far worse than existing crypto futures ETFs because they lack redemption mechanisms, meaning that the market value of the assets you buy can actually be traded at a discount to the underlying trust holdings.
Despite the flaws of GSOL, investors still find Solana’s narrative persuasive enough to imitate the tool at a significant premium, causing further market confusion as private placement (the method in creating shares) is currently closed, meaning supply cannot meet market demand.
III. Stagnant Bitcoin Futures Demand
If the approval of a spot crypto ETF actually leads to a substantial inflow of funds into this asset class, then we expect to see a continuous flow of funds into futures products.
On the contrary, the largest BTC futures ETF, BITO, has had virtually no change in circulating shares since July 2022, deviating from the trend seen in June 2023 (the month BlackRock first applied for a spot BTC ETF). A week later, the cryptocurrency market began pricing in the imminent approval of spot Bitcoin.
BITO shares have been issued
External capital is speculating the launch of a spot Bitcoin ETF using BITO in advance, and the increase in circulating shares can serve as an alternative indicator of the market’s view on the approval of a spot Bitcoin ETF. However, there seems to be no actual external demand for Bitcoin futures products, especially considering that the number of circulating shares had already dropped below 60 million before the recent spot ETF approval frenzy.
While the vision of approving a spot crypto ETF ahead of time has had an impact on prices in the second half of 2023, the spot BTC ETF is about to be listed, and the market’s demand theory will be put into practice.
A few weeks ago, traders were caught off guard by the potential impact of a spot BTC ETF and failed to price it in. But when approval arrives, they may once again make misguided trades, resulting in disappointing inflows of funds.
In the face of limited external capital willing to purchase crypto assets, particularly in uncertain macroeconomic conditions, potential buyers are forced to focus on financial stability amidst growing debt concerns rather than chasing the next 100x speculative project. Therefore, it wouldn’t hurt to observe if the spot ETF can truly fulfill expectations before increasing crypto exposure.