Bitcoin price falls 16% following launch of ETFs, defying expectations

Bitcoin has lost 16 per cent of its value over the past two weeks, as some investors use the much-hyped launch of bitcoin exchange traded funds earlier this month to take profits and exit their holdings of the volatile cryptocurrency.

The price of bitcoin sank as much as 3 per cent on Tuesday, falling below US$39,000 for the first time since early December.

The recent losses have unwound part of a huge rally late last year, which came amid fevered speculation that the launch of mainstream stock market funds tracking the world’s leading crypto token would draw in new investors to bitcoin.

But the flows into the ETFs — many launched by big Wall Street players such as BlackRock — have underwhelmed and investors who bought them have been left with hefty losses.

The 10 new funds launched on January 11, after they were approved by the US Securities and Exchange Commission, had collectively pulled in US$4.7b by the end of Tuesday, according to crypto investment group CoinShares. Bitcoin traded at US$46,100 on the day the ETFs were launched, but has fallen steadily since.

At the same time, US$3.4b has left Grayscale’s fund, the world’s largest bitcoin investment vehicle, since it converted to an ETF alongside the new launches.

Analysts think much of the money in the 10 new funds is likely to have come from investors exiting Grayscale, which charges much higher fees than its competitors.

“What people didn’t realise is that you would have an enormous exit from Grayscale,” said Douglas Comin, a senior crypto options trader at XBTO. “If you scratch the surface, you see that most inflows are not new money, it’s just investors moving from Grayscale to another ETF.

“These ETFs were super highly anticipated, and now we see that [a bitcoin bull run] is not going to materialise, at least not as quickly as the market wanted.”

The conversion of Grayscale’s 10-year-old bitcoin trust has allowed some of its investors — who have for years only been able to sell shares in the trust at a large discount to the price of bitcoin — to exit their holdings altogether. The fund’s overall size has fallen from US$28b earlier this month to US$22b by close of trading on Monday.

“ETFs bring liquidity, and while they enable people to come in, they also enable people to exit,” said Varun Paul, director of market infrastructure at blockchain platform Fireblocks. “Some investors are exiting positions after buying bitcoin a long time ago, so they’re in the money.”

Grayscale reduced its 2 per cent management fee to 1.5 per cent as it prepared to launch its ETF, but that rate remains considerably more expensive than its competitors.

In contrast, BlackRock charges just 0.12 per cent. However, that figure will rise to 0.25 per cent in the next year if its ETF pulls in US$5b in assets under management. The US group has drawn in US$1.7b to date.

Written by: Scott Chipolina in London

© Financial Times