Bitcoin price keeps rising, but where are the new investors?

A record $2.45 billion inflow in digital asset products in the week ending Feb. 17, and Bitcoin’s BTCUSD price appreciation, caused the industry’s assets under management to reclaim December 2021 levels at $67.1 billion. Most of the investment happened in the United States through Bitcoin’s spot exchange-traded funds (ETFs), according to a Feb. 19 CoinShares blog post. However, some data points to the Bitcoin ETF inflow not being driven by new entrants, which is far less bullish than previously thought.

Given the ETF launch's success, one must consider whether the 21.8% price gains by Feb. 19 meet investors' expectations. Despite this achievement, Bitcoin's price is still nearly 25% below the $69,000 all-time high, and previous instances of entities announcing billion-dollar acquisitions in Bitcoin caused a much stronger price reaction. Consequently, one would have expected a much higher impact from the ETFs' $4.93 billion net inflow since their launch on Jan. 11, as displayed by BitMEX Research data.

Bitcoin shows strength in the absence of retail investors

There are a couple of possible explanations for Bitcoin’s limited performance, although it is impossible to determine how each market participant values their position or what the rationale behind the sell pressure is. But one thing is certain: if nearly $5 billion of net inflows entered the spot Bitcoin ETFs, then the same size was sold by previous holders. Some analysts and investors confuse daily issuance with available supply for trade, but those are not necessarily aligned.

Presently, the Bitcoin network issues 900 BTC per day as miners’ incentives, which is equivalent to some $328 million per week. In comparison, Bitcoin’s daily adjusted volume surpasses $10 billion, so ultimately the coins minted for subsidies are not representative in terms of pricing, given that over 93% of the maximum 21 million supplies are already in circulation. In short, miners’ flow is unlikely the culprit for Bitcoin’s limited upside post the spot ETF launch.

Tesla announced a $1.5 billion position in Bitcoin on Feb. 8, 2021, which was followed by a 48% rally in 14 days. Curiously, the starting point, $38,870, was merely 7.5% below the previous all-time high just 30 days earlier, meaning that even if the market somehow anticipated the movement, the event itself drove Bitcoin’s price to a much higher level. That goes on to show how less impactful the spot ETF launch in the U.S. was in terms of price action.

Benefits of the spot Bitcoin ETF incentivizes a migration from previous holders

There are numerous advantages for holders of Bitcoin to migrate their position to a spot ETF. In that sense, it is possible that part of the inflow was offset by investors who sold the equivalent position. Reasons include tax efficiency, as gains/losses in the stock market can be offset by the ETF instrument, more simple fiscal reporting, easier estate planning, and reduced custody risks. Surely some investors value the benefits of direct investments through their own wallets, but that’s not the reality for many.

Additionally, the growing CME Bitcoin futures open interest hints that part of the spot ETF inflow could have been matched by equivalent short (sell) positions. Arbitrage desks profit from the price difference between fixed-month contracts and regular spot prices, commonly known as a premium or basis rate. The ‘cash and carry’ trade consists of buying a spot position and selling the futures contracts at a premium.