Summary The SEC approved the launch of several spot Bitcoin ETFs, including the ARK 21Shares Bitcoin ETF. Both the ETF's and Bitcoin's prices have dipped following the approval, raising questions about institutional adoption and demand. Instead, the answer seems to be investors rotating away from Grayscale's GBTC to ARKB and other recently launched ETFs. The approval of spot ETFs has created a more level playing field and introduced competition in the crypto marketplace, benefiting investors and the broader market. However, with this asset class turning more mature, the risks are that strategies that have worked in the past may simply fail, especially in light of the halving event. This is my first Bitcoin ( BTC-USD ) related publication since the important milestone reached on January 11, when the Securities Exchange Commission (SEC) approved the launch of several spot Bitcoin ETFs or exchange-traded funds, some of them issued by Wall Street's major financial institutions. One of these is the ARK 21Shares Bitcoin ETF ( ARKB ) which was trading around $45.6 at the time of writing as shown in the blue chart below, closely following Bitcoin's price in orange. Data by YCharts However, what appears abnormal in the above price action is Bitcoin currently trading at around $43K, which is below the $46K level at the time of approval. The reason is a regulatory go-ahead is normally a bullish sign as it paves the way for mainstream adoption including by institutional investors, but other dynamics at play revolving around the Grayscale Bitcoin Trust ( GBTC ) also impacted the price action. As an ETF that holds Bitcoins, volatility was also induced in ARKB, and the objective of this thesis is to investigate the underlying reasons and assess whether there is potential for upside. For this purpose, I will also focus both on demand and supply, but first, I bring some precision concerning regulations. The SEC's Aim Behind Approving Spot ETF Coming back to the approval, it can be qualified as a historic decision as it was effected after regulators rejected more than 20 applications, and, despite the SEC's Chairman finding Bitcoin to be "primarily a speculative, volatile asset that’s also used for illicit activity", more precisely for getting paid during ransomware attacks, indulging in money laundering, and terrorist financing. www.sec.gov Mr. Gensler's words remind us that despite some of Wall Street's majors now supporting cryptocurrency, there are risks involved in investing in this asset class compared to others like equities or bonds. Viewed from this angle, the objective behind the approval appears more to stimulate competition in an industry dominated by a few, notably, GBTC, which launched in 2013, before becoming publicly quoted on OTCQX in 2015. It eventually became the world’s largest fund with an AUM (assets under management) that exceeded $28 billion at its peak on January 9. Eventually, it was converted to an ETP (Exchange Traded Product) on January 11, before being subsequently listed on the NYSE (New York Stock Exchange) under the GBTC ticker, this time as a spot Bitcoin fund. However, as shown below, the AUM has plummeted to $20.35 billion or lost about 28% of its value (from around $28 billion) within less than one month which is alarming considering that Bitcoin has only been down by about 7.5% since. Data by YCharts There are several reasons for this including the liquidation of FTX, the crypto exchange which went bankrupt in November 2022 and held 22 million of GBTC's shares. Now, disposing of these shares plus hedge funds (which had massively invested in the trust in anticipation of the SEC approval) also locking profits contributed to the net outflows. The downside was also due to arbitrage funds pocketing gains, after taking advantage of GBTC trading at a premium relative to its underlying asset BTC. ARKB Has Benefited From GBTC's Outflows In addition to the above, some investors appeared to be rotating away from GBTC and putting their money into some of the newly launched spot Bitcoin ETFs, with the net inflows contributing to boosting their AUMs as charted below. Data by YCharts Therefore, if one takes some time to think about this rotation, the SEC has been successful in achieving one of its objectives which is to create a more level playing field . Singling out ARKB, it now has an AUM slightly above $700 million as shown above in purple, which is much less than the iShares Bitcoin Trust ETF's ( IBIT ) $3.267 billion, but it is still a more liquid fund than either the WisdomTree Bitcoin ETF ( BTCW ) or the Valkyrie Bitcoin ETF ( BRRR ). This idea that outflows from GBTC has benefited lower-fees ETF is supported by analysts at Needham , and, to this end ARKB charges management fees of 0.21%. Still, currently, there is a waiver of -0.21% which means that investors do not incur any expenses when investing. Thus, by introducing competition in the crypto marketplace, the SEC has prompted issuers to reduce fees which is proving to be beneficial to investors and the broader market. For that matter Grayscale was initially charging 2% and has now scaled back to 1.5%. ark-funds.com Still, the question remains as to whether after this rotation, investors' money will continue to flow into the ETF since analysts expect the outflow from GBTC to peak at about $8 billion , based on the inflows data. Interestingly, the point of maximum outflow appears to have been reached on February 5 when the Grayscale ETF started to reverse its downtrend (as per the AUM chart above), while ARKB has continued to gain. This possibly shows after the rotation we have reached more of a normal trading condition, or one characterized by wider adoption of BTC. For this purpose, ARKB being a regulated spot Bitcoin ETF is advantageous. The Advantages of Being a Regulated Spot Investment Vehicle For recall, there are two main types of exchange-traded funds, spot ETFs involve holding the actual assets so that their price reflects what they are made of, or Bitcoins. Then, there are futures ETFs based on futures contracts which do not involve holding crypto assets but consist of a bet on their future price as is the case with the ProShares Bitcoin Strategy ETF ( BITO ). Comparing their price performances in the chart below, the ARK ETF has underperformed less than BITO since launch as shown in the blue below which could indicate that investors may be shifting exposure, from holding future contracts to getting exposure through ARKB which tracks the performance of the actual asset (Bitcoin). For this purpose, the ARK ETF tracks the CME CF Bitcoin Reference Rate – New York Variant, the index. Also, for the sake of clarity, an investment in ARKB does not constitute a direct investment in Bitcoin as when holding a hardware crypto wallet including private cryptographic keys for actually accessing the digital coins. Data by YCharts Coming back to the comparison, according to Coindesk , activity on BITO has cooled significantly since spot ETFs went online with volumes traded now only amounting to one-fourth of what was the case previously. This has coincided with ARKB seeing inflows which could simply be because it is regulated, and, as a spot ETF, eliminates certain complexities and risks associated with trading derivates such as futures contracts. ARKB is a Buy As Inflows are Likely to Continue In addition to benefiting from more risk-averse investors, the evolving monetary landscape also favors cryptos in general. In this respect, with the inflation rate trending downwards since mid-2022 , there is a higher probability of a rate cut this year even if it does not happen in March as most market participants were expecting about five earlier. In this case, falling bond yields and lower rates normally attract investors to risky assets. Additionally, the next Bitcoin halving will occur in less than 8 weeks, which, according to previous such events has resulted in the reward obtained by miners (or the ones minting crypto assets) divided into two, in turn causing a drop in production as their profitability takes a hit. This could potentially mean less supply and the dynamics of the three previous halvings suggest that prices should go up at least in the short to medium term. Moreover, the advent of higher prices should be supported by the demand factor, as with ETF funds now passively tracking the market price of Bitcoin on their behalf, investors, especially pension funds particularly sensitive to regulatory oversight, could add crypto assets to their portfolio in the name of diversification. Previously, they were required to carry out transactions on cryptocurrency exchange platforms. Against such a backdrop, I am bullish on the ARK ETF. Thus, based on a "normalization" of market conditions as of February 5 (after the initial rotation away from GBTC as explained earlier) the three ETFs have delivered an average upside of around 4% for three days as per the chart below. Now, since there are 10 weeks ( 70 days ) till the next halving, a potential upside of 40% (4 x 10) can be envisaged in the eventuality of the uptrend being sustained. However, adopting a dose of moderation for reasons detailed below, I assume only 20% which translates into a target of $54.7 (45.6 x 1.2) based on the current share price of $45.6. This optimistic outlook is further supported by momentum indicators with ARKG's RSI of 44.3 . Data by YCharts However, one cannot talk about gains without evoking risks, especially in the crypto world. There are Risks and, the Price Action May Differ from the Past as Bitcoin becomes more Mature First, coming back to Mr. Gensler's statement above, even if the SEC has approved spot ETFs, this does not exclude regulators from pouncing in when an irregularity occurs, as was the case with FTX, a sad episode for many as crypto assets across the board suffered terribly. Second, according to a time-based analysis considering the last three halvings, an upside during the pre-halving period has been accompanied by acute episodes of volatility soon afterward. Third, whereas previously, price dynamics were mostly determined by crypto enthusiasts and retail investors, this time with a higher dose of institutional interest in the period leading to the fourth halving, different strategies may come into play. Consequently, following their rewards being halved in April, some miners who would normally have discontinued operations may this time opt to continue adding to the network’s hash rate thereby not contributing to reducing the supply to the same degree as expected. In conclusion, after benefiting from GBTC's outflows, ARKB should see further upside this time based on demand for cryptos, but, now widely available in ETF format just like commodities like oil, Bitcoin can now be envisioned as a more mature asset class where inflated gains, as was the case before, become less probable. As such, a moderate target of $54.7 is justified.
