LianGuaintera Capital Founder Is it the right time to sell when the Bitcoin spot ETF is finally launched?

Should LianGuaintera Capital's Founder Sell Now that Bitcoin Spot ETF Has Been Launched?

Original title: Impending Bitcoin ETF…Buy The Rumor, Buy The News

Author: Dan Morhead, Founder of LianGuaintera Capital; Translation: LianGuai0xjs

Impending Bitcoin ETF: Buy the rumor, buy the news

There has been a lot of discussion about the possibility of a Bitcoin ETF being approved soon.

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There’s an old saying on Wall Street: “Buy the rumor, sell the news.” The theory behind this is that if most investors expect something to happen and buy into it, then when the event actually occurs, it’s naturally the perfect time for sellers to sell, while many buyers are already exhausted.

The launch of a Bitcoin ETF is arguably the worst-kept secret in the blockchain industry. So, when this news finally arrives, is it the right time to sell?

Before we share our thoughts on the future, let’s take a look back.

This saying has perfectly played out in the recent two major regulatory events in the crypto field.

Bitcoin Futures launched on CME in 2017

At one of our investor summits, former Chairman of the U.S. Commodity Futures Trading Commission (CFTC), Chris Giancarlo, pointed out a crazy fact that I had never noticed before. Throughout 2017, the market kept rising, with the slogan being “When CME lists Bitcoin futures, Bitcoin price is going to the MOON!!!”

Until the day Bitcoin futures were listed, the price of Bitcoin had indeed risen by 2448% compared to 12 months earlier. That was the top. The day marked the beginning of an 84% bear market decline.

Coinbase went public in 2021

Prior to Coinbase’s public listing, the market went through the exact same cycle. The entire industry was excited about Coinbase’s upcoming direct listing. On the day of the listing, the price of Bitcoin had reached an all-time high of 848% compared to 12 months earlier. The day marked the start of a 76% bear market decline.

In 2021, we jokingly said, “Can someone remind me the day before the Bitcoin ETF is officially launched? I may want to take some chips off the table.”

ETF

I believe a Bitcoin ETF will be seen as a major step forward in the adoption of digital assets. Before discussing the product and its impact on the industry, let’s take a moment to reflect on how far this industry has come.

A Brief History of Buying Bitcoin

In the past decade, acquiring Bitcoin has undergone tremendous changes. In the early days, people would receive free Bitcoin through so-called “Bitcoin faucets.” When I first came across Bitcoin, Gavin Andresen had Bitcoin Faucet – just register and receive free Bitcoin. My brother sent me some free Bitcoin at that time.

Soon, people needed a place to trade Bitcoin. A poker card trading website called Magic The Gathering Online Exchange allowed enthusiasts on the site to trade a digital currency called Bitcoin, abbreviated as Mt.Gox.

Bitstamp was launched in August 2011 and remains one of the oldest exchanges in operation. There was also LocalBitcoins – a marketplace that facilitated face-to-face transactions between buyers and sellers. Those were the days.

We now have hundreds of exchanges. However, many of them are offshore and opaque, bearing more resemblance to FTX than the New York Stock Exchange. Many institutions are unwilling to trade and custody with these entities. IRA accounts and other types of financial accounts typically do not have access to crypto exchanges.

The Future Comes from the Past

Futures haven’t had much impact. I’ve been in currency trading for thirty-five years and know that traditional fiat currencies rarely use futures. The forex market is mostly cash/spot.

Although it may sound somewhat contradictory, Bitcoin futures are actually a step backward.

Bitcoin futures missed the entire “thematic” aspect of Bitcoin (as my friend Andrew Lawrence said). The beauty of Bitcoin is that the trade is also the settlement – it’s “t-minus zero.” The trouble of rolling over (like from March to June) when Bitcoin has already settled is unnecessary.

There are no T+2 settlements, collateral, monthly futures rollovers, or cash settlement market manipulations in raw exchanges. When we go back to monthly cash-settled futures, all the charm of Bitcoin disappears.

Don’t get me wrong – I think the presence of futures is a good thing. They brought in thousands of new traders who couldn’t get access to Bitcoin otherwise. The listing of CME and CBOE and the CFTC’s regulation of Bitcoin futures was a huge positive step forward for tokenized assets.

Bitcoin futures market versus cash/spot market trading volume and relative proportions data: Bitcoin futures average daily trading volume of approximately $38 million in October 2023, theoretically 13,300 contracts vs. Bitcoin spot trading volume of $6.169 billion, relative proportion of 0.4%.

The Impact of ETFs

Although beginning predictions with “this time it’s different…” is not usually an auspicious start, I genuinely believe that this time it truly is.

The previous two Bitcoin price peaks were:

• CME futures reached a peak of $20,000 on the day they were launched (December 18, 2017), but the price immediately dropped 65%, eventually falling by 84% at its lowest point.

• On the day of Coinbase’s listing on April 14, 2021, the price was $65,000, but it immediately dropped 54%, reaching a low point of 76%.

None of these events had any impact on the actual use of Bitcoin in the real world.

It’s all about “buy the rumor, sell the news.”

Bitcoin futures didn’t attract any significant new group of investors. They only interested a small group of major arbitrageurs. The net new buying volume was not significant.

Coinbase’s product was more straightforward. Coinbase’s website functioned well when held privately and continued the same way the next day when it went public. The change in ownership of Coinbase stocks didn’t increase people’s chances of getting Bitcoin.

Bitcoin ETF, on the other hand, is a whole different story. The BlackRock ETF fundamentally changes the way Bitcoin is accessed. It will have a huge (positive) impact.

We firmly believe that many spot Bitcoin ETFs will be approved. We also believe this will happen in one or two months, not in several years.

When they made the Goldman Sachs index, I was at Goldman Sachs. Now, everyone sees commodities as an asset class. In the ’90s, I was very active in emerging markets. Now, emerging markets are seen as an asset class. Blockchain will also be seen the same way. Bitcoin spot ETFs are a crucial step towards them becoming an asset class. Once Bitcoin spot ETFs exist, if you don’t have exposure, you’re effectively shorting Bitcoin.

“Buy the rumor, sell the news.”

Gold ETF: Digital Gold and Traditional Gold

Many market observers believe that the impact of launching a “digital gold” ETF is best compared to the impact of launching a physical gold ETF. The first gold ETF was launched outside the US in 2003, and the first US ETF GLD was launched in 2004. This analogy could be a good one because in the early 2000s, holding physical gold was challenging for many investors, just as custody of crypto assets is a challenge for many investors today. Additionally, the convenience, low cost, and trustworthiness of issuers are likely to attract new investors into the gold market who previously wouldn’t have participated.

We expect a similar situation to occur when Bitcoin ETFs are launched. The demand function for Bitcoin may permanently change when investors have this choice. The launch of ETFs also has another important impact on Bitcoin and cryptocurrencies. Twenty years ago, the launch of ETFs had a legitimizing effect on the idea of allocating commodities within investment portfolios. We expect the appearance of the most respected brands in the consumer finance sector in the first wave of Bitcoin ETFs to have a similar impact.

We should also expect that a few ETFs will gain the majority market share. The larger the size of an ETF, the more efficient its pricing becomes, thus initiating a positive cycle that makes the larger ETFs sell better. SPDR Gold Trust (GLD) ($54.6 billion) and iShares Gold Trust (IAU) ($25.3 billion) account for almost 90% of the value of US gold ETFs, with no other competitors exceeding $10 billion.

“Some say that Bitcoin ETFs will snatch the demand from traditional retail exchanges. I don’t think so. Consider the demand for gold bars/coins before and after the introduction of gold ETFs: 2003: 293 tons; 2022: 1,107 tons. ETFs legitimize gold as an investment and significantly increase demand for physical gold.” – Matt Hougan, Chief Investment Officer at Bitwise

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