Spot bitcoin listed in the US Exchange-traded funds (ETFs) are back in demand, with investors pouring $1.4 billion into them in the past five days. Still, the spot price of bitcoin remains in limbo.
One possible explanation, in addition to escalating geopolitical tensions and rising oil prices, is the mechanics of the ETFs themselves, according to analysts at cryptocurrency exchange Bitfinex.
The analysts explained in an email to CoinDesk that ETF inflows risk being overinterpreted as immediate spot demand, noting that ETF structures often create a lag between inflows and actual bitcoin purchases. In other words, upward pressure on prices may take effect with a delay, leaving prices stagnant in the meantime.
An ETF is a pooled investment vehicle that holds assets like bitcoin and issues shares that trade on stock exchanges like regular stocks. The fund is designed to closely track the value of the underlying, with each share representing a claim on the underlying holdings. A total of 11 spot ETFs debuted in the US in January 2024. Since then, these funds have seen cumulative inflows of more than $55 billion.
Shares are created and redeemed by authorized participants (APs), specialized financial institutions such as large banks, market makers or stockbrokers. When demand for the ETF increases, its price can trade above the fund’s net asset value, leading APs to create new shares, sell them to buyers, and close the price gap.
APs often sell shares they don’t already own, a process known as short selling. In general markets, short-selling rules require most investors to borrow shares first, but regulators allow APs to short ETF shares almost immediately and buy the corresponding bitcoins hours later or as late as the next business day, depending on whether creations are made in cash or in-kind.
As a result, demand for ETFs may increase even if the actual purchase of BTC on the spot market is delayed. When those actual BTC purchases are made, they are often offset by other selling pressures elsewhere in the market, which can help mitigate the bullish impact on price and keep Bitcoin trading in a tighter range.
According to Bitfinex analysts, this likely helps explain the recent surge in inflows along with the lackluster price action.
“The result is that the ETF grows, but the actual price of BTC does not increase because there has been no buying in the spot market. This can make the price of BTC feel ‘stagnant’ or suppressed,” the analysts said.
“Overall, this does not have a significant impact on the market, but in periods of severe market dislocation, the gap between ETF demand and actual BTC spot purchases, or vice versa, can create a brief period of market mispricing,” the analysts added.
