Since US spot ETF approval last month the market has been choppy to say the least. Despite a considerable sell-off in the weeks following, the bullish sentiment that sprung up from approval and the upcoming halvening has not been dampened. Instead Bitcoin and the wider market has come back with force, rallying as much as 35% from last months lows to hit the $50k level for the first time in over two years*. There are a number of factors responsible for the push higher, but before we delve into that lets first address some speculative reasons for the initial move lower on what was meant to be a bullish catalyst...

Whilst volatility and price movement were predicted post-ETF approval, most had expected the opening of the floodgates for institutions to lead to a rise in market prices and not a collapse of over -20% following approval*. Despite impressive daily net inflows of $125 million just over $4.1 Billion total inflows since go-live, Bitcoin nonetheless fell from its post-ETF high of ~$49k down to just $38.5k in a week and a half"*. The consensus reasoning for the sell-off is that it was led by mass redemptions and therefore BTC selling from Grayscale's GBTC (that had been previously open for investment as a trust and converted to an ETF on approval). In being one of the few US-based traditional investment wrappers offering exposure to Bitcoin, Grayscale has held a prominent place in the market over the years. GBTC took particular precedence in recent times; as it began trading as low as a ~50% discount to its net asset value in December 2022 and remained at a significant discount as concerns around its parent company DCG continued to whirl in the depths of the bear market*. Investing in GBTC at the time offered a leveraged, institutionally wrapped bet that the market would recover, which began to reap rewards first after their court win against the SEC on 29th August and came to full fruition post ETF approvals now trading at only 0.02% discount to NAV*.

Despite this impressive recovery from its bear market lows, GBTC has seen total net outflows of over $6.5 Billion since converting to an ETF on 11th January. Grayscale's Bitcoin trust has been faced with a swathe of redemptions since its conversion, as it chose to maintain a relatively high management fee of 1.5% falling from the previous 2%. In comparison to newcomers like Blackrock's IBIT that charges just 0.25% and other competitors charging as little as 0.19%, Grayscales fees are clearly a bracket above. However, given total net flows of all spot BTC ETFs have been positive even despite the $6B sell wall, it's clear that GBTC redemptions are not entirely to blame for the initial drop and that general market sluggishness or apathy after a lack of pop on approval may have had an effect also.

Nonetheless, the market has recovered well since the $38.5k low to now trade above $52k. Despite the deflating post-approval market response its important not to underestimate the wider impact these instruments may have on market structure*. Unlike in most traditional markets where there is a passive consistent bid from funds who need to purchase on behalf of their end customer, crypto has thus far been without this type of market player in any meaningful sense. Having the world's largest asset manager alongside many other massive names, actively marketing to their clients to invest in their Bitcoin ETFs is not to be underestimated. Over the last few days Bitcoin has seen a significant recovery trading back up above $50k for the first time since 2021 without any clear catalyst other than the aforementioned evolution of market structure and sentiment surrounding the ETFs. Initially, speculation for this push centred on expectations of a low CPI print and impending rate cuts leading to the 5% rally on Monday. But when CPI instead came in higher and we continued to pump after just one day of retracement many were left wondering whether pent up institutional demand is instead driving the Bitcoin price higher in the face of news that should be bearish for risk assets*.

Looking beyond Bitcoin, Ethereum too has seen positive price movement over the past few weeks as numerous ETF providers have followed up the BTC ETF approval with applications for a spot Ethereum ETF, as referenced here last month. Following this excitement, open interest on CME for options on Ether in February have already exceeded last month's, reaching $482 million with another two weeks to go^. Despite positive sentiment surrounding Ethereum it's not all sunshine and rainbows, as Gary Gensler made clear in recent comments that he will not commit to an ETH ETF and stressed that the recent approval was Bitcoin specific. The market is currently expecting an Ethereum ETF approval in April/ May, but given the lengthy delays for Bitcoin's, expecting Gensler's SEC to rush to approve another cryptoasset ETF over the coming months may be wishful thinking. 

Further along the risk curve, a number of other attention-worthy events have taken place in recently; including sizeable airdrops (JUP, DYM, STRK and more) of tokens to communities, a new social graph layer called Farcaster capturing the attention of crypto's faithful, further TradFi institutions announcing onchain tokenisation strategies and even Donald Trump announcing that if elected a US CBDC would never come to fruition. Though Bitcoin now sits comfortably above $50k it feels like the weird and wonderful side of crypto are only just beginning to emerge in this bull cycle.

As always please send any feedback, suggestions or comments to the Team mailbox.

Best Oliver Wink, on behalf of the Digital Assets team.

*Data sourced from Bloomberg
"Data sourced from Farside Investors

^Data sourced from The Block