“That’s Our Two Satoshis” - The BTC and ETH ETF Vacuum

Jeff Dorman, CFA
Jun 24, 2024

Thats Our 2 Satoshis Logo

Screenshot 2024-06-24 at 1.11.53 PM
Source: TradingView, CNBC, Bloomberg, Messari
A Smattering Of What’s Being Discussed
We mentioned earlier this year that the BTC (and soon-to-be ETH) ETFs were a double-edged sword.  On the one hand, crypto ETFs absolutely attract more capital from non-crypto native investors, and bring crypto into everyday investing mainstream conversations.  On the other hand, jamming a T+0 real-time settlement instrument into an antiquated T+1 box isn’t really moving crypto rails forward.  Two steps forward, one step back.
Fast-forward six months, and we’re seeing the negative effects bear fruit. Almost every discussion in the market now focuses on the ETF flows, potential approvals, and possible further regulatory clarity in Washington resulting from these approvals. 
Again, in isolation, these are all very positive events. New buyers plus regulatory clarity is a good thing.  But holistically, when viewing this across the broader market, it overshadows anything and everything else happening in digital assets. The ETFs are sucking all human and financial capital away from the rest of the market. Many investors feel there is simply no reason for capital to crossover into actual crypto rails when you can buy the BTC ETF, BTC mining stocks, COIN stock and soon-to-be ETH ETF.  
For example, here are a handful of positive discussions that were had on Arca’s trading desk this week.  Every one of them revolved around the ETFs, and more specifically, BTC and ETH:
  • “Michael Dell tweets related to BTC continued today.  It seems either their family office or the public company, may be buying BTC.”  For context, CEO and majority shareholder Michael Dell tweeted, “scarcity creates value,” prompting a response from Michael Saylor. Dell confirmed that he was talking about Bitcoin via a meme. Dell was also briefly the largest merchant who accepted Bitcoin in 2015.
  • “3iQ just filed to launch the first Solana ETF in Canada (and thus North America).  Maybe this will be a future Solana catalyst, as Canada was way quicker with getting BTC and ETH ETFs off the ground than the U.S.”
  • “Looking at some BTC ETF flows data: post-launch BTC bottomed on 1/23 after GBTC shed 13.93% of AUM (7 trading days post-launch). 11 days later (18 days post-launch) price accelerated to the upside after GBTC shed an additional 7.17% of AUM. Then outflows picked up again 32 days post-launch, but inflows offset, and thus didn't have a material impact on price. BTC was +8% the week before the launch. Post-launch, applying this data, means going mega long ETH/high ETH beta 7 - 10 days post-launch and after 15 - 20% of grayscale AUM has been withdrawn. “
On the contrary, these were also internal conversations had this week on Arca’s trading week, all regarding other assets, none of which were terribly positive: 
  • “Ethena (ENA) is probably a “stay away” from here on out.  The ETH ETF coming online will be rough for ENA, especially if the BTC ETF is now dominated by funds running basis trades (cash and carry).  This should compress the rate and hurt ENA, which sits at a $10B market cap.”
  • “Coinbase is launching pre-listing markets.  This is bad for AEVO and WHALEs, both of who were dominating trading of points and pre-token launches before this.”
  • “These clicker games on Telegram are not good products. This is the same exact thing as the Axie Infinity farms before the blow-up. Average revenue per user will be $0.01 and trend to 0 the moment the token stops going up. There is no long-term value here.  To be clear, I’m not bearish on TON. I’m bearish on the investment firms coming out with their theses that ‘tap to earn’ is the future of gaming/global adoption.  Real mobile games that are engaging and drive revenue are the key for TON; not click farms. From the outside, it seems like tap to earn is driving vanity metrics.”
  • “Near-term market breadth, across several of our internal metrics, is close to the worst levels on record outside of May 2022 when LUNA blew up. Historically, close to a local bottom at these levels.”

Source:  Arca Internal Research / Artemis
Not only has the conversation steered towards BTC and ETH ETFs, but liquidity has, too. The lack of interest and liquidity for altcoins can be seen in futures open interest flows, increased downside capture, low volumes, and fragmentation. Over the last 30 days, open interest, excluding BTC and ETH, is down nearly 30% while BTC and ETH open interest is down less than 2%. Funding rates had been skewed positively, so this has been mostly longs exiting the market. This one-way flow quickly turns reflexive to the downside and exacerbates underperformance relative to majors. Bid-side liquidity is less incentivized, and traders hesitate to catch a falling knife. Throw in fewer market makers and a huge increase in coin issuance and you've got a very sloppy alt coin market.
For the rest of the summer, it appears all eyes and liquidity will continue to be on BTC and ETH via these ETFs. And that’s okay for a short period of time. But ultimately, this narrative needs to shift, or we may be watching an asset's growth but the asset class's decline.


And That’s Our Two Satoshis!
Thanks for reading everyone! Questions or comments, just let us know.

The Arca Portfolio Management Team
Jeff Dorman, CFA - Chief Investment Officer
Katie Talati - Director of Research
Sasha Fleyshman - Portfolio Manager
David Nage - Portfolio Manager
Wes Hansen - Director of Trading and Operations
Michal Benedykcinski - Senior Vice President, Research
Nick Hotz, CFA - Vice President, Research
Kyle Doane - Vice President, Trading
Alex Woodard - Associate, Research
Christopher Macpherson - Research Analyst
Andrew Masotti - Associate, Trading and Operations
To learn more or talk to us about investing in digital assets and cryptocurrency
call us now at (424) 289-8068.

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