ETFs and institutions are snapping up Bitcoin, but who’s on the other end driving the price down?
It’s more complicated than you’d think.
The 2024 focus has been on ETF inflows as if they were the entire story, but it neglects the broader market dynamics picture. So, who’s offloading their Bitcoin?
On one hand, the early adopters, or OGs, are cashing in. These seasoned holders have more BTC than all the ETFs combined—ten times more.
This isn’t unusual; they tend to sell during bull markets, a pattern dating back to Bitcoin’s inception.
Why?
Bills come up. Life-changing profit is worth realizing sooner rather than later for many.
Let’s keep in mind BTC whales are less likely to be sage oracles thinking in terms of centuries rather than early techies that got super lucky with their timing, either mining or through bold purchases.
Beyond that, we’re witnessing a new era in Bitcoin trading.
The introduction of paper BTC (through CME and Cboe in December 2017) has transformed the market landscape, and its interplay with the 2024 ETF launch is worth exploring.
Futures markets allow you to buy Bitcoin on paper: you can get Bitcoin exposure from sellers with no actual BTC, only USD.
This diversion of demand from real to paper BTC is significant.
In the past, Bitcoin price rallies were slightly impacted by limited sales from OGs and newly minted coins from miners.
Today, paper BTC plays a pivotal role.
Despite spot holders holding firm, the bear market of 2022 was largely influenced by an influx of paper BTC (The first Bitcoin Futures ETF (ProShares Bitcoin Strategy ETF) was approved in October 2021)
Synthesizing this information is more of an art than a science, and everyone is working with educated estimates, but there’s enough information to justify that the bull market’s price rally may be suppressed by paper BTC, as we’ll explore below.
The Market Dynamics of Bitcoin’s Price
Bitcoin’s derivatives markets are forcing a market dynamics lesson on BTC holders.
Investors who buy into BTC ETFs are not necessarily buying physical Bitcoin. Instead, they might be buying shares of a fund that holds Bitcoin or gains exposure through derivatives.
This can divert demand away from the actual Bitcoin market.
BTC ETFs often use futures contracts and other derivatives to gain exposure to Bitcoin prices. These financial instruments do not require the holder to buy actual Bitcoin, thereby increasing the supply of “paper BTC.”
In Wolf of Wallstreet terms, it ain’t real– it’s a fugazi, fairy dust.
This supply increase can meet new investors’ demand without pushing up the price of actual Bitcoin.
With more investors able to gain Bitcoin exposure through ETFs and futures rather than buying physical Bitcoin, the demand pressure on the actual Bitcoin market is reduced.
This can suppress the price of Bitcoin, as the influx of new investment money is channeled into financial products rather than buying the real asset.
If the market perceives that most new demand is being met through paper BTC rather than actual purchases, it can influence trader behavior; sellers might be more willing to sell at lower prices, anticipating that demand is being absorbed by derivatives rather than spot markets.
This price suppression through derivatives and futures isn’t exclusive to BTC; it has played out in several other asset classes.
Price Suppression Theory: Some market analysts believe that the extensive use of futures contracts has suppressed the price of physical assets like gold. The idea is that by creating large amounts of “paper gold” (futures contracts), the actual demand for physical gold is reduced, keeping the prices lower than they might be if all investments were directed toward physical gold.
The gold market is one of the most prominent examples of how derivatives can influence the price of an asset; gold futures contracts allow investors to speculate on the price of gold without actually holding physical gold.
In the real estate market, mortgage-backed securities are a type of derivative that played a significant role in the 2008 financial crisis.
MBS are created by pooling together various mortgage loans and selling the cash flows from these pools to investors.
While MBS are not typically cited as directly suppressing real estate prices, their proliferation led to significant distortions in the housing market. The ease of selling mortgage loans to be packaged into MBS led to lax lending standards, increasing the money available for housing and inflating property prices.
When the market for these securities collapsed, real estate prices sharply declined, demonstrating the powerful indirect effects of financial derivatives on the underlying asset market.
Similar to gold, the oil market is heavily influenced by futures trading. This allows companies and investors to hedge against or speculate on the future oil price, leading to significant price volatility.
At times, the price set in the futures market can suppress spot prices, especially when there is a significant amount of speculative trading that does not correlate directly with the physical supply and demand for oil.
Agricultural commodities like wheat, corn, and soybeans are also traded heavily through futures contracts. These markets were originally created to help farmers hedge against price fluctuations, but they’ve become popular with speculators.
In January 2024, the U.S. Securities and Exchange Commission (SEC) approved the first spot Bitcoin ETFs, marking a significant milestone for the cryptocurrency market.
Unlike futures-based ETFs, spot Bitcoin ETFs hold actual Bitcoin; ETFs allow investors to gain direct exposure to Bitcoin’s price movements without needing to manage digital wallets or deal with self-custody issues.
While ETFs increase overall market participation, the presence of derivatives and synthetic products can lead to complex interactions between spot and futures markets, influencing price movements and volatility.
Final Thoughts: Bitcoin’s Price Signals Maturity
This begs the question– how do long-term self-custodied Bitcoin holders combat price suppression?
Price suppression isn’t necessarily terrible; it’s an indicator that Bitcoin is mature enough to handle the same market manipulative abuse as more mature asset classes, if that’s any consolation.
Still, BTC is for BTC holders, and the technology is vastly more important than the speculative markets formed around it in recent history.
A community of long-term Bitcoin holders can take proactive steps to combat price suppression by promoting self-custody, supporting transparency, and advocating for Bitcoin-backed financial products.
Moreover, as more Bitcoin is moved into cold storage, the available supply in the active market decreases. HODL behavior shifts the balance in favor of long-term organic pricing, making it harder for paper Bitcoin to have as much suppressive effect.
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