Did the ETF Approval BTC Dip Happen Due to Grayscale's Sell-off? How Much More Selling Pressure Can We Expect in the Future?

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On the second day of trading for the Spot Bitcoin ETF, GBTC saw outflows of $484 million, bringing the total outflows for the first two days to $579 million.

Original Title: "Did ETF Approval Cause BTC to Drop Due to Grayscale Selling Pressure? How Much Selling Pressure Is Still Ahead?"

Original Source: JK, Odaily Planet Daily

Since the SEC approved a Bitcoin spot ETF this week, Bitcoin's price has fluctuated: after the approval, it quickly rose to above $48,000, then dropped all the way down after a period of consolidation around $46,000 to below $42,000, and is now stable around $43,000, with a 7-day decrease of 1.69%.

Odaily previously reported that according to Yahoo Finance data, the spot Bitcoin ETF had a trading volume of $4.6 billion on the first day of trading, with a total volume of $3.1 billion on the second day, and a cumulative total volume close to $7.7 billion. Among the new issuers of the spot Bitcoin fund, BlackRock led with a transaction volume of $564 million on Friday, while Fidelity had a trading volume of $431 million.

Both of these volumes are still lower than Grayscale's GBTC – the ETF's trading volume was $2.29 billion on Thursday and $1.83 billion on Friday, accounting for more than half of the total volume.

According to BitMEX Research data, on the second day of trading of the spot Bitcoin ETF, $484 million flowed out of GBTC, and the total outflow in the first two days was $579 million.

What Is the Relationship with Grayscale's Historical Negative Premium?

From the data, it can be seen that the historical negative premium has almost disappeared after converting the trust to an ETF. In December 2022, the negative premium reached 50% at one point, but then shrank as the market recovered and the ETF's anticipation increased. By Monday, the negative premium had shrunk to 5.6%.

Why is that? This needs to be discussed in the context of the different structures of Trusts and ETFs.

A Trust, such as the former GBTC, is closed-end, meaning they issued a fixed number of shares at IPO, which then trade on the secondary market. Once issued, the number of Trust shares cannot be increased or decreased based on market demand. Therefore, the market price of the Trust is primarily determined by the supply and demand of buyers and sellers, which can lead to significant divergences between its market price and the actual value of its underlying assets (i.e., Net Asset Value, NAV). If demand for the Trust decreases, its market price may fall below the NAV, resulting in a discount.

An ETF is open-end, allowing authorized participants (APs) to create or redeem ETF shares when needed. These APs can exchange cash or assets of equivalent value with the ETF issuer based on the market demand for ETF shares, either creating new ETF shares or redeeming ETF shares for cash or assets. This flexible creation and redemption mechanism ensures that the market price of an ETF usually closely tracks its Net Asset Value (NAV). For example, if an ETF's share price trades below its NAV, authorized participants can buy these discounted shares and redeem them for the underlying assets' value. This activity not only profits the authorized participants but also helps raise the ETF share price, bringing it closer to its NAV.

Therefore, purely from a pricing perspective, investors seeking financial returns who buy at a low point are likely to sell when the current discount disappears, causing Grayscale to sell Bitcoin to redeem cash for those selling GBTC shares.

So, did Grayscale really trigger a sell-off?

According to data from Arkham, there is no evidence of a sell-off; currently, based on the tagged Grayscale addresses, Grayscale holds approximately 617K Bitcoins worth around $26.6 billion, with outflows of about $1.67 billion in recent days. This means that Grayscale has not been forced to sell off most of its Bitcoin due to continuous client GBTC share sales, with the amount sold still only representing a small fraction.

Grayscale's current holdings data. Source: Arkham

However, market sentiment has not eased. One possible argument is that Arkham does not have records of all Grayscale addresses, the recorded Grayscale addresses may not be accurate, this statistic may have missed some of the BTC sales and trades, so the $1.67 billion sell-off may not be precise.

There is an even scarier argument involving the fee issue of all Bitcoin spot ETFs. Currently, according to Bloomberg analyst's statistics, Grayscale's GBTC has the highest management fee among ETFs:

Current ETF management fee rates. Source: Bloomberg

It can be seen that the rates released by issuers such as Franklin and Bitwise are relatively low, while Grayscale's fee belongs to the highest tier, at around 1.5%. If investors are unwilling to pay this 1.5% management fee, they can freely choose to sell GBTC shares and invest in other ETFs. As this ETF is fully redeemed in cash, when selling GBTC shares, one cannot choose to sell for Bitcoin but only for dollars, which will inevitably bring selling pressure and lower the price.

This leads to the argument held by many on Twitter: Not selling now does not mean there will be no selling in the future. If more people in the future sell off their GBTC shares to purchase shares of other BTC due to fee issues, and due to the selling behavior causing more people to hold cash and wait due to the continuously declining price, it is not ruled out that BTC may plummet all the way to below $40,000.

Crypto KOL Neuner said that Bitcoin "might face a period of selling pressure" because "$25 billion is a pretty large number, even if only 20% is redeemed, that still means there will be $5 billion in sales volume in the market."