Bitcoin has recently experienced significant sell-side pressure, leading to a substantial price drop and declining investor confidence.
Bitcoin‘s price has faced increasing sell-side pressure, causing it to drop by over 5.5% in the past week, reaching a six-week low of $58,400 on June 25. According to market intelligence firm Glassnode, this decline pushed BTC below its short-term cost basis, indicating a potential for a deeper correction.
What is the cost basis?
The cost basis is the original value or purchase price of an asset. In this context, it helps determine whether Bitcoin holders are currently in profit or loss.
“Since mid-June, the spot price has fallen below the cost basis for both 1-week to 1-month holders ($68.5k) and 1-month to 3-month holders ($66.4k),” Glassnode reported in its “Week On-chain” newsletter published on June 25. “If this trend continues, it could lead to a further decline in investor confidence, making the correction deeper and recovery slower.”
Bitcoin realized price by cohort. Source: Glassnode
The short-term holder (STH) cost basis, or realized price, is a metric that indicates the average purchase price of Bitcoin for investors who have held their coins for less than 155 days.
Understanding investor behavior is crucial in assessing the dynamics of the Bitcoin market.
Short-term holders, those who have kept their coins for less than 155 days, tend to react more quickly to market fluctuations.
When Bitcoin’s price falls below its average purchase price or cost basis, it often triggers panic selling as these investors seek to minimize their losses.
This can lead to a cascading effect, further driving down the price.
In contrast, long-term holders who have held their coins for more than 155 days typically have a higher cost basis and are more resilient to short-term price volatility. Their investment strategies are often rooted in long-term growth expectations, making them less likely to sell during market downturns.
The recent market trends highlight a worrying shift in investor sentiment.
The fact that the cost basis for short-term holders has fallen below that of mid-term holders (1 to 3 months) signals weakening demand and a net outflow of capital from Bitcoin.
Such a structure has historically led to deeper corrections and prolonged recovery periods. The current market environment, characterized by significant outflows from Bitcoin ETFs and a general decline in investor confidence, mirrors patterns observed in previous market cycles where similar negative capital flows resulted in substantial price declines.
According to data from LookIntoBitcoin, when BTC dropped below the $64,000 mark on June 23, it fell below the STH realized price, which was $64,591 at that time.
Furthermore, the recent price drop nearly brought Bitcoin below the cost basis for holders of 3 to 6 months, which is $57,300.
This cost basis is still increasing despite the falling price. The report also notes that the cost basis for 1-week to 1-month holders has fallen below that of 1-month to 3-month holders. This indicates a decline in demand and a net capital outflow from Bitcoin.
Investor confidence and market trends
“During previous bull markets, a negative capital flow structure has happened up to five times. This pattern has been present since May and continued into early June,” the Glassnode report states.
Spot Bitcoin ETFs are experiencing an increase in inflows. On June 25, the 10 U.S.-based spot Bitcoin exchange-traded funds (ETFs) saw inflows totaling $31 million, breaking a seven-day streak of outflows.
According to SoSo Value, Fidelity’s ETF FBTC led the way with $49 million in net inflows on June 25. It was followed by the Bitwise Bitcoin ETF BITB, which saw $15 million in inflows, and the VanEck Bitcoin Trust ETF HODL, which had $4 million in net inflows.
Total Bitcoin spot ETF net inflow. Source: SoSo Value
Contrasting Trends in ETFs
On the other hand, the Grayscale ETF GBTC experienced a single-day outflow of $30.2 million, while the ARK 21Shares Bitcoin ETF saw $6 million in net outflows.
As of the end of June 2024, the ten spot Bitcoin funds that started trading on January 11 have accumulated net inflows of $14.42 billion, managing over $53.56 billion in assets. The significant outflows observed over the past few weeks are the highest since April, when spot Bitcoin ETFs recorded net outflows exceeding $1.2 billion between April 24 and early May.
Bitcoin ETFs are the intersection where cryptocurrencies meet the structured universe of traditional investing.
Bitcoin ETFs, or ‘exchange-traded funds’ that focus on Bitcoin, offer a unique way to participate in the exciting growth potential of cryptocurrencies without diving headfirst into the often complex crypto markets.
These ‘crypto ETFs’ blend the familiarity of conventional stock trading with the adventurous spirit of digital currencies, providing a gateway for both seasoned investors and curious newcomers.
As we explore this innovative investment vehicle, you’ll discover how it simplifies the process of adding digital assets to your portfolio, all while maintaining the ease and accessibility of traditional stock market trading. Let’s dive in and unravel the essentials of Bitcoin ETFs.
What are exchange-traded funds (ETFs)?
Imagine you want to invest in the stock market, but instead of picking individual stocks (like shares of Apple or Google), you decide to buy a little bit of lots of different stocks all at once. That’s essentially what an Exchange-Traded Fund (ETF) is.
An ETF is like a basket that contains a mix of various stocks, bonds, or other assets. When you buy a share of an ETF, you’re buying a small piece of all the things inside that basket. This mix can include all sorts of investments – from tech companies to government bonds. The beauty of ETFs is that with just one purchase, you can invest in a whole range of assets, which can reduce the risk compared to buying just one company’s stock.
What makes ETFs special is that they are traded on the stock exchange, just like regular stocks. This means you can buy and sell shares of an ETF throughout the day at different prices, just like you would with stocks of individual companies.
So, in a nutshell, ETFs offer a simple way to diversify your investments, spreading out your risk while still allowing you the flexibility to buy and sell as you would with traditional stocks.
Why is everyone talking about a spot Bitcoin ETFs?
The sudden importance of spot Bitcoin ETFs in the crypto world stems from their potential regulatory approval, a significant step forward in legitimizing Bitcoin as a mainstream investment.
Unlike previous ETFs tied to Bitcoin futures, spot Bitcoin ETFs would be directly linked to the current price of Bitcoin, offering a more direct and potentially more accurate reflection of Bitcoin’s market value. This direct connection attracts investors looking for a more straightforward way to invest in Bitcoin through traditional financial structures.
The anticipation of these ETFs has been heightened by the involvement of major asset management firms like BlackRock, Fidelity, and VanEck, signalling strong institutional interest.
The approval of spot Bitcoin ETFs by the SEC would not only increase Bitcoin’s accessibility to a broader range of investors but also potentially provide more stability and liquidity in the crypto market.
This move is seen as a critical milestone for the cryptocurrency industry, as it represents a significant endorsement from regulatory authorities and could lead to increased adoption and integration of Bitcoin into the traditional financial system.
The benefits of Bitcoin ETFs
Bitcoin ETFs are an exciting option for those interested in the buzz of the cryptocurrency world but looking for something a bit more familiar and potentially less risky. Let’s break down why someone might lean towards a Bitcoin ETF instead of buying Bitcoin directly.
Familiarity and Ease of Trading
Investing in a Bitcoin ETF feels much like investing in any other stock. You don’t need to learn the ins and outs of cryptocurrency exchanges or how to securely store digital coins. It’s as straightforward as trading regular stocks, making it a comfortable option for many traditional investors.
Diversification
Bitcoin ETFs often track not just the price of Bitcoin but can include other cryptocurrencies or related assets. This means you’re not putting all your eggs in one basket (Bitcoin) but spreading your risk across a range of assets. It’s like choosing a mixed fruit basket over just apples. This diversification can be a safer bet, especially in the volatile world of cryptocurrencies.
Regulatory oversight
ETFs are subject to regulatory oversight, which means there’s an added layer of security and transparency. When you buy Bitcoin directly, you’re stepping into a largely unregulated space, which can be riskier. With a Bitcoin ETF, you have the peace of mind that comes with regulated financial products.
Lower entry point
Investing in Bitcoin directly can be expensive, as you often have to buy whole units of the cryptocurrency. But with a Bitcoin ETF, you can invest with much smaller amounts, making it more accessible for the average investor.
No digital wallets are needed
Holding Bitcoin directly means dealing with digital wallets and the security concerns that come with them.
With a Bitcoin ETF, you don’t have to worry about digital wallet security or remembering complex passwords. Your investment is as safe as any other stock in your portfolio.
Top Bitcoin ETFs to invest in
When it comes to dipping your toes into the world of Bitcoin through ETFs, there are several key players you might want to consider. Here’s a list of some of the top Bitcoin ETFs, each offering a unique crypto-investing approach.
ProShares Bitcoin ETF
ProShares is a big name in the ETF world, and their Bitcoin ETF is a popular choice. It’s known for its reliability and is a go-to option for many investors looking to get involved in Bitcoin through a more traditional investment vehicle.
Grayscale Bitcoin Trust
While not a traditional ETF, Grayscale’s Bitcoin Trust is another major player. It offers exposure to Bitcoin’s price movements without the need to directly buy and store the cryptocurrency.
Valkyrie Bitcoin Strategy ETF
This ETF is relatively new but has quickly gained attention. It focuses on Bitcoin futures contracts, offering a different angle on Bitcoin investment.
VanEck Bitcoin Trust
VanEck is known for its innovative investment products, and its Bitcoin Trust is no exception. It aims to reflect the performance of Bitcoin, offering investors direct exposure to the cryptocurrency’s price changes.
Bitwise 10 Crypto Index Fund
For those who want broader exposure, the Bitwise 10 Crypto Index Fund covers the top 10 cryptocurrencies by market cap, not just Bitcoin. It’s a good option if you’re looking to diversify within the crypto space.
Each of these options has its unique features and approaches to Bitcoin investment. Whether you’re looking for something straightforward like the ProShares Bitcoin ETF or something more diverse like the Bitwise 10 Crypto Index Fund, there’s likely an ETF that fits your investment style and risk tolerance.
Remember, investing in Bitcoin, whether directly or through ETFs, carries risk. It’s always wise to do your own research and consider seeking advice from a financial advisor to find the best fit for your investment goals.
How to trade Bitcoin ETFs
Trading Bitcoin ETFs is like playing a video game where you need to know a few key moves. Let’s make sense of terms like ‘bitcoin tracking’ and ‘bitcoin exchange-traded note,’ and also explain how different platforms work for trading these crypto ETFs.
Bitcoin Tracking
Imagine Bitcoin’s price is like a rollercoaster at an amusement park. ‘Bitcoin tracking’ is like having a model of that rollercoaster in your backyard. The ETF follows the ups and downs of Bitcoin’s price, just like your model coaster follows the same path as the real one.
Think of ETNs as a promise note from your school friend. They promise to pay you back your lunch money with a little extra. In the financial world, an ETN is a promise by a company to pay you based on Bitcoin’s price performance.
But remember, if your friend moves away, you might not get your money back. Similarly, if the company behind the ETN has problems, your investment could be at risk.
Trading platforms for Bitcoin ETFs
Now, let’s talk about where you can trade these ETFs. You’ve got two main options: brokerage platforms and crypto exchange platforms.
Brokerage platforms: These are like your regular supermarkets where you can buy all sorts of things (stocks, bonds, ETFs). Trading Bitcoin ETFs here is like buying cereal from a supermarket. You use the same cart (platform) you use for other shopping. These platforms are user-friendly and regulated, offering a familiar environment for regular stock traders.
Crypto Exchange. These are specialized stores, like a shop that only sells video games. They mainly deal with cryptocurrencies. While you can’t directly buy Bitcoin ETFs here, these platforms are where the action happens for Bitcoin and other cryptocurrencies. They offer more crypto-specific features and can be a bit more complex to use.
The main difference between these platforms is what you can buy on them. Brokerage platforms offer a variety of investment products, including Bitcoin ETFs, while crypto exchanges focus on cryptocurrencies.
Also, brokerages are often seen as more beginner-friendly and regulated, while crypto exchanges offer more in-depth features for crypto trading.
Crypto vs crypto ETFs: comparing investment options
Let’s talk about the difference between buying cryptocurrencies directly and investing in crypto ETFs, and how these stack up against other investment options like mutual funds.
1. Direct crypto investment
Imagine buying cryptocurrencies like Bitcoin or Ethereum directly is like owning a specific type of exotic fruit. You have full control over it; you can eat it, save it, or sell it. However, you need to know where to buy it, how to store it safely and be ready for its price to jump up and down wildly.
2. Crypto ETFs
Now, investing in a crypto ETF is like buying a fruit basket that includes a bit of this exotic fruit along with other types. You don’t own the fruit directly, but you own a share of the basket. It’s simpler and safer in some ways because you’re not responsible for taking care of the individual fruits, and you also get a variety, which can balance out the risk.
3. Crypto ETFs vs traditional mutual funds
Traditional mutual funds are like a pre-packed lunch – you know what you’re getting, and it’s usually a well-balanced meal.
Mutual funds pool money from many investors to invest in stocks, bonds, or other assets and are managed by professionals. They’re not as volatile as cryptocurrencies but may offer lower returns.
4. Platforms for trading
The difference in platforms is like shopping at different types of stores.
Crypto exchanges are like speciality stores where you buy and manage individual types of fruit (cryptocurrencies). Some of the most popular centralized exchanges (CEXs) are Binance, KuCoin, WhiteBit, Kraken and Coinbase.
In contrast, brokerage platforms where you trade ETFs are like big supermarkets where you can buy fruit baskets (ETFs), along with other groceries (stocks, bonds).
As you see, there is more than one way to invest in crypto. Investing directly in cryptocurrencies is for those who want full control and are comfortable with high risk and volatility.
Crypto ETFs, on the other hand, offer a simpler, more diversified way to get into the crypto market, much like traditional mutual funds, but with a focus on digital assets.
And where you shop (trade) depends on whether you want to manage individual assets or prefer a more diverse, managed portfolio.
