Grayscale Bitcoin Trust losing billions: What are the consequences for the market?

The record outflows are driving Bitcoin prices down and even seem to menace the market along with the growing fears of Bitcoin “institutionalization”.

Bitcoin prices continue to fall, losing another 7% since Monday. It triggered some $550 million of long position liquidations in two days, according to Coinglass. Since the ETF-induced high of $49k, recorded on January 11th, BTC has lost a total of 21%. Generally, this would be considered a normal correction for the leading cryptoasset, which made a stunning 180% gain in just one year.

However, some analysts are worried that one of the reasons for this drop, other than the typical “sell the news” or simple market correction, might still be at play. More specifically, the outflows from Grayscale Trust, while anticipated, have astonished many by their scale. Moreover, given the billions in bitcoin still under the fund's management, there's uncertainty about when these hefty withdrawals will cease, and if the influx into newly launched ETFs can offset them.

Still, prevailing concern nowadays centers around the potential over-institutionalization of Bitcoin and the implications this could have for an asset traditionally valued for its independence.

About Grayscale

The Grayscale Bitcoin Trust (GBTC) began trading as a closed-end fund in 2013 for accredited investors and has accumulated over $28 billion worth of assets under management by January 10, 2024.  As of today’s morning, the fund, now converted to an ETF, has shrunk to $21 billion.

One of the most obvious reasons is Grayscale’s hefty 1.5% fees, which differ drastically from other ETF’s fees ranging from 0.25% to 0.5%. Also, while the previous iteration of GBTC had a mandatory 6-month lockup period, its new quality of ETF allowed its holders to cash out immediately.

As shares of GBTC have been redeemed, Grayscale has been selling the bitcoin that was backing them, creating a $7 billion sell-off wave that naturally impacted market prices.

Yet, this selling pressure is partially alleviated by the buying pressure of the new ETFs, notably the market heavyweights BlackRock’s iShares and Fidelity.

Can the market digest Grayscale’s outflows?

Since its debut, iShares Bitcoin Trust, also known under the $IBIT ticker, has accumulated $1.6  billion in assets under management (AUM).

As Bloomberg’s ETF analyst Eric Balchunas noted, this is an extraordinary performance for such a young fund. Indeed, its YTD flow now ranks 7th among the long-established ETF veterans, such as $IVV, $VOO, and $QQQ. Fidelity’s $FBTC fund is also in the top 10.

However, according to the analyst, only around 35% of GBTC outflows go into other Bitcoin ETFs. This is not enough to contain the selling pressure, especially since GBTC still has some $21 billion worth of bitcoin.

This raises the question of whether the market can digest Grayscale’s outflows.

To answer it, it is worth recalling that while Bitcoin ETFs are important for the crypto markets, they are still rather marginal.

Data from bitcointreasuries.net, which tracks BTC holdings of corporations and funds, reveals that only 2.16 million BTC, or 11% of the total Bitcoin supply of 19.6 million, is currently held by corporate entities. Of this, just over a third is in the hands of financial funds. The remainder is with Bitcoin stalwarts like Microstrategy and Block.one, mining firms, and even governments (mostly the US and China).

In dollar terms, the funds are now holding $31.5 billion of bitcoin, or 4% of its total market cap of $0.7 trillion. This means that it is likely that the market can absorb GBTC’s outflows in time, especially with the halving on the horizon.

Does Bitcoin risk being institutionalized?

Some crypto bloggers argue that Bitcoin's growing institutionalization contradicts its nature and that Bitcoin ETFs, while making the asset easier to buy for institutional investors, would ultimately lead to its demise. For instance, if all US pension funds would invest their entire $6 trillion of AUM into Bitcoin ETFs simultaneously, this would create a market imbalance. However, even in such an impossible scenario, these potential buyers would quickly face Bitcoin’s limited liquidity wall.

In reality, of course, Bitcoin ETFs demand will not skyrocket overnight. Most investors stay wary, changing their minds slowly (if ever). This process will let the market adjust the prices progressively, most likely keeping the institutional ownership of Bitcoin at levels that do not threaten the market.

Written by D.Center