The US-listed spot bitcoin exchange-traded funds (ETFs) are back in demand, with investors pouring $1.4 billion into them in the past 5 days. Still, bitcoin’s spot price remains in limbo.
One possible explanation, aside from escalating geopolitical tensions and rising oil prices, is the mechanics of ETFs themselves, according to analysts at cryptocurrency exchange Bitfinex.
Analysts explained in an email to CoinDesk that ETF inflows risk being over-interpreted as immediate spot demand, noting that ETF structures often create a lag between inflows and actual bitcoin purchases. In other words, the bullish pressure on prices may take effect with a delay, leaving prices stuck in the meantime.
An ETF is a pooled investment vehicle that holds assets such as bitcoin and issues shares that are traded on exchanges like common stocks. The fund is designed to follow the value of the underlying closely, and each share represents a claim on the underlying holdings. A total of 11 spot ETFs debuted in the US in January 2024. Since then, these funds have cumulatively recorded inflows worth over $55 billion.
The shares are created and redeemed by authorized participants (APs), specialized financial institutions such as major banks, market makers or broker-dealers. When demand for the ETF increases, its price may trade above the fund’s net asset value, prompting APs to create new shares, sell them to buyers and narrow the price gap.
Often, APs sell shares they do not yet own – a process known as shorting. In general markets, short-selling rules require most investors to borrow shares first, but regulators allow APs to short ETF shares almost immediately and buy the equivalent bitcoin hours later or until the next business day, depending on whether the creation is in cash or in kind.
As a result, ETF demand may increase even while actual BTC purchases on the spot market are delayed. By the time these actual BTC purchases occur, they are often offset by other selling pressure elsewhere in the market, which can help mitigate the bullish impact on price and keep Bitcoin trading in a tighter range.
This likely helps explain the recent surge in approaches along with the weak price action, according to Bitfinex’s analysts.
“The result is that the ETF is growing, but the actual BTC price is not increasing because there has been no buying in the spot market. This can make the BTC price feel ‘stuck’ or depressed,” analysts said.
“In general, this does not have a significant market impact, but during periods of severe market dislocation, the gap between ETF demand and actual BTC spot purchases, or vice versa, can create a brief period of market mispricing,” analysts added.
