Bitcoin ETP: Buy the Rumor, Sell the News?

A long-awaited event may finally arrive this week.  The SEC is expected to issue a ruling about Bitcoin ETPs no later than Wednesday, and it is widely expected that the agency will finally allow these products to be listed.  As with any highly anticipated development, traders need to consider whether we are experiencing a “buy-the-rumor, sell-the-news” event.

It is quite obvious that the price of Bitcoin has been a huge beneficiary of the enthusiasm surrounding the potential advent of ETPs.  Note the price movement of Bitcoin in the chart below.  It has nearly doubled in just over three months.  Also note the relative performance of Ethereum over that time frame.  Those prices have improved but have clearly lagged.  Although it is conceivable that Ethereum ETPs could eventually be forthcoming, for now it lacks the catalyst that has turbocharged Bitcoin over recent months.

6-Month Chart: Bitcoin (red/green candles), Ethereum (blue line)

Source: Interactive Brokers

A cursory glance would imply that Bitcoin is at risk of giving back half its recent gains if there is insufficient follow-through from the ETP enthusiasm.  But it behooves us to think a bit more analytically.

Some might assert that there are already ETPs that ably track Bitcoin.  While it is true that there have been ETPs based upon Bitcoin futures, such as BITO, those are considered to be imperfect proxies for the cryptocurrency itself.  We wrote about some of their disadvantages shortly after BITO was listed in October 2021.  ETPs that hold futures need to roll their futures holdings periodically.  There is a cost to those transactions – commissions and “slippage” from the bid/ask spreads and contango.  Those costs impede performance and the funds’ ability to track the underlying cryptocurrency.

Those who wanted an equity-like product to track Bitcoin have long been able to access the Grayscale Bitcoin Trust (GBTC), but that had its own difficulties.  The trust structure is one-way.  It is relatively simple to crate shares in the trust, but essentially impossible to redeem them.  As a result, GBTC traded at a significant discount to its Net Asset Value (NAV) for long periods of time.  An ETP that can be freely created and redeemed should be expected to track its NAV more closely, and that was one of the motivations for GBTC taking legal action to allow itself to convert from a trust to an ETP.  We are now seeing the culmination of those efforts.

So, now that the finish line is in sight, will investors be clamoring for the ETPs that are expected to arrive?  They certainly shouldn’t lack for choices.  Besides a converted GBTC, a wide range of ETP issuers such as Blackrock, Fidelity, Invesco, and others are expected to join the fray.  It would of course be advantageous for a wider range of individuals and institutions to be able to access Bitcoin via an ETP, but it is not clear how many of them are desirous to do so in the immediate future.  Some will certainly succumb to the initial hype, but the key would be if there is follow-through over the coming weeks.  That is uncertain.

There is also a potential negative catalyst lurking.  At the end of November, the FTX bankruptcy estate was given permission to start selling $744 million in Grayscale assets, the bulk of which are held in GBTC, and presumably worth more than they were about six weeks ago.  It would be understandable if the bankruptcy trustees would wait until the persistent discount in GBTC fully evaporated before selling those assets.  That seems like a significant overhang for cryptos in general and Bitcoin specifically.

Thus, we see an underlying asset that has appreciated dramatically in a short period of time ahead of a well-telegraphed event.  There is an enormous theoretical demand for the product, but it is not clear that the demand will be immediate.  Finally, there is a potential large seller lurking in the weeds.  This is the sort of convergence that leads to a “sell-the-news” reaction after a lengthy period of “buy-the-rumor.”   We’ll know soon enough if this well-known market adage holds true once again.