Spot ETFs Could Help Bitcoin Become Less Volatile
The anticipation of the U.S. Securities and Exchange Commission (SEC) greenlighting one or more exchange-traded funds (ETFs) has sparked discussions among analysts about the potential impact on the cryptocurrency market. If approved, these ETFs would invest directly in bitcoin (BTC) rather than in futures tied to the cryptocurrency.
Analyst Consensus
Analysts are expecting that the approval of spot ETFs will have a bullish impact on bitcoin prices. However, there is disagreement on whether this approval will subdue bitcoin’s notorious price volatility, which has been a major concern for investors.
Reducing the Influence of Whales
Bitcoin’s price is heavily influenced by a small number of owners, known as whales, due to the concentration of BTC in their hands. This influence often triggers violent price swings. A spot ETF, which closely tracks the value of the underlying assets, could potentially reduce the influence of these whales by broadening the owner base.
Nate Geraci, the president of registered investment adviser The ETF Store, highlighted that a spot ETF would open bitcoin exposure to a broader range of market participants, potentially lowering volatility and making it more difficult for larger bitcoin whales to manipulate prices.
Boosting Liquidity
If a U.S. bitcoin ETF is launched, estimates from Galaxy Digital indicate that the addressable market size could be $14 trillion in just one year after its launch, and $39 trillion by the third year. This strong market uptake could significantly boost liquidity in the underlying asset, resulting in less volatile trading conditions and the ability to absorb large orders at stable prices.
The experience from the equity markets shows that ETF ownership tends to enhance liquidity in the underlying stocks. This increased liquidity is attributed to arbitrageurs trading against potential mispricings between the ETF and the basket of underlying stocks, effectively adding liquidity to the underlying assets.
Potential Volatility Due to Cash Creation
However, there are opposing views on the potential impact of spot ETFs. Laurent Kssis, an ETF expert and crypto trading adviser, argues that spot ETFs could become a source of BTC price volatility due to the cash creation process. In a cash creation scenario, where the issuer purchases the actual asset with cash, there could be more arbitrageurs trading around the time channel, inadvertently creating volatility during that period.
Rumors on the X indicated that the SEC might require ETF applicants to work through cash creation, raising concerns about potential price volatility if this requirement were to be implemented.
Ultimately, while the approval of spot ETFs is widely anticipated to boost bitcoin prices and liquidity, the potential impact on volatility remains a topic of debate among analysts and experts.
I have over 10 years of experience in the field of cryptocurrency and blockchain technology. I have attended numerous conferences and events around the world, and my work has been featured in major publications such as CoinDesk, Bitcoin Magazine, and Yahoo Finance.
