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To investors,

It has been one week since the bitcoin spot ETF began trading. The big surprise to many is that bitcoin’s price has traded down despite billions of dollars flowing into the various ETFs.

How could that have happened?

There are two main reasons in my opinion — first, investors across the market had built up anticipation of the ETF approvals. This led the asset to rise from around $27,000 in mid-October to ~$45,000 earlier this month.

Whenever you get this type of rapid appreciation, it is likely that the market will sell the news. That is exactly what happened here. Investors took profits after their speculation was confirmed.

“Buy the rumor, sell the news” has not been the only culprit though.

There have been billions of dollars flowing out of Grayscale’s GBTC also, which is putting significant sell pressure on the bitcoin price. Bloomberg’s Eric Balchunas shared this visual to highlight more than $2 billion leaving the world’s largest bitcoin fund.

This is happening because Grayscale’s management fee only dropped to 1.5% from the previous 2%. While the 25% drop may seem significant, the other ETFs are competing with sub-0.50% management fees. Simply, Grayscale is the most expensive fund based on fees.

Why would they leave their fee so high?

The asset management firm is betting that majority of the capital will not leave the fund. The current market cap is over $25 billion, so less than 10% of the capital has left in the first week, which probably signals that more than 50% of the fund will stay and continue to pay a 1.5% management fee. If that is the case, Grayscale will still pull in ~ $225 million annually without any increase in bitcoin’s price.

Not a bad business.

This nuance around Grayscale and the sell pressure in the market highlights an important development — the dynamics of the bitcoin market are changing because the holder base is changing.

For example, the hardcore bitcoin holders, who helped turn the digital currency into the best performing asset over the last 15 years, have created a culture and meme where it is looked down upon to sell your bitcoin. HODL is a rallying cry.

This meme created a highly illiquid asset, which led to asymmetry following material inflows of demand. But now the hardcore holder base is going to be diluted by the traditional financial players.

Blackrock’s IBIT already has more than $1 billion in the fund after the first four days. I would expect Blackrock to eventually have more bitcoin than Michael Saylor’s Microstrategy.

So why does this matter?

Traditional financial investors have different behavior. For example, they like to rebalance their portfolios, which means they will sell assets that have increased in value. This taking of profits will be a new source of sell pressure that was previously not present in bull markets.

Another example is the creation of derivatives. Many of the incoming capital flows will end up in these products, rather than buying spot bitcoin, which will reduce the actual positive impact on price. If the use of derivatives is used to heavily short the asset, it could even create a significant headwind for the asset.

One more point is that the increase in liquidity, from more capital and more products, will generally dampen volatility as well. The positive is that we shouldn’t see severe 80% drawdowns in the future, but we also shouldn’t expect 1,000% price increases in a single year.

Bitcoin is growing up. There is less risk investing in the asset today, so an investor should get paid a smaller return. That is how markets work. The true test of a great investor is whether you can continue to update your mental model and adapt to an ever-changing world.

Bitcoin is one of the most interesting financial assets. It will continue to do very well, especially since governments can’t help themselves from printing trillions of dollars annually. But don’t expect the past performance to be indicative of future performance.

Hope you all have a great end to your week. I’ll talk to everyone on Monday.

-Anthony Pompliano

Darius Dale is the Founder & CEO of 42Macro.

In this conversation, we talk about global liquidity, Macro Weather Model, bitcoin & other risk assets, and impact of fiscal stimulus.

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Darius Dale Highlights Global Liquidity Data Turning Bullish

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