Bitcoin ETF could harm prices in short-term

The long-desired Bitcoin exchanged traded-fund (ETF) could weaken the cryptocurrency’s price in the short-term but positively impact the market in the long-term

JPMorgan analysts believe that the long-desired Bitcoin (BTC) ETF could positively impact Bitcoin’s price and the general cryptocurrency market in the long-term. However, the analysts also feel that the cryptocurrency’s price would suffer a short-term loss when the ETF is approved.

According to the analysts, a Bitcoin ETF would draw institutional funds away from the Grayscale Bitcoin Trust (GBTC), a move that could negatively affect BTC’s price. GBTC is the only way some Wall Street firms are gaining exposure to Bitcoin, which has benefitted Bitcoin’s price.

Due to regulatory and other restrictions, some Wall Street firms and hedge funds can’t directly own Bitcoin or even directly purchase Grayscale shares. To access the Bitcoin market, their only option is to buy the GBTC shares through the secondary markets at a premium.

However, the launch of a Bitcoin ETF would drastically reduce the premium. Hence, negatively affecting the attractiveness of the GBTC shares. A decline in the GBTC premium would also reduce the glamour of a popular trade.

Some financial institutions currently purchase GBTC at net asset value, aiming to sell after the mandatory six-month lockup period expires. This way, they capitalise on the premium and earn profits. However, if the GBTC premium were to drop following an ETF entry, the popularity of buying GBTC at Native Asset Value (NAV) would drastically reduce.

According to the JPMorgan analysts, the GBTC premium monetisation trade could represent around 15% of outstanding GBTC stock. The analysts added that the prospect of a Bitcoin ETF and the decline in GBTC premium could see some institutional investors who entered the market in the second half of 2020 selling off their holdings when their six-month lockup expires. Thus, putting downward pressure on the GBTC premiums.

Crypto community clamouring for a Bitcoin ETF

The cryptocurrency community has long desired a Bitcoin ETF as they believe it would attract more institutional investors to the market. The United States Securities and Exchange Commission (SEC) has blocked all efforts by institutions like VanEck and Bitwise to launch a Bitcoin ETF.

VanEck is yet to throw in the towel as it proposed another Bitcoin ETF towards the end of 2020. Optimism over the SEC approving a Bitcoin ETF this year is high as a new commissioner is likely to be appointed this year by President-elect Joe Biden.