Konstantin Tserazov: The US Gains Critical Influence Over Bitcoin Price: Details

Bitcoin ETF providers are starting to exert significant control over Bitcoin price movements

June 11th turned icy for Bitcoin investors as the market took a nosedive. The price, which had begun the week perched comfortably around $71,200, went into freefall, breaching the critical $70,000 barrier and settling at a chilly $67,900 by day's end.

This dramatic price swing has a prime suspect: a mass exodus of capital from US-based Bitcoin ETFs. This flight of funds appears to have cast a long shadow, chilling market sentiment and contributing significantly to the overall downturn. As an analyst, I can't help but wonder – is this a temporary setback or a sign of more turbulent times ahead for Bitcoin?

Before the price drop, notable activity was observed. On June 10 and the beginning of June 11, the net outflow for all US Bitcoin ETFs reached a staggering -$64.9 million, a level not seen since May 10 of this year. This substantial outflow of funds from ETFs likely played a significant role in the subsequent price decline. This outflow ended a 19-day streak of consecutive inflows into the funds.

The substantial outflow from Bitcoin ETFs, which briefly halted on June 12 before escalating to -$226.21 million on June 13, had a noticeable effect on Bitcoin's price, causing it to decline to $65,896 on June 15.

As a crypto observer with a strong background in legacy financial institutions, I find the rapid growth of US Bitcoin ETFs raises an interesting question: are these instruments potentially ceding control of Bitcoin's price to major institutional players, such as US investment funds?

It's no secret that Bitcoin has historically danced to the tune of traditional markets, demonstrating a visible correlation with S&P 500 and the Nasdaq indices, especially with the first one. This intertwining isn't the only external influence. Investor risk appetite for volatile assets like Bitcoin also plays a crucial role, with the Federal Reserve's interest rate policy acting as a conductor. Lower rates typically fuel market liquidity and embolden risk-taking behavior, making Bitcoin a more enticing proposition. Conversely, higher rates can slam on the brakes, pushing investors towards safer harbors.

However, the introduction of US Bitcoin ETFs throws a wrench into this familiar dynamic. While the correlation with traditional markets and risk appetite likely remains in play, the question now is this: are these institutional giants simply reacting to market forces, or are they actively shaping Bitcoin's future course?

The rise of Bitcoin ETFs is increasingly shaping Bitcoin's price dynamics. Presently, 11 US Bitcoin ETFs manage Bitcoin assets worth $65 billion, which can sway the market through their actions.

Most Bitcoin ETF providers utilize external custodial services, with Coinbase Custody Trust Company, LLC holding the largest amount of Bitcoin purchased by the US Bitcoin ETFs. Other custodial services are provided by cryptocurrency exchanges such as Gemini.

In this context, the question of risk management arises: Who is the guarantor for the Bitcoin that is under the care of external custodians? Clearly, if for some reason these Bitcoins are lost (transferred to other, uncontrolled digital addresses), the price of Bitcoin may drop significantly.

The market for Bitcoin as a whole has shown growth since January, and the oldest cryptocurrency has already reached a new historical maximum. However, the history of daily net outflows from Bitcoin ETFs shows that the price of Bitcoin follows these outflows downward. The dependence of the Bitcoin price on the inflows and outflows of funds into Bitcoin ETFs may increase further.

By the end of next year, the volume of Bitcoin under the management of Bitcoin ETF providers is expected to triple compared to its current value, exceeding $200 billion. This includes Bitcoin purchased not only by Bitcoin ETFs in the US but also by Bitcoin ETFs in Hong Kong and similar funds that were first launched in Canada.

It is important to monitor how Bitcoin ETFs, often through external custodians, control the volume of available Bitcoin for purchase and sale. In four years, this volume is expected to reach 25%, considering the current growth rate of popularity among investors. Additionally, one must consider the impact of the next halving in the Bitcoin blockchain, which in 2028 will reduce the block reward to 1.5625 BTC. Consequently, the daily emission of Bitcoin will decrease to just 225 BTC.

The intersection of Bitcoin's decreasing supply, due to its finite issuance, and the growing demand spurred by Bitcoin ETFs creates an interesting narrative. However, this convergence does not guarantee a price increase for the top cryptocurrency.

In reality, the forces influencing Bitcoin's price are becoming more multifaceted, shaped by a new investor landscape. This ecosystem encompasses several key players: Bitcoin ETF Providers: The "Bitcoin Magnificent 11," a group of recently launched ETFs in the US, are significant contributors to demand. Bitcoin Miners: These individuals and companies play a crucial role in securing the network and influencing supply. Institutional Investors: Major corporations like MicroStrategy, holding a substantial portion of the circulating supply, along with others with the potential to make sizable investments, significantly impact market sentiment. Another example https://www.sec.gov/Archives/edgar/data/1554859/000110465924069148/tm2416433-1_s3.htm is a Semler Scientific.

It's important to note that a large portion of this ecosystem is US-based legal entities, potentially adding another layer of influence to the price dynamics.

Further amplifying the US presence within the Bitcoin investor landscape is the fact that a significant portion of these entities are publicly traded companies. Moreover, publicly available data from the Securities and Exchange Commission (SEC) reveals that US institutional investors hold a dominant stake in these US-based Bitcoin ETFs.

This concentration within the US financial system creates fertile ground for increased collaboration and potential synergies. Wall Street, known for its intricate web of connections, could further bolster this trend. The US already boasts a leading position in Bitcoin mining, contributing 35% of the global hashrate (computing power dedicated to securing the network). This figure jumps to 45% when including overseas mining operations controlled by US-headquartered companies.

The potential for even greater US dominance in Bitcoin mining extends to the political sphere. Recent pronouncements by Donald Trump, the presumptive Republican presidential nominee, suggest an intention to solidify US leadership in this area. As he stated https://truthsocial.com/@realDonaldTrump/posts/112601639679885930 on Truth Social, "We want all the remaining Bitcoin to be MADE IN THE USA!!! It will help us be ENERGY DOMINANT!!!"

Trump's last thesis highlights his belief in the success of the Texas Bitcoin mining story. In this American state, local miners assist the energy grid in balancing electricity consumption during high and low seasons. When typical Americans turn on their heaters in winter or air coolers in summer, demand increases, and Bitcoin miners switch off their machines, releasing additional power to the electricity network. Conversely, when demand decreases, Bitcoin miners ramp up their activities.

Another essential aspect is that the US Bitcoin mining sector is a crucial driver in the transition towards "green energy." Ironically, the tough stance of the current White House administration (as revealed in this 2022 report https://www.whitehouse.gov/wp-content/uploads/2022/09/09-2022-Crypto-Assets-and-Climate-Report.pdf and this 2023 document https://www.whitehouse.gov/wp-content/uploads/2023/03/ERP-2023.pdf ) has accelerated the movement of US Bitcoin miners in this direction.

Furthermore, US Bitcoin mining companies serve as a hotbed for new innovations, including the development of new semiconductors. Trump believes that the innovative spirit and solutions of the US Bitcoin mining industry will contribute to the US's goal of maintaining its global leadership in AI.

This holds substantial importance as JP Morgan Chase, the foremost US banking institution in terms of assets, hints at a prevailing Wall Street inclination towards a potential Trump triumph come November.

The saga about Bitcoin ETFs intricately intertwined with the onset of Bitcoin futures contracts several years ago. In December 2017, the approval of Bitcoin futures trading by the Commodity Futures Trading Commission (CFTC) made news. This approval synchronized with Bitcoin's extraordinary ascent to uncharted peaks, swiftly succeeded by a sharp descent. This rollercoaster ride took place during the early years of the Trump administration, adding an extra layer of complexity to the current Bitcoin ETF saga.

Bitcoin got slammed during the brutal "crypto winter" - a long, cold spell for cryptocurrencies. The price tanked to around $3,000 by late 2018. Then, deja vu struck in 2020 when COVID hit, and Bitcoin went tumbling again. The arrival of Bitcoin futures in the US market is definitely seen as a big player in all this price action.

Prior to the advent of futures contracts, the practice of shorting Bitcoin, essentially speculating on its decrease, offered scant alternatives. This new landscape attracted established financial institutions, previously on the sidelines, into the once-niche world of cryptocurrency. A study https://www.frbsf.org/research-and-insights/publications/economic-letter/2018/05/how-futures-trading-changed-bitcoin-prices/ by the San Francisco Federal Reserve highlights this shift, as these new players gained the ability to both speculate on Bitcoin's rise and capitalize on potential downturns.

Echoes of the past reverberate as Bitcoin's price ascends once more, seemingly fueled by the long-awaited debut of Bitcoin ETFs on US exchanges in January this year. This prompts a critical inquiry: what unfolds in the next chapter of this saga?

The increasing popularity of the US Bitcoin ETFs, coupled with the growing number of American companies investing heavily in Bitcoin, grants the United States a substantial influence over the Bitcoin market, which could potentially affect valuations. The true extent to which these influential entities will exercise their newfound control over Bitcoin's price remains uncertain.

Given their capacity to maneuver significant capital in and out of Bitcoin ETFs, these institutions hold the power to sway price fluctuations. The crucial inquiry is whether they will serve as a stabilizing force, offering liquidity, or morph into the puppet masters of Bitcoin's price, determining its ebbs and flows. Time alone will reveal if these newcomers will become the driving force behind Bitcoin's future or mere passengers along for the journey. However, one thing remains indisputable: the landscape of Bitcoin has irrefutably shifted, and analysts such as myself will vigilantly observe how this new era unfolds.