Summary Bitcoin ETFs have been approved and there has been activity from these funds, but it does not necessarily indicate Wall Street's bullishness on BTC. The net inflows into ETFs may not be a true reflection of Wall Street's sentiment as some of it may be due to traders needing a marginable long BTC position while shorting other assets. Other factors, such as pairs trades and basis trades, may also contribute to the inflows, suggesting that not all of the BTC bought is a result of bullish investors. This doesn't really impact the long run tailwinds for Bitcoin. This is a short article which takes a careful look at the mainstream narrative that Bitcoin ETFs signal institutional adoption, and that Wall Street is increasingly bullish on Bitcoin ( BTC-USD ). It's been three months since the spot ETFs were approved, and we’ve seen a good amount of activity from these funds. BlackRock’s iShares Bitcoin Trust ETF ( IBIT ) has been called the most successful ETF launch in history by Larry Fink. There were prominent headlines when IBIT surpassed MicroStrategy ( MSTR ) in the amount of BTC held. The sentiment within crypto circles seems to be that Wall Street is entering the game and that things are only going up from here. I just want to do a quick reality check on whether Wall Street is actually as bullish on BTC as people are saying. Based on what I have seen, I don’t think the ETF net inflows indicate Wall Street is bullish at all. We need to consider the net inflows because Grayscale Bitcoin Trust ETF ( GBTC ) has seen a huge amount of outflows. Here Are The Numbers Right before the approval of the spot ETFs, GBTC had about $29 billion in AUM. The BTC price on January 8 2024 was about $47,000. This means GBTC held about 617,000 BTC. GBTC AUM (YCharts) As of April 10 2024, the combined Bitcoin ETFs hold 838,729 BTC. Let’s round this number to 839,000 BTC. Bitcoin ETFs (heyapollo.com) So we started with only GBTC’s 617,000 BTC and now there are 839,000 BTC in all the funds, so it looks like Wall Street is super bullish right? Investors clearly bought up a net 222,000 BTC during this time - more than 1% of the entire maximum supply of 21 million BTC, and just slightly higher than MicroStrategy’s total BTC holdings. This is used by those in crypto to show that there is “insatiable demand” for BTC from Wall Street, and that ETFs are literally “eating multiples of the daily issuance of BTC.” Not so fast. Kerrisdale recently published a “ short report ” on MicroStrategy. Even though it was called a short report by the media, it was actually outlining a simple pairs trade between MSTR and BTC. Their thesis is that MSTR has become overvalued compared to the BTC it holds, trading at an unsustainably high premium, so it is time for a long BTC, short MSTR pairs trade. Now I think it should be quite obvious that Kerrisdale, or any other hedge fund making this bet, will use a Bitcoin Spot ETF as the “long BTC” leg of this pairs trade. ETFs are marginable securities, whereas real BTC cannot be margined in a brokerage account. It is much more capital efficient for a trader to use the ETFs and manage the risk within a single account. Even today when brokers offer crypto, they are actually enlisting the help of other firms which specialize in custodying and transacting crypto. The spot ETFs are the best option, and I believe many hedge funds may be betting on this trade, so they are inherently long BTC via the ETFs. Importantly, these longs are not long because they are bullish on BTC. They are long only to capture a spread between MSTR and BTC. Such traders do not have any interest in BTC, yet they will nevertheless show up as ETF inflows. In other words, at least some of the 222,000 BTC inflow is due to traders needing a marginable long BTC position while shorting MSTR. How much dollars might be betting on this? Well, the short interest on MSTR is about 19% of outstanding shares. Let’s assume some of these are unhedged shorts and others have to do with the convertible debt issuance. I also think that some hedge funds will do this long/short but use MSTR options for the short position. This is effectively a “synthetic short” position which won’t show up on the short interest. They could sell a call and buy a put. Indeed, the puts to call ratio for open interest has been approaching 1, indicating that roughly the same amount of contracts exist for both puts and calls. MSTR Puts/Calls OI (Schwab) Assuming much of the short interest is betting on this pairs trade, and assuming that derivatives are used for some of the MSTR shorts (thus obfuscating and understating the true amount of short positions), I'm guessing maybe 20% of the shares outstanding in notional short value in this pairs trade exists - as a combination of options and shares sold short. Personally I think 20% is a conservative figure. There’s more. The market cap of MSTR is $26.3 billion and they hold 214,246 BTC, worth about $14.8 billion. So the premium over owned BTC is about 78%. So to get a dollar-equivalent MSTR/BTC pairs trade, you'd need to be long about 1.78x as much BTC as what the MSTR shares you are shorting is supposed to represent. For example, 100 MSTR shares represent 1.26 BTC held by MicroStrategy. But 100 MSTR shares is worth about 2.24 BTC, so to actually establish a dollar-equivalent pairs trade where you short 100 MSTR shares and are long the same dollar amount as a hedge, you need to be long 2.24 BTC, or whatever that value is in your chosen Bitcoin ETF. So if 20% of the shares outstanding in notional value is short, then about 20% x 1.78 x 214,246 = 76,271 BTC is needed for the long leg of the pairs trade. That would mean 76,271 BTC of the 222,000 net inflow of BTC is actually not bullish on BTC. But that’s not all. Let me direct your attention to the Commitment of Traders (COT) report regarding the Bitcoin futures trading on the CME (/BTC, where each contract is 5 BTC of notional value). The recent COT report reveals about a net 16,000 contracts short on the behalf of "leveraged traders." Again, it is likely there is a pairs trade going on. More specifically, this is what is called a “basis trade.” You see, /BTC futures have been trading at a sizable premium to the BTC spot price. The “basis” is the technical term for this premium. The basis can be captured by going long in the spot market and going short in the futures market. Right now, with the June futures priced at $71,400 and the spot price at $69,500, the basis is an annualized return of 16%. And this is a pretty much guaranteed return as it only relies on the CME remaining solvent. BTC Futures (CME) So 16,000 short contracts represent 80,000 BTC, which again will be purchased via the marginable spot ETFs. These will look like inflows, but they do not represent bullishness in BTC itself. So in total, MSTR and the /BTC futures are probably responsible for 156,000 BTC of inflows which are not indicators of bullishness. To complete this analysis, we need to look at the outflow which was not a sign of bearishness nor was it a sign of wanting to switch from GBTC to an ETF with a cheaper fee. The main culprit here is Genesis, which has sold a lot of GBTC shares to redeem about 32,000 BTC for its creditors. This is an outflow from the ETFs which should be added back in to the net inflow figure. So all in all we have: 156,000 BTC inflow from pairs and basis trade 32,000 BTC outflow which was forced from Genesis 222,000 net inflow into ETFs when we just consider the delta between what GBTC had pre-approval to what the ETFs hold in total right now 222 - 156 + 32 = 98, so only 98,000 BTC were bought by bullish BTC investors. I would like to add that this is probably an overestimate too. There could be a lot more than just 20% of MSTR shares in notional short value. The actual short interest was 19% and there could be a lot more shorting from derivatives than what I have assumed here. Also, MSTR isn’t the only Bitcoin equity which could be involved in a long/short strategy. Some Bitcoin miners may be in some trouble after the Halving. Miners are very leveraged and most have bad margins. These could also be pairs trade candidates. That would mean even more non-bullish inflows. Lastly, I also don’t know how many are only bullish in the short-term, like in the form of a momentum trade. The narrative that Wall Street is eating up BTC with an insatiable hunger is, to me, a very dangerous form of confirmation bias which could lead to crazy, unrealistic projections. Should You Be Bullish On Bitcoin? I am 100% allocated to BTC or BTC-adjacent positions (including the ETFs and MSTR in my Roth). I think you should be bullish, but not because you think Wall Street grabbed 222,000 BTC in just 3 months after launching the ETFs. The Halving is coming up and there are many macro catalysts. I think global liquidity is surely to rise, and this has been very helpful for BTC. I covered developing catalysts for this crypto bull cycle which could make this bull run extremely Bitcoin-centric in this article . I also believe there is a lot to be said about Bitcoin mining becoming an integral part of energy grid infrastructure. People will start to realize that BTC was one of the best ESG assets after all, since it does so much for renewable energy and communities in developing nations . Bitcoin is surely here to stay. Wall Street might not be bullish per this analysis, but the ETFs have undoubtedly opened the floodgates to vast pools of capital, although I believe these pools haven’t yet begun to enter in any sizable volume. Did you know that this is the first time in Bitcoin’s history that it broke previous all-time highs before the Halving? There is definitely some bullishness under the surface. I’m still buying BTC, hand over fist.
