A Troubling Sign or Mere Accounting Quirk?
The prices of some of the biggest spot-Bitcoin exchange-traded funds (ETFs) closed on Tuesday at their largest discounts to the value of their underlying assets since their launch. This type of dislocation is typically a concerning sign for an ETF, but the chief investment officer of one issuer called it “more an accounting quirk than a real issue” due to the unusual way in which these funds track the value of their Bitcoin assets.
Discounts Emerge as Bitcoin Prices Dip
The discounts appeared in closing data after the cryptocurrency sank to a two-month low on Tuesday, including a dip of about 2% between 3 p.m. and 4 p.m. New York time. This particular hour is when average prices are used to track the value of the ETFs’ Bitcoin holdings. The discounts were significant, with some of the largest Bitcoin ETFs facing their biggest discounts to date:
- The $16 billion iShares Bitcoin Trust (IBIT) closed about 1.7% below its net asset value (NAV) – the largest dislocation since its launch in January.
- The $9 billion Fidelity Wise Origin Bitcoin Fund (FBTC) saw a 1.1% discount.
- The $2.5 billion ARK 21Shares Bitcoin ETF (ARKB) and the $2 billion Bitwise Bitcoin ETF (BITB) both closed with discounts of more than 1.4%, also the biggest on record for each.
A Concerning or Ordinary Occurrence?
James Seyffart, ETF analyst at Bloomberg Intelligence, acknowledged the discounts as “not a great look,” but added that it would have been more concerning if the discounts were isolated to one fund. “It’s a little out of the ordinary in the fact that we’ve seen premiums and discounts in the range of -1% to +1% and this is bigger. But it’s not groundbreaking,” Seyffart said.
Contributing Factors: Portfolio Rebalancing and Price Volatility
Tuesday marked the last day of the month, a common time for investors to rebalance portfolios, especially around the 4 p.m. closing auction in the stock market. According to Teddy Fusaro, president of Bitwise, the largest Bitcoin ETFs saw heavy selling pressure near the equity market close, reaching a peak during the time leading into the closing auction.
Fusaro explained that the ETFs calculate net-asset value using a 60-minute time-weighted average price for Bitcoin, which can lead to differences between market prices and NAV during large price moves in the last hour of the day, as was the case on Tuesday.
“We expect such dislocations during periods of high volatility to be common and brief, often occurring in the last few minutes of trading,” Fusaro said.
Tracking Discrepancies: An Accounting Quirk or Real Issue?
Matt Hougan, chief investment officer at Bitwise, weighed in on the matter, writing in a post on X that since the premium and discount figures are based on average prices between 3 p.m. and 4 p.m. in what’s known as the CF benchmark reference rate, it is “more an accounting quirk than a real issue. A better measure of tracking is to chart a Bitcoin ETF vs. the spot price of Bitcoin and see how closely they match.”
Opportunities for Authorized Participants
While the discounts underscore how Bitcoin’s volatility may pose more complex issues to ETF investors than funds focused on traditional financial assets, the volatility also creates profitable opportunities for specialized trading firms known as authorized participants. These firms are tasked with keeping the price of the funds in-line with their net asset values.
Douglas A. Cifu, Chief Executive Officer of Virtu Financial Inc., expressed confidence in the sustained elevated opportunities in crypto ETFs due to the inherent underlying volatility of cryptocurrency as an asset class.
Fund Flow Expectations and Macro-Economic Factors
Despite the discounts, hopes remain high that more institutions will adopt spot-Bitcoin ETFs as they establish a track record. However, the price of Bitcoin has historically been affected by macro-economic factors, and a case is building for the Federal Reserve to signal a delay in rate cuts after officials conclude a policy meeting on Wednesday. This could create a tough backdrop for speculative assets like digital tokens.
Mohit Bajaj, director of ETFs at WallachBeth Capital, acknowledged the possibility of the discounts persisting if Bitcoin continues to slide, stating, “It’s possible it stays at a discount if Bitcoin continues to slide, but that remains to be seen.”
Navigating Volatility and Embracing Innovation
As the cryptocurrency market continues to evolve, the emergence of Bitcoin ETFs has introduced both opportunities and challenges. While the recent discounts have raised concerns, industry experts offer differing perspectives, ranging from accounting quirks to genuine volatility-driven issues.
In this dynamic landscape, investors and market participants must remain vigilant, closely monitoring market conditions and adapting to the inherent volatility of cryptocurrencies. Embracing innovation while exercising caution will be crucial in navigating the complexities of this rapidly evolving asset class.
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