Liquidity and Options Pave the Way for Bitcoin ETF Market Expansion

ETF trade volume is a small fraction of the market

However, the ETF market remains a small fraction of the overall bitcoin trading volume.

On October 11, which was a complete trading day, the Bitcoin futures market handled approximately $53.4 billion in trades, the spot market dealt with around $4.5 billion, and ETFs accounted for about $2 billion. In other words, the trading volume of ETFs represented only around 3% of the total Bitcoin market volume traded that day.

The basis trade is a portion of the total inflows

Determining the precise proportion of investments into ETFs related to the “basis trade,” or the cash-and-carry trade, can be tricky. This strategy is about investors buying the underlying asset at the same time as they sell a futures contract, which usually has a higher price. The aim is to take advantage of the difference between the current and future prices, known as the premium. As the futures contract approaches expiration, its price tends to match the current price, eliminating the arbitrage opportunity and enabling investors to pocket the difference in prices.

In this type of investment strategy, an individual holds both a long and short position on the same asset. This approach neutralizes the impact of market fluctuations because any changes in the asset’s underlying price are balanced out by the futures position. This way, the investor can secure the arbitrage premium without bearing the risk of the market moving in a specific direction.

IBIT’s biggest holders

By examining data from Fintel, we can take a look at IBIT’s leading shareholders, as detailed in their 13-F filings. Institutions with more than $100 million in assets under management (AUM) are required to disclose ETF acquisitions. Notably, prominent holders like Goldman Sachs and Jane Street Capital function as authorized participants (APs), participating in the creation and redemption of ETF shares. On the other hand, hedge funds such as Millenium Management and Capula Management seem to primarily utilize the ETF for basis trading. However, the State of Wisconsin Investment Board’s significant holding doesn’t appear to follow this strategy.

What can we expect moving forward

Previously, investment firm Bernstein described institutional basis trading as a “disguised strategy for integration.” They proposed that with increasing liquidity in the Exchange-Traded Fund (ETF) market, these trades might result in long positions. As ETFs grow to represent a larger portion of the overall market, this would further boost liquidity and investor involvement.

A significant factor that could drive the growth of ETFs is the approval of options linked to IBIT, which can be physically settled. These options, preferred by experienced investors, offer passive income opportunities through strategies like covered calls or allow mining companies to protect their positions. As more investors embrace ETFs, these aspects are likely to become increasingly important in the market.