Bitcoin ETFs Flash Signs of Stress as Discounts Reach Records

(Bloomberg) — Signs of stress are emerging in spot Bitcoin exchange-traded funds after the cryptocurrency fell to a two-month low.

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Prices of some of the largest ETFs tracking the token suffered the steepest reductions in the value of underlying assets in their short history on Tuesday after Bitcoin fell nearly 5%. The losses continued on Wednesday, with the original cryptocurrency falling as much as 5.6%.

The $16 billion iShares Bitcoin Trust (IBIT) closed about 1.7% below its net asset value on Tuesday; This was the biggest loss since it began trading in January. The $9 billion Fidelity Wise Origin Bitcoin Fund (FBTC) saw a 1.1% discount, while the $2.5 billion ARK 21Shares Bitcoin ETF (ARKB) and $2 billion Bitwise Bitcoin ETF (BITB) also saw a 1.4% discount. It closed at a huge discount, making it the biggest. There are records for each, according to data compiled by Bloomberg.

“This is not a good outlook,” said James Seyffart, ETF analyst at Bloomberg Intelligence, adding that it would be more concerning if the discounts were specific to a single fund. “The fact that we see premiums and discounts ranging from -1% to +1% and larger is a bit unusual. But it’s not groundbreaking.”

Read: Bitcoin Hits Two-Month Low After Worst Downturn Since FTX Crash

According to Seyffart, the discounts may be a sign of the frictions inherent in the traditional market overlap with Bitcoin; because, according to Seyffart, shares in the funds can only be created and redeemed for cash, rather than “in-kind” exchanges for Bitcoin.

Such price deviations tend to be short-lived due to the creation-redemption mechanism of ETFs. Still, the discounts underscore that volatility in Bitcoin could pose greater risks for ETF investors than funds focused on traditional financial assets. At the same time, volatility creates profitable opportunities for specialized trading firms, known as authorized participants, who are tasked with keeping the price of funds in line with their net asset values.

Virtu Financial Inc. “We are confident that the underlying volatility of crypto as an asset class will lead to ever-increasing opportunities in crypto ETFs,” Chief Executive Officer Douglas A. Cifu said in a conference call to discuss the company’s earnings last week. It included record performance in crypto market-making operations.

The story continues

Once ETFs were launched, expectations for fund flow were exceeded, and the group broke one record after another in the $8 trillion-plus U.S. industry. Hopes remain high that more institutions will establish a track record by adopting spot Bitcoin ETFs. But the Bitcoin price has historically been affected by the macroeconomic environment, and a case is being made for officials to signal a delay in interest rate cuts from the Fed following Wednesday’s policy meeting. This is often challenging terrain for speculative assets such as digital tokens.

“If Bitcoin continues to fall, it is possible it will remain at a discount, but time will tell,” said Mohit Bajaj, director of ETFs at WallachBeth Capital.

–With help from Katie Greifeld and Sunil Jagtiani.

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