Here's why the approval of a US bitcoin ETF would send the cryptocurrency tumbling in the near term, according to JPMorgan
Summary List Placement Approval of a bitcoin exchange-traded fund in the US could pull investors out of a popular trade and erode a key support of the cryptocurrency's lofty price, JPMorgan strategists said Friday. Institutional investors largely invest in the Grayscale Bitcoin Trust for regulatory reasons instead of directly buying bitcoin. But the trust touts a premium to the underlying token. The Securities and Exchange Commission is expected to authorize a bitcoin ETF in 2021. The introduction of such a fund could drive institutional investors out of Grayscale's trust and cut into the premium. While outflows from Grayscale's trust could present a near-term pressure for bitcoin prices, JPMorgan still expects bitcoin ETFs to benefit the cryptocurrency in the longer term. Watch bitcoin trade live here.
The introduction of a bitcoin exchange-traded fund in the US is likely to pull investors out of a popular buying option and create a near-term drag on the token's price, JPMorgan said Friday. The Securities and Exchange Commission is expected to approve such an ETF this year as the Biden administration brings new leadership to the agency. Regulatory authorization would strengthen bitcoin's investment case in the long term. But more immediately, approval would likely sap investor capital from the Grayscale Bitcoin Trust, according to JPMorgan. While retail investors typically buy bitcoin directly, institutional investors largely purchase stakes in Grayscale's trust for regulatory reasons, according to the strategists. The fund effectively holds a monopoly on institutional capital flowing into bitcoin and therefore boasts a large premium to the cryptocurrency it tracks. A bitcoin ETF would offer an alternative to the Grayscale trust and cut into the premiums that funds pay, the team said. Read more: The CIO of a $500 million crypto asset manager breaks down 5 ways of valuing bitcoin and deciding whether to own it after the digital asset breached $40,000 for the first time "A cascade of GBTC outflows and a collapse of its premium would likely have negative near-term implications for bitcoin given the flow and signaling important of GBTC," the bank said in a note to clients. Bitcoin cooled to start the week after soaring to nearly $42,000 on Friday. The cryptocurrency tumbled as much as 19%, to $30,775.26, on Monday as investors secured profits from its weeks-long rally. Bitcoin still sits roughly 90% higher over the past month. JPMorgan didn't estimate just how much an ETF could slam bitcoin, but the purchase structures used by institutional investors provide some hints. A typical trade for monetizing the Grayscale trust's premium involves borrowing bitcoin, placing the tokens in the trust, and receiving shares with a six-month lockup period. Investors then hedge the stake by shorting GBTC shares. Read more: BANK OF AMERICA: Buy these 10 Dow stocks to take advantage of rich dividends and a long-term strategy primed for a comeback in 2021 Some institutional investors likely entered the monetization trade during the second half of 2020 with the intention of selling after the lockup period, JPMorgan said. The strategists estimated that roughly 15% of GBTC shares were being used for the monetization trade. Once the six-month lockup expires, a significant portion of the trust's investors could rush for the exits to pocket the premium. A bitcoin ETF would only intensify the exodus, the bank added. Such a fund would erode Grayscale's monopoly status and could prompt more investors to leave the trust. Bitcoin traded at $33,625.67 as of 8:48 a.m. ET on Monday. Now read more markets coverage from Markets Insider and Business Insider: 'This one feels a lot like 1999': An ex-Wall Street strategist breaks down why he is approaching the markets with a 'tactically bullish' strategy – and 3 pieces of advice on how to play a market set for a correction 3 reasons why bitcoin has doubled in less than a month — and why experts think it won't repeat its 2017 crash US payrolls post surprise drop of 140,000 in December, the first decline since April as America's labor-market struggles continue Join the conversation about this story » NOW WATCH: What makes 'Parasite' so shocking is the twist that happens in a 10-minute sequence
More like this (3)
Tesla's bitcoin investment reportedly made more profit this year than car sales in the whole of 2020
Summary List PlacementTesla's $1.5 billion bitcoin investment didn't just make headlines, it has also made the...Summary List PlacementTesla's $1.5 billion bitcoin investment didn't just make headlines, it has also made the company more profit than its car sales last year, according to a Times of London report. On Friday, the cryptocurrency smashed through the $55,000 level, bringing its market cap above $1 trillion. This means if Tesla owns the same amount of Bitcoin as it did on January 31,...
JPMorgan and Morgan Stanley are eyeing bitcoin. Here are the big Wall Street names warming to cryptocurrencies
Summary List PlacementA $150 billion investment arm of Morgan Stanley is weighing up getting involved in...Summary List PlacementA $150 billion investment arm of Morgan Stanley is weighing up getting involved in bitcoin, according to a report, as the soaring price of the biggest cryptocurrency garners attention on Wall Street. In another example of the rising interest, JPMorgan co-president Daniel Pinto said on Friday he's "sure" demand for bitcoin will pick up to the extent that the Wall Street giant...