Despite the groundbreaking launch of spot Bitcoin Exchange-Traded Funds (ETFs), led by industry giants BlackRock and Fidelity – which are among the top five ETF launches in the first month of all time – BTC’s price reaction has been remarkably muted. Prior to the launch of these EFTs, BTC rose to a peak of $49,040 on January 11.
Fast forward to today and BTC is currently settling at $51,000, marking a modest appreciation of 4.3%. This tepid performance has confused market observers, especially in light of the massive net inflows of $5.278 billion into all Bitcoin ETFs in just six weeks. In fact, these could have been significantly higher if there had been $7.398 billion in outflows from Grayscale’s GBTC.
The discovery of the bomb
Yet Ki Young Ju, CEO of CryptoQuant, may now have found the ‘real’ reason that has had an even bigger impact on Bitcoin’s price action in recent weeks. Ju’s analysis highlights the transfer of more than 700,000 BTC to Over-The-Counter (OTC) desks used mainly by miners in the weeks following the spot approval of Bitcoin ETFs – an equivalent of approximately $35.6 billion at current prices.
He shared the diagram below and declared: “700K BTC moved to OTC desks used by miners in last three weeks following approval of spot Bitcoin ETF.” This revelation has led to a reevaluation of the impact of such substantial transfers on Bitcoin market dynamics.
Ju later corrected his statement slightly, explaining: “I have some questions about the accuracy of the data. These OTC addresses are not only used by miners. It could be used by other whales. We will let you know which addresses caused this spike,” recognizing the complexity and multifaceted nature of these transactions.
The Bitcoin OTC mechanism explained
OTC desks facilitate direct transactions between two parties, unlike open exchanges where orders are matched between different participants. This trading method can handle large volumes of Bitcoin without immediately affecting the market price.
When significant amounts of BTC are bought or sold on public exchanges, the sudden increase in supply or demand can lead to significant price volatility. By opting for OTC transactions, large buyers, such as ETF issuers, can accumulate Bitcoin in large quantities without triggering the steep price increase that would inevitably follow if these purchases were made on spot markets.
So, Ju theorizes that the issuers behind the newly launched Bitcoin ETFs are strategically purchasing Bitcoin through OTC desks. This approach serves a dual purpose: it allows these entities to meet the demand of ETF investors by securing enough Bitcoin to support the ETF shares while mitigating the immediate price impact that such large-scale purchases would have if they would take place at open fairs.
The gist of Ju’s claim is that if the 700,000 BTC had been purchased on the spot market rather than through OTC channels, the influx of demand would likely have driven Bitcoin’s price significantly higher than the observed 4.3% increase. This moderate price action can therefore be attributed to the strategic use of OTC trades by ETF issuers and other large-scale buyers.
However, there is also a silver lining. What will happen if after the upcoming BTC halving in April, miners can only sell half of the current supply, but demand remains? Moreover, this restriction is not limited to miners only.
Given that OTC supply is finite and likely to be depleted quickly, it seems inevitable that a supply shock could impact the market once OTC reserves are fully tapped. When entities like BlackRock and others are forced to buy Bitcoin on the open market to support their ETFs, the BTC price could respond quickly.
At the time of writing, BTC was trading at $51,030.
Featured image created with DALL·E, chart from TradingView.com
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