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The cryptocurrency market can easily handle the trading volume of Bitcoin ETFs, which could be worth billions of dollars
A wave of investment money appears poised to pour into the cryptocurrency market if the U.S. Securities and Exchange Commission does as expected and approves bitcoin ETFs from a dozen companies in the coming days, as will virtually everyone, cryptocurrency expert or not. , they get. easier access to the world of bitcoin (BTC).
This would force ETF issuers to rush to purchase potentially tens of billions of dollars of the original cryptocurrency to meet a surge in demand from mom-and-pop (even grandma, grandpa and baby) investors. The current largest Bitcoin investment vehicle, a relatively difficult-to-purchase product called Grayscale Bitcoin Trust, has $26 billion in assets, giving a sense of the appetite for BTC even before the doors open.
Is the sector up to the task? Yes, according to major market players, who believe bitcoin trading is liquid enough to easily allow such gigantic purchases from issuers including BlackRock, Grayscale, Fidelity and Galaxy/Invesco.
To ensure that any large amount of capital is traded efficiently, two key players must intervene: trading firms called authorized participants (APs) and market makers.
APs create and redeem ETF shares, directing investor money into and out of the fund; While it may seem trivial, it is a vital part of ensuring that the price of an ETF remains closely linked to the value of the fund’s underlying holdings. With Grayscale’s trust, shares cannot be redeemed. This can lead to an oversupply of trust shares, putting downward pressure on their price. And, in fact, the trust fund has hovered well below its so-called net asset value in recent years – one reason Grayscale wants to turn it into an ETF.
While the work of APs is considered the “primary” market, in the “secondary” market, for example on exchanges, where the majority of trades are made, another key player is needed, market makers. Market makers build on the role played by APs by buying ETF shares when others want to sell them and vice versa. If prices get out of control, they can earn a profit by trading to bring them back in line. In some cases, market makers also play the role of AP.
Several large Wall Street firms have agreed to serve as APs for bitcoin ETFs: JPMorgan Chase, Jane Street and Cantor Fitzgerald. Others are probable.
The DRW trading company is one of the largest liquidity providers in the world. Its crypto division, Cumberland DRW, is preparing for bitcoin ETF onboarding of issuers and bitcoin sourcing to ensure it is ready when orders come in from APs if and when new investment vehicles come to market, the company told CoinDesk.
While it may seem like billions of dollars of bitcoin orders are too much for the market to handle, traders are confident that the market is efficient enough to absorb this type of trading volume.
“If there is demand, there will be supply,” Rob Strebel, relationship management manager at Cumberland DRW, said in an interview. “I would be surprised if issuers and regulators would allow this product to launch if they were not confident they could raise liquidity. I think it’s in everyone’s interest to make sure that liquidity is aligned and I’m confident that we will be able to provide the necessary liquidity.”
ETFs are attractive products for investors because they are relatively easy to access. In the United States, conventional brokerage accounts allow clients to buy essentially any of the thousands of stocks and ETFs listed in the nation. A bitcoin ETF would be as easy to buy as Apple stock.
Another strength: They tend to closely monitor the value of the asset they hold. Gold ETFs, for example, generally move in lockstep with the price of the gold they hold. As? Authorized participants dynamically create and redeem ETF shares to keep the fund’s price tied to the underlying asset.
Over the past 45 days, daily bitcoin trading has averaged around $22 billion on major exchanges, although there have been spikes of up to around $40 billion on some days, according to CoinMarketCap.com data analyzed by CoinDesk. Observers believe this is enough to meet demand from bitcoin ETF issuers.
“The market can absorb this new level of demand for the ETF market,” Laurent Kssis, director of financial services firm CEC Capital and former chief executive of 21Shares, said in an interview.
While the new wave of money is potentially positive for the overall health of the market, it’s unclear whether it will have an impact on the price of bitcoin itself, which would depend on demand for the ETF and how quickly it arrives. added.
“Not every ETF is going to get this kind of traction,” he said. “I firmly believe that investment demand will be skewed towards BlackRock.”