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Exclusive | Bitcoin Spot ETF Trading Comprehensive Analysis: Is JPMorgan Actually Buying Bitcoin Long Positions in Bulk?

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Exclusive | Bitcoin Spot ETF Trading Comprehensive Analysis: Is JPMorgan Actually Buying Bitcoin Long Positions in Bulk?

The U.S. Bitcoin spot ETF has officially been listed for 12 trading days. Are you feeling overwhelmed by the daily analysis of trading fund data? Who exactly is entering the market? Has the Bitcoin spot ETF truly created a successful bridge between cryptocurrency and traditional finance? Let's break down the meaning behind this from the basic ETF trading market step by step!

Complete Analysis of Bitcoin ETF: Not Just Trading on Exchanges

Literally speaking, ETF is a product traded on exchanges, naturally the main trading venue is on exchanges! In fact, ETF trading is divided into "primary market" and "secondary market". In addition to exchanges, over-the-counter (OTC) trading is also an important source of liquidity. Therefore, the liquidity of ETFs cannot be measured solely by the average daily trading volume (ADV) on exchanges.

Overview of ETF Trading Markets

There are four market participants in the ETF trading market: ETF issuers such as Grayscale, BlackRock, Authorized Participants (AP), market makers, and retail investors.

There are three trading venues: the issuer's primary market, secondary markets: OTC, and stock exchanges.

Primary Market - How are ETFs Created and Redeemed?

New shares in ETFs are not created out of thin air when investors decide to buy. Instead, they are created in advance by Authorized Participants (AP) in a basket. This is also known as primary market trading for ETFs.

According to BlackRock's prospectus, the current list of Authorized Participants (AP) includes:

  • ABN AMRO Clearing USA LLC
  • Jane Street Capital, LLC
  • JP Morgan Securities LLC
  • Macquarie Capital USA Inc.
  • Virtu Americas LLC

The list may continue to grow in the future, but currently these five companies are the only entities able to create or redeem baskets of stocks related to the ETF.

A basket of stocks consists of 40,000 shares. According to BlackRock's latest data as of 1/29, the outstanding shares are 91.32 million, with each basket equivalent to approximately 22.79 BTC. This means that at least 22.79 BTC (1 basket) must be purchased whenever stocks are created for the ETF.

Secondary Market for ETFs - OTC Trading

OTC trading primarily involves market makers and APs conducting trades off-exchange. OTC trading liquidity is an important source of liquidity for ETFs. Most ETFs are traded by multiple market makers, which may already hold inventory shares.

The following chart shows the trading volume of the first day of the BlackRock Bitcoin Spot IBIT, where we can see: the highest trading volume is concentrated at the opening, with the volume coming from Finra's alternative display facility ADF, which is the so-called OTC trading market, where participants are the so-called APs or market makers.

Market makers are one of the liquidity providers in the market. In addition to buy and sell orders placed by retail investors in the secondary market, some of the trading volume comes from market makers. Market makers hold a certain amount of ETF units in hand, but they usually only place a small portion of buy and sell orders in the market, which is one of the hidden liquidity of ETFs. It is worth mentioning that APs usually also act as market makers, but market makers do not necessarily have to be APs.

Secondary Market for ETFs - Stock Exchanges

Exchanges like Nasdaq, the most well-known, where retail investors trade in the secondary market. Remember, in addition to retail investors, market makers also place orders on exchanges to provide liquidity.

APs are also Market Makers, Providers of Hidden Liquidity for ETFs

According to CryptoSlate's analysis report, to meet liquidity demands, APs typically purchase a basket of shares in advance and then sell them to the market. This process occurs once each trading day and uses the Bitcoin CF Reference Rate (BRRNY) to ensure that the issuance of shares is relative to the price of Bitcoin. Baskets of shares are created based on trading volume, and these new shares will appear in the fund inflow report of the ETF.

For example, if an AP purchases 7 million new shares from the ETF issuer, resulting in a total circulation of 70 million shares, and the net asset value (NAV) of the ETF is $22, the AUM will increase by $154 million to reach $1.54 billion. However, these shares may not have been sold on the open market yet, and the newly created shares may still be held by APs for future trading activities and liquidity.

If the price of Bitcoin falls, causing investors to sell ETF shares, the managed assets may not necessarily decline at the same pace. While the AUM in USD decreases due to the drop in Bitcoin value, the amount of BTC held in the fund remains constant until redeemed by APs.

Based on current data, the BlackRock IBIT continues to show net inflows, with many shares possibly belonging to APs who created the baskets and are holding shares in hand, yet to be distributed to the secondary market.

Have Major Financial Institutions Entered? JPMorgan Has Arrived

Therefore, many ETF shares are likely held by APs or market makers, as current Bitcoin spot ETFs operate in cash mode, so these institutions cannot purchase Bitcoin themselves or exchange their own Bitcoin for ETF shares. Instead, they must use cash to buy ETF shares, and the ETF issuer will buy Bitcoin on their behalf.

These large financial institutions, although not directly holding Bitcoin, indirectly hold long positions in Bitcoin through the purchase of Bitcoin spot ETF shares.

Illustration of ETF | What is the difference between the ETF cash mode preferred by the SEC and the BlackRock Bitcoin physical ETF?

According to information from Bloomberg terminals, the primary APs currently include Jane Street, Virtu, Macquarie, JPMorgan, Cantor Fitzgerald, ABN AMRO, and Marex, among others, including prominent traditional financial players. And this list may continue to grow, with reports that Goldman Sachs may also intend to participate as an AP in Bitcoin spot ETFs.

Analysis of BlackRock IBIT Data Shows Healthy Inflows

From the compiled trading data of the BlackRock IBIT for the first 11 days, it can be seen that:

  • Trading Volume: On the first day, there was a large amount of pre-stocked trading by APs, with trading volume reaching $1 billion, gradually declining afterward, but on the 11th day, 1/26, it rose again to $480 million, and the most recent 12th day data also reached $460 million.
  • Due to daily inflows, the yellow cumulative cash flow, and Bitcoin inventory (deep blue bar chart) are increasing, with approximately 52,028 BTC as of the 11th day.
  • The green line represents the reference Bitcoin price BRRNY, showing a downward trend, but due to overall net inflows, the AUM represented by the blue line continues to grow.

As for the concerns about the continuous outflow of funds from Grayscale GBTC, this situation has gradually eased in recent days. By the 11th day, GBTC had a total outflow of $5 billion, with a daily outflow of $255 million. The net inflows of the other nine ETFs offset the outflow of GBTC, reaching $58 billion.

Bloomberg's ETF analyst Eric Balchunas also shared a chart comparing the inflows of Bitcoin spot ETFs with the outflows of GBTC, stating that this situation is similar to the chart of active vs. passive funds and high-cost vs. low-cost funds.