Spot Bitcoin ETF Hangover: Weekend Trip or Long-Term Condition?

Spot Bitcoin ETF Hangover: Weekend Trip or Long-Term Condition?

Bitcoin-based products are likely to remain prominent on many investors’ radars.

Reviewed by: Staff
Edited by: James Rubin

$30, $22, $24 in that order.

That’s the price path of the iShares Bitcoin Trust ETF (IBIT), a $1.8 billion ETF that didn’t exist on public stock exchanges when the National Football League season ended two weeks ago! 

This is not the only time in history that an ETF has dropped 27%, then rallied back nearly 9%, all in its first two weeks out of the starting gate. But, at the risk of mixing sports analogies, this one is moving at the speed of a racehorse. And, it has 10 competitors! I’m talking of course about Bitcoin ETFs.

When I Googled that while writing this article, it generated 90 million results in one-half of one second. And that about sums up the fervor over spot Bitcoin ETFs. So, after that wild debut, what do IBIT, the product backed by ETF giant iShares, and its 10 mates do for an encore? Those mates were the spot Bitcoin ETFs that started in sync with IBIT on Jan. 10 a day after they received SEC approval.

Spot Bitcoin ETFs Future Uncertainty 

Angst over their future path is enough to give ETF watchers a headache, or worse. In fact, I’ll refer to this immediate follow-on period as the hangover period. Which naturally reminds many of us of a classic movie of that same name. Because for those who rushed to buy these new, highly touted vehicles the moment they opened their doors for new business, they may feel the investor’s version of a hangover.

What’s the remedy? A sharp rebound in the price of Bitcoin, which these ETFs now allow investors to get closer to replicating, versus earlier generations of bitcoin linked products such as ProShares Bitcoin Strategy ETF (BITO), whose asset base is right about where IBIT’s currently stands. 

This really all has more to do with two decisions any investor or financial advisor must weigh before entering the arena of a class of ETFs that can often trade like options more than ETFs or even stocks.

The first decision is whether they are a trader or investor. Traders buy based on anticipation of more immediate gratification. They also shed their holdings quickly if they are not working, or if they are working but they believe they have captured most of the profits from the trade, and don’t want to tempt fate. 

Similar to Stop Loss Orders? 

This is especially the case with cryptocurrency ETFs, since bitcoin is a 24/7 market. For ETF investors, that means that if bitcoin trades at one price at 4:00 p.m. Eastern Time when U.S. stock markets close, and that spot price is much higher or lower by the time the market opens at 9:30 a.m. the next business day, their investment will reflect the jump or drop in price at the market open.

This is not unlike the dilemma investors face with “stop loss orders.” For instance, IBIT closed this past Monday at $22.95, but opened Tuesday at $22.16. That’s more than a 3.5% drop from close to open, with no trading in the main stock market in between. If you had a regular stop order (versus a stop limit order) at $22.90, guess what? You were “filled” (i.e. you sold IBIT) at $22.16 or thereabouts on Tuesday morning. As I write this, IBIT just hit $24. That’s a financial hangover to traders. 

$200M in Assets 

Of course, not everyone is in this for the trade. For many, Bitcoin, crypto and the blockchain are, understandably, an existential moment in the history of commerce. Maybe.

But these investors and advisors, like the animal the Hangover movie bunch ended up “entertaining” during the movie, are the “tigers” of the crypto movement. Their fierce insistence on bitcoin reaching this stage of its evolution is the main reason we now have 11 spot bitcoin ETFs, and several of them are already north of $200 million in assets. So, to them, this initial dip in price on IBIT and the rest are just a little “tiger snooze” as Alan from the hangover pondered in that quote above. 

Part of the pent-up demand from retail investors from IBIT and its 10 pals was based on anticipation that institutions would soon pile into this new asset class, in a way they have used ETFs to efficiently own other types of assets, after years of having to trade securities individually.

The “basket” case for ETFs (pun intended) is as valid as any bullish argument for spot Bitcoin ETFs. Will it come to fruition? That’s for the markets to work out. 

Rob Isbitts' Wall Street career spans 5 decades and multiple roles, all dedicated to providing clarity to investors by busting classic myths and providing uncommon perspective. He did so as a fiduciary investment advisor, Chief Investment Officer and fund manager for 27 years before selling his practice in 2020. His efforts now focus exclusively on investment research, education and multimedia. He started ETFYourself and SungardenInvestment to provide straightforward commentary and access to his investment intellectual property for portfolio construction, stocks and ETFs. Originally from New Jersey, Rob and his wife Dana have 3 adult children and have lived in Weston, Florida for more than 25 years.