Every weekday at 9:30 a.m. ET and 3:30 p.m. ET, there is a subtle shift in the digital asset markets.
This shift hints at a growing market dynamic that is flying under the radar.
It showcases not only how small the market for digital assets is… but also how impactful the new Bitcoin exchange-traded funds (ETFs) are to the market, creating dozens of trading opportunities.
Since their launch on January 11, 2024, Bitcoin ETFs have witnessed more than $17 billion in flows. That’s just the fresh capital flowing into these vehicles in about eight months.
There was such a massive stream entering this new asset class that Bloomberg was running commentary such as, “Another day, another record across the booming world of Bitcoin ETFs.”
Their success highlighted the pent-up demand from investors wanting to gain exposure to this emerging asset class. Both retail and institutional investors wanted exposure to Bitcoin but hadn’t been willing to convert from fiat currencies to bitcoin.
They just wanted to be able to buy Bitcoin through normal equity brokerages.
And it’s as if nobody cared about price either. Investors were willing to get in at any price.
The fresh wave of demand caused the price of Bitcoin to rocket nearly 55% higher in the 60 days that followed.
And that was after investors were front-running the launch of these ETFs, causing the price to run up over 70% in the 90 days before the ETFs launched. It was a buy the rumor, buy more on the news event. And it was simply incredible.
After several months of this massive rally, the price of Bitcoin and the market finally began to cool. Nothing goes straight up forever. And it’s the sort of market action that investors should welcome.
It’s normal for a growth asset to take a breather and consolidate from time to time before moving on to new all-time highs. And pullbacks are even better, giving tuned-in investors the opportunity to increase their positions.
What makes us so confident that Bitcoin is preparing for another leg higher is how the ETF inflows never stopped.
Capital has continued to seek exposure to Bitcoin despite how it’s disappeared from mainstream media headlines and its price has sagged.
In the chart below, we can see this dynamic playing out. Price is moving sideways and sagging. Meanwhile, the capital inflows have risen 33% in the last three months.
This consistent capital inflow has resulted in the top 10 Bitcoin ETFs commanding more than $55 billion worth of Bitcoin under management. That’s about half what all the gold ETFs hold. And this momentum will soon surpass the behemoth GLD ETF with its $68 billion in gold.
The reality is that this asset class has become impossible to ignore. And with these substantial flows, the landscape of digital assets has changed forever.
The Price Drift
Unlike equities, Bitcoin trades 24 hours a day, seven days a week. In a perfect world, each hour represents about 4% of the trading volume of the day.
The reality is much different.
The lion’s share of daily volume happens in two thirty-minute windows. During these two windows, volume more than doubles.
It’s the thirty minutes after the New York Stock Exchange rings its opening bell and a thirty-minute window that begins one hour before that same bell closes the markets.
These two thirty-minute windows represent almost 9% of the day’s volume. These five hours throughout the week often represent more volume than is seen on an entire Saturday or Sunday.
These short windows see incredible trading volumes.
But what’s important to note here is that this effect, this spike in trading volumes at certain times during the day, didn’t exist before the Bitcoin ETFs.
Because bitcoin ETFs trade as equities, traders come out of the gates at the beginning of their day when the markets open. This is a similar dynamic for traditional equity markets.
The 3:30 p.m. ET window is the more interesting of the two. It speaks to a possible rebalancing that takes place with ETFs.
ETFs need to maintain a one-to-one ratio of Bitcoin on their book to the amount of ETF shares outstanding in the market. And they typically do this before the day comes to an end.
This means if broker-dealers need more shares to give their clients, then these ETF issuers need to go out and buy more Bitcoin from the digital asset markets to issue new shares of the ETF.
That might seem rather nuanced, but we can see that this rush results in the bitcoin price moving for several hours after the close.
We can think of it as the “drift effect.”
Looking back at our previous chart, we should be able to notice a strong relationship between the two lines. When one moves up, the other moves up with it. And vice-versa.
So when flows are positive, price tends to rise. Simple enough. More money coming in pushes an asset’s price higher.
But by looking at some hypothetical returns, we can see just how much this influences this market.
For the example below we recorded Bitcoin’s price just before this volume surge at 3:30 p.m. ET and recorded the price again for our hypothetical sell – 2 p.m. and 8 p.m. ET, in this case.
Just look at the results…
The hypothetical daily trade here would have resulted in 11.2% returns after five days. This is during a week that saw Bitcoin gain just over 9% from the Monday open to the Friday close.
This means this market dynamic of capital flowing into Bitcoin ETFs and ETFs having to “balance” their books is moving the market each day.
What’s more is that the rest of the digital asset market is moving with it. The direction of Bitcoin impacts the rest of the digital asset market.
The difference is that the rest of the market is made up of smaller-market-cap digital assets. These assets rise and fall with even greater magnitude as a result.
If we look at digital assets outside the 10 largest by market cap, they collectively rose nearly 17% last week while Bitcoin rose just over 9%. That’s nearly twice the move compared to Bitcoin.
With thousands of tokens to track, it can be overwhelming to seek out better setups to take advantage of this ETF dynamic.
That’s why Brownstone Research’s Perceptron is so instrumental.
It can track market conditions for all digital assets to find the highest probability trading opportunities. It’s an incredible piece of software – an artificial intelligence – that has consistently generated impressive returns in both bear and bull markets.
Our goal at Brownstone Research is not just to ensure that our subscribers are on top of every major growth and technological trend in the markets, but also to use bleeding-edge technology to make us even better investors and traders.
We’re still in the early stages of a multi-year bull market in digital assets. Blockchain technology is still emerging as a technological trend. That means these opportunities are looking better than ever.
In the coming months, we’re going to be reinstituting coverage of digital assets at Brownstone Research for both trading and buy-and-hold investment opportunities. There have been a lot of advancements since Brownstone readers last saw the Perceptron, which means there is a lot to look forward to.
More on that soon.
Regards,
Jeff Brown & Ben Lilly