The following is a guest post from Shane Neagle.

Regardless of an asset’s fundamentals, its value is governed by one underlying feature – market liquidity. Is it easy for the wider public to sell or buy this asset? 

If the answer is yes, then the asset receives high trading volume. When that happens, executing trades at varied price levels is easier. In turn, a feedback loop is created – more robust price discovery boosts investor confidence, which boosts more market participation.

Since Bitcoin launched in 2009, it has relied on crypto exchanges to establish and extend its market depth. The easier it became to trade Bitcoin worldwide, the easier it became for the BTC price to rise.

By the same token, when fiat-to-crypto rails such as Mt. Gox or FTX fail, the BTC price suffers greatly. These are just some obstacles to Bitcoin’s path to legitimization and adoption.

Bitcoin’s journey to mainstream finance. Image credit: Pantera Capital

However, when the Securities and Exchange Commission (SEC) approved 11 spot-traded Bitcoin exchange-traded funds (ETFs) in January 2024, Bitcoin gained a new layer of liquidity.

This is a liquidity milestone and a new layer of credibility for Bitcoin. Entering the world of regulated exchanges, alongside stocks, ran the steam out of naysayers who questioned Bitcoin’s status as a decentralized digital gold.

But how does this new market dynamic play out in the long run?

The Democratization of Bitcoin Through ETFs

From the get-go, Bitcoin’s novelty has been its weakness and strength. On the one hand, it is a monetary revolution to hold wealth in one’s head and then be able to transfer that wealth borderless. 

Bitcoin miners can transfer it without permission, and anyone with internet access can become a miner. No other asset has that property. Even gold, with its relatively limited supply resistant to inflation, can be easily confiscated as it happened in 1933 under Executive Order 6102.

This means that Bitcoin is an inherently democratizing wealth vehicle. But with self-custody comes great responsibility and space for error. Glassnode data shows that around 2.5 million bitcoins have become inaccessible due to lost seed words that can regenerate access to the Bitcoin mainnet. 

This is 13.2% of Bitcoin’s 21 million BTC fixed supply. In effect, self-custody induces anxiety among both retail and institutional investors. Would fund managers engage in Bitcoin allocation with such risk?

But Bitcoin ETFs changed this dynamic completely. Investors looking to hedge against currency debasement can now delegate the custody to large investment firms. And they, from BlackRock and Fidelity to VanEck, delegate it to chosen crypto exchanges like Coinbase.

Although this reduces Bitcoin’s self-custody feature, it boosts investor confidence. At the same time, miners, via proof-of-work, still make Bitcoin a decentralized asset, regardless of how much BTC is hoarded within ETFs. And Bitcoin remains both a digital asset and a hard asset grounded in computing power (hashrate) and energy.

Bitcoin ETFs Reshaping Market Dynamics and Investor Confidence

Since January 11th, Bitcoin ETFs opened the capital floodgates to deepen Bitcoin’s market depth, resulting in a $240 billion cumulative volume. This substantial influx of capital has also shifted the break-even price for many investors, influencing their strategies and expectations about future profitability.

Yet, despite the launch being widely successful in exceeding expectations, negative outflows have gained ground as Bitcoin ETF hype subsided.

Spot Bitcoin ETF flows, image credit: Block

As of April 30th, Bitcoin ETF flows netted negative $162 million, marking the fifth consecutive day negative outflows. For the first time, Ark’s ARKB outflow (yellow) outpaced GBTC (green), at negative $31 million vs $25 million respectively.

Considering this was after Bitcoin’s 4th halving, which reduced Bitcoin’s inflation rate to 0.85%, it is safe to say that macroeconomic and geopolitical concerns temporarily overshadowed Bitcoin’s fundamentals and deepened market depth.

This was even more evident when the Hong Kong Stock Exchange’s opening of Bitcoin ETFs failed to deliver. Despite opening capital access to Hong Kong investors, the volume accounted for only $11 million ($2.5 million in Ether ETFs), compared to the expected $100 million.

In short, Hong Kong’s crypto ETF debut was nearly 60x less than in the US. Although Chinese citizens with registered HK businesses could participate, mainland Chinese investors are still prohibited.

Likewise, taking into account that the New York Stock Exchange (NYSE) is approximately five times larger than HKSE, it is not likely that HKSE’s Bitcoin/Ether ETFs are going to exceed $1 billion flows in the first two years, according to Bloomberg ETF analyst Eric Balchunas.

Future Outlook and Potential Challenges

During the Bitcoin ETF liquidity extravaganza, BTC price probed the above-$70k threshold multiple times,…



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