Popular Science | How is the price of a Bitcoin ETF determined?

At 4 a.m. on January 11, Beijing time, the U.S. Securities and Exchange Commission (SEC) simultaneously approved 11 spot Bitcoin ETFs. This is a historic moment worthy of highlight in the history of Bitcoin and even the entire crypto market. Spot Bitcoin The ETF finally passes and Bitcoin turns a new page.

So what is the principle of ETF? How to track institutional Bitcoin ETF prices? BlockBeats organizes existing data.

ETF (Exchange Traded Fund), exchange-traded fund. It represents part of the ownership of the underlying assets, so ETF products support redemption, and ETF products cannot be issued out of thin air. The issuer needs to hold underlying assets of equivalent value before issuing ETFs.

A Bitcoin ETF is a certificate whose price is tied to the price of Bitcoin.ETFs are divided into spot ETFs and futures ETFs.

Among them, the Bitcoin futures ETF is a protocol. It is not bound to the spot price of Bitcoin and is similar to an expiration contract. You can sign an agreement to purchase or sell Bitcoin at a certain time in the future. In other words, if you open a Bitcoin futures ETF, you don’t need to spend a penny to buy Bitcoin.

The Bitcoin spot ETF is different in that it is bound to the price of Bitcoin spot. Every spot ETF you buy corresponds to one spot Bitcoin.

ETF price change tracking

In the fierce competition among Bitcoin spot ETFs, the ETF fees set by each company are of decisive importance, which not only affects investors’ choices, but also significantly affects the company’s market competitiveness. ETF fees, as management costs borne by investors, are directly related to investment return, so when choosing ETF products, investors tend to give priority to options with lower fees.

Updated fees as of January 11 are shown below. Hashdex charges 0.90%, ARK 21Shares Bitcoin ETF (ARKB) charges 0.0% (0.21%), Bitwise charges 0.0% (0.2%), Franklin charges 0.29%, BlockRock charges 0.2% (0.3%), VanEck charges Fees 0.25%, WisdomTree charges 0.0% (0.3%), Invesco and Galaxy Digital charges 0.0% (0.39%), Valkyrie Investment charges 0.0% (0.49%), Grayscale charges 1.5%, Fidelity charges 0.0% ( 0.25%).

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1.SEC: You can register on the SEC’s official website and fill in your email address to get official news and decisions about Bitcoin ETF and other related matters as soon as possible. As a regulatory agency, the information released by the SEC is the most authoritative and accurate.

In terms of grasping market information, you can also follow some well-known industry analysts, such as Bloomberg ETF analystsEric Balchunas and James Seyffart, they have in-depth research and insights on Bitcoin ETFs. Follow their social media to get more professional analysis and predictions, and turn on the little bell to get the news as soon as possible.

1. ETF management company official website: You can see basic information such as issued shares, expense rate, total Bitcoin trust amount, and the amount of Bitcoins per share, as well as transactions such as market price, market price changes, and daily trading volume (shares) data.

· Grayscale Bitcoin Trust

· Bitwise Bitcoin ETF

· iShares Bitcoin Trust

· Valkyrie Bitcoin Fund

· ARK 21Shares Bitcoin ETF

· Invesco Galaxy Bitcoin ETF

· VanEck Bitcoin Trust

· WisdomTree Bitcoin Fund

· Fidelity Wise Origin Bitcoin Fund

· Franklin Bitcoin ETF

· Hashdex Bitcoin ETF: Currently, spot exposure has not been added to the Hashdex Bitcoin ETF, which is currently awaiting final approval from the U.S. Securities and Exchange Commission (SEC).

1. Trading platform: Among the 11 spot Bitcoin ETFs approved by the SEC, six ETFs will be listed on the Chicago Board Options Exchange (CBOE), three will be listed on the New York Stock Exchange (NYSE), and two will be listed on the Nasdaq Dak trade. Enter the code of the Bitcoin ETF that will be listed on the platform’s search interface to view relevant information.

· NYSE

· CBOE

· Nasdaq

1. Data network:Tradingview、Yahoo Finance、CNBC、FinGuidesInvestors can enter the ETF code they want to query in the search box of these websites to view the corresponding ETF price and other related information.

In FinGuider, after registering an account with your email, you can select the ETF targets you want to observe to create an observation collection, and the website will automatically generate market comparison information for the selected ETFs.

ETF management company assets under management

Among the passlists and applicants, Grayscale (GBTC) stands out with its approximately $46 billion in assets under management, and Blackrock-owned iShares also leads the industry with its massive $9.42 trillion in assets under management. Following closely behind is ARK 21Shares (ARKB) with approximately $6.7 billion in assets under management. By comparison Bitwise (BITB), while smaller, still has around $1 billion in AUM.

Other significant players include VanEck, which has about $76.4 billion in assets under management; WisdomTree (BTCW) with its $97.5 billion in assets under management; Invesco Galaxy (BTCO) and Fidelity (Wise Origin), respectively With assets of US$1.5 trillion and US$4.5 trillion.

How ETF prices are determined

ETFs trade in real time just like stocks, so prices are determined by market supply and demand. ETFs can be created based on a basket of assets or a certain asset, and the sum of the prices of this asset is called the NAV (Net Asset Value) of the ETF, which is the net asset value.

Your purchase of this ETF is equivalent to your purchase of the assets contained in this basket. In theory, the most basic premise of investing in an ETF is that the ETF price reflects NAV. ETFs are also traded in the market, and the market transaction price is determined by the behavior of countless participants. The market cannot stipulate that everyone must trade according to NAV. Therefore, the market price of an ETF will be different from its NAV.

Here, we use a very simplified model to illustrate how ETF trading works.

Suppose the issuer wants to issue an ETF fund. Each ETF contains only two stocks A and B, and their ratio is 1:1. After the issuer gets approval from the SEC, it raises funds to buy a lot of stocks A and B, then puts these stocks into a trust, and then creates corresponding ETFs based on the stocks it owns and puts them on the market.

Therefore, the ETF sold in the market itself is a certificate and does not actually buy or sell the stocks contained in it. The stocks themselves have been kept by the issuer. The issuer of an ETF earns a management fee from the ETF. Its responsibility is the issuance and management of the ETF and it does not directly participate in its market transactions.

When the market opens, assume that the market price, or NAV, of the two stocks included in each ETF is $2, and that there are only two people trading the ETF in the market. The first buyer is willing to pay $4 for a share of the ETF. If his purchase is successful, it will cause the market price to rise to $4, which is much higher than the NAV of $2, which may cause potential investors to refuse to buy the ETF.

At this time, the second buyer acted opportunistically and went to the market to purchase a stock A and a stock B for a total price of $2, intending to sell them to the first buyer for $3.

However, if the first buyer is only willing to buy ETF certificates, then the second buyer goes to the issuer and exchanges the stocks he holds into ETF certificates. This process is called ETF creation. He then sells it to the first buyer for $3, at which point the market price is pulled down and he makes a $1 difference.

In the same way, if the price of the ETF is lower than the NAV, that is, the first buyer intends to sell the ETF for $1, then the second buyer can bid $1.5 to buy the ETF and then find the ETF issuer to exchange it. The shares are converted into stocks and sold on the market. This process is called ETF redemption. At this point the market price was bid up and he made the $0.50 difference.

Therefore, if other buyers perform the same operation, the market price of the ETF will eventually be infinitely close to the cost price of NAV of $2, thus enabling the price of the ETF to closely track NAV.

In this process, the buyer who creates and redeems the ETF is the Authorized Participant (AP). In the market, they must exchange ETFs and stocks with ETF issuers. Therefore, in order to facilitate arbitrage, AP will have a certain amount of ETF inventory in hand.

Of course, this is just a simplified model, and the real market situation is more complex. In the ETF market, there are actually two levels of markets and different participants.

Source: BlackRock

Among them, participants include ETF management companies, also called “sponsors”, such as iShares in the picture; market investors, such as retail investors and institutions; MM (market makers) and APs. AP is often an institution, such as a bank. He and MM are shown as two different participants in the diagram, but they can be the same institution in the real world.

As mentioned before, the money earned by ETF management and issuance companies is management fees. After creating ETFs, they will wholesale these ETFs to large institutions and let these institutions put the ETFs into the market. These institutions are often AP. This process occurs in the primary market for ETFs and is not accessible to retail investors.

The ETFs wholesaled by AP will be put into the secondary market where our retail investors participate. If AP is like a wholesaler, then MM is a retailer. MM and AP conduct wholesale buying and selling, and then directly trade with retail investors in the secondary market, so that the trading price of this ETF is close to NAV. APs and MMs operate in a highly competitive environment and are financially incentivized to participate in the creation or trading of ETF shares.

Example 1: Bitcoin ETF stock creation (investment in ETF):

Retail investors looking to invest $10,000 in a specific Bitcoin ETF, such as IBIT. If the spot price of BTC:USD is $40,000 and the Bitcoin ETF IBIT is trading at $40,010 on the market, AP receives an order from the investor’s broker to purchase $10,000 worth of the ETF at its fair value ($40,010) iBit. Because Bitcoin is trading at $40,000, and $10,000 is equivalent to 0.25 Bitcoins, and IBIT is trading at a $10 premium to its NAV, AP’s profit is not the entire $10 difference between the ETF spot and BTC spot, but the full $10 difference between the ETF spot and BTC spot. Yes (0.25 x $10) = $2.50.

Example 2: Bitcoin ETF stock redemption (ETF liquidation):

A retail investor wants to sell his $10,000 position when the ETF is trading at $39,990 and the ETF’s NAV is $40,000 (the spot price is $40,000 in BTC:USD).

In this example, the ETF is trading at a discount. The AP will open a trade and simultaneously buy $10,000 worth of IBIT and sell $10,000 worth of BTC (0.25 BTC) on the exchange where BTC:USD is trading at $40,000, netting $2.50 (0.25 x $10 = $2.50 ).

Historically, if one AP exits the ETF market, other APs step in to facilitate the creation and redemption of ETF shares, particularly if there is a significant premium or discount to NAV, or there is a divergence between the prices of the ETF and its underlying holdings . This is because AP typically seeks to exploit the economic arbitrage opportunities created by such differences, which also apply to MM.

This is how ETFs achieve the price determination mechanism of ETFs through transactions in the primary and secondary markets by different participants. That is, through the “arbitrage mechanism”, the trading price of ETFs can relatively accurately track its NAV. Of course, there will be a premium or discount in the price of ETFs. In addition to the results of transactions, there are also other factors, such as the transactions of assets in ETFs in different time zones.

Authorized AP of ETF Management Company

Given the complexities associated with ETF creation and redemption, APs are typically institutions with a high degree of expertise and market operations capabilities. In situations of high market volatility or low liquidity, the activities of APs are particularly important in ensuring the health of the ETF market. Through the AP mechanism, ETFs can more effectively track the performance of their underlying assets while providing investors with a more stable and reliable trading environment.

According to the latest information, most of the asset management companies that are applying for Bitcoin spot ETFs, including BlackRock, have selected and announced their respective authorized participants.

For example, BlackRock plans to select JPMorgan Securities and Jane Street as its authorized participants. Grayscale CEO posted on social media that Grayscale had already confirmed in the documents submitted in May this year that after GBTC was converted into a spot ETF, Jane Street Capital and Virtu Americas were the authorized traders (Authorized Participants) of its ETF.

Goldman Sachs is approaching BlackRock and Grayscale and in talks to become an authorized participant (AP) for its spot Bitcoin ETF. According to Nate Geraci, president of The ETF Store, disclosed on social media, following Goldman Sachs, JPMorgan Chase is also negotiating with Grayscale to serve as an authorized participant of its spot Bitcoin ETF.

WisdomTree has filed the latest revised S-1 filing for its spot Bitcoin ETF, appointing Jane Street Capital as its authorized dealer (Authorized Participant) for its spot Bitcoin ETF. Invesco Galaxy has appointed JP Morgan and Virtu Americas as authorized dealers for its spot Bitcoin ETF, which will charge no fees for the first six months. Fidelity named Jane Street an authorized dealer for its spot Bitcoin ETF, which charges 0.39%.

Fidelity named Jane Street Capital as one of its authorized participants. Invesco/Galaxy selected JPMorgan and Virtu as authorized participants. Valkyrie selected Jane Street and Cantor Fitzgerald as its authorized participants.

This information may change as subsequent approval processes and individual company policies change. But what can be seen is that Jane Street is the choice of almost all these asset management companies.

Three BTC ETFs

ETF based on BTC spot

In the BTC spot ETF, the BTC price is the NAV in the above example. Simply put, to issue a BTC spot ETF, you need to hold an equivalent amount of BTC spot. So: BTC spot ETF market = BTC spot market.

In other words, large-scale global financial institutions like BlackRock are likely to have new BTC investors. These investors do not participate in the existing crypto market. They are more accustomed to, or are restricted by regulatory and other conditions. Only ETF products issued by institutions can be purchased. The greater the market demand for BTC spot ETFs, the more institutions will need to hold BTC spot.

Therefore, the issuance of BTC spot ETF products by large financial institutions can bring incremental funds and a broader international market to BTC spot.

ETF based on BTC futures

Currently, many financial institutions have issued BTC futures ETF products, but these BTC futures ETF products are based on CME’s BTC futures, and CME’s BTC futures are settled using cash. Therefore, the BTC futures ETF market cannot bring incremental funds to the BTC spot market.

Cash based BTC

ETFs are based on cash-based BTC. The issuer holds cash to issue BTC ETFs and redeems the cash when redeeming. Naturally, it will not bring capital flow to the BTC spot market.

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