Bitcoin’s sell-off could put ETF shares on the discount rack

Bitcoin’s dramatic sell-off could present buy-and-hold bulls with a rare opportunity to scoop up BTC ETF shares at bargain-bin prices. 

Spot Bitcoin ( BTC ) prices tumbled to a four-month low on Friday of around $53,500 as markets braced for billions of dollars in impending BTC liquidations by Germany’s government and Mt. Gox , the defunct Japanese crypto exchange. Share prices of top BTC ETFs are already feeling the heat. If market volatility continues — which it likely will — they may soon sell at attractive discounts.

Vanishing premiums

Bitcoin ETFs — such as Franklin Templeton Digital Holdings Trust (EZBC), VanEck Bitcoin Trust (HODL) and iShares Bitcoin Trust (IBIT) — have emerged as the new gold standard for spot BTC holders since U.S. regulators greenlighted the publicly traded funds in January.

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But the funds’ robust investor protections and security protocols have come at a cost. Shares of BTC ETFs have traded at persistent premiums to net asset value (NAV) — the value of a fund’s underlying spot BTC holdings — since inception, as institutional capital poured into the hot new asset class. As of early July, shares of the top five Bitcoin funds traded at an average premium of almost 1%.

ETFs depend entirely on a select group of professional market makers called “authorized participants” to keep ETF share prices in line with the fund’s underlying NAV. They are the only traders permitted to exchange and redeem BTC ETF shares for spot BTC and they profit from intraday pricing spreads. For now, only a handful of APs are equipped to handle BTC spot trading, making ETF shares uniquely vulnerable to sharp price swings in volatile markets.

Germany’s and Mt. Gox’s ongoing liquidations threaten to bring billions of dollars of sustained selling pressure over the coming months. The resultant volatility, the wider ETF price swings that follow, could open up attractive arbitrage opportunities for traders.

Epic arbitrage

Seasoned BTC traders are not strangers to cashing in on NAV discounts. In late 2022, shares of Grayscale Bitcoin Trust (GBTC), the pioneering Bitcoin fund, traded at discounts approaching 50% of NAV on investor concerns that the fund — which at the time used a less-liquid fund structure — would never get regulatory sign-off to convert to an ETF.

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Traders that bet otherwise saw unprecedented gains from what was effectively a “buy one, get one free” Bitcoin sale. Grayscale’s ETF application was approved in January and GBTC now trades at a 0.04% premium. Hedge funds including Fir Tree Partners and Hunting Hill reportedly locked in discounts exceeding 40%.

New ETF opportunities

If you’re waiting on a Grayscale-sized arbitrage to come around again, don’t hold your breath. The circumstances behind GBTC’s mega-spread are unlikely to repeat themselves. Regulatory approval of BTC ETFs has vastly improved liquidity in public markets. Institutional investors are also wising up to BTC’s value proposition. Bitcoin funds have already seen $398 million in net inflows since the sell-off.

But significant opportunities may still await savvy traders. In May, shares of BlackRock’s IBIT ETF briefly dipped to a discount of almost 2% as institutional holders undertook end-of-month rebalances amid a volatile market. Other funds — including FBTC, BITB and ARK 21Shares Bitcoin ETF (ARKB) — traded at discounts of nearly 1.5% simultaneously. 

With Germany’s government and Mt. Gox preparing to dump billions of dollars of BTC, heightened market volatility is inevitable. Keep an eye out for similarly-sized ETF arbitrages in the coming months, and pay special attention to EZBC, HODL, and IBIT. These ETFs, all sponsored by blue-chip asset managers, are offering steep discounts on management fees, in some cases waiving fees completely until 2025.

Traders willing to look past today’s choppy waters stand to benefit. Selling pressure aside, BTC is primed for a bullish resurgence before the end of the year, thanks to impending interest rate cuts by the Federal Reserve, and better-than-ever odds that Donald Trump prevails in the United States’ November presidential election.

Now is the time to start shopping for discounts.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.