Bitcoin ETF Discounts Reach Records After Late-Day Selloff

May 1, 2024

3 minutes read

(Bloomberg) — Prices of some of the biggest spot-Bitcoin exchange-traded funds closed Tuesday at their largest discounts to the value of their underlying assets since they were launched.

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While that type of dislocation is typically a troubling sign for an ETF, the chief investment officer of one issuer called it “more an accounting quirk than a real issue” due to the unusual way in which the funds track the value of their assets.

The discounts appeared in closing data after the cryptocurrency sank to a two-month low on Tuesday, including a dip of about 2% between 3 p.m. and 4 p.m. New York time, which is the hour in which average prices are used to track the value of the ETFs’ Bitcoin. The $16 billion iShares Bitcoin Trust (ticker IBIT) on Tuesday closed about 1.7% below its net asset value — the largest dislocation since it began trading in January, according to data compiled by Bloomberg. The $9 billion Fidelity Wise Origin Bitcoin Fund (FBTC) saw a 1.1% discount while the $2.5 billion ARK 21Shares Bitcoin ETF (ARKB) and the $2 billion Bitwise Bitcoin ETF (BITB) both closed with discounts of more than 1.4%, also the biggest on record for each.

“That’s not a great look,” said James Seyffart, ETF analyst at Bloomberg Intelligence, adding that it would have been more concerning if the discounts were isolated to one fund. “It’s a little out of the ordinary in the fact that we’ve seen premiums and discounts in the range of -1% to +1% and this is bigger. But it’s not groundbreaking.”

Read: Bitcoin Hits Two-Month Low After Worst Stretch Since FTX Crash

Tuesday was the last day of the month, which is a common time for investors to rebalance portfolios, especially around the 4 p.m. closing auction in the stock market. The largest Bitcoin ETFs saw heavy selling pressure near the equity market close, reaching a peak during the time leading into the closing auction, according to Teddy Fusaro, president of Bitwise. The ETFs calculate net-asset value using a 60-minute time-weighted average price for Bitcoin, which can lead to differences between market prices and NAV during large price moves in the last hour of the day, as was the case yesterday, he added.

“We expect such dislocations during periods of high volatility to be common and brief, often occurring in the last few minutes of trading,” Fusaro said. Earlier during Wednesday’s trading session, he added, “all ETFs are trading within a few basis points of their estimated NAV during today’s session. We expect that all of these ETFs will trade at slight premiums and discounts to NAV depending on market conditions and whether or not there is net buying or selling in the marketplace.”

His colleague Matt Hougan, chief investment officer at Bitwise, wrote in a post on X that since the premium and discount figures are based on average prices between 3 p.m. and 4 p.m. in what’s known as the CF benchmark reference rate, it is “more an accounting quirk than a real issue. A better measure of tracking is to chart a Bitcoin ETF vs. the spot price of Bitcoin and see how closely they match.”

Still, the discounts underscore how Bitcoin’s volatility may pose more-complex issues to ETF investors than funds focused on traditional financial assets. At the same time, the volatility creates profitable opportunities for specialized trading firms known as authorized participants who are tasked with keeping the price of the funds in-line with their net asset values.

“We remain confident that the inherent underlying volatility of crypto as an asset class will drive sustained elevated opportunities in crypto ETFs,” Virtu Financial Inc. Chief Executive Officer Douglas A. Cifu said on a conference call last week to discuss the company’s earnings, which included record performance in crypto market-making operations.

Expectations for fund flows were exceeded after the ETFs were launched as the cohort broke one record after another in the more-than $8 trillion US industry. Hopes remain high that more institutions will adopt spot-Bitcoin ETFs as they establish a track record. But the price of Bitcoin has historically been affected by the macro-economic environment and a case is building for the Federal Reserve to signal a delay in rate cuts after officials conclude a policy meeting Wednesday. That’s generally a tough backdrop for speculative assets like digital tokens.

“It’s possible it stays at a discount if Bitcoin continues to slide, but that remains to be seen,” said Mohit Bajaj, director of ETFs at WallachBeth Capital.

–With assistance from Katie Greifeld and Sunil Jagtiani.

(Updates headline and throughout with comments from ETF issuer.)