Bitcoin Sell-Off Presents Rare Opportunity for BTC ETF Bargain Hunters

Bitcoin’s dramatic sell-off has sent shockwaves through the market, presenting buy-and-hold bulls with a rare opportunity to scoop up BTC ETF shares at bargain prices. Spot BTC prices plummeted to a four-month low on Friday as markets braced for billions of dollars in impending BTC liquidations by the German government and Mt. Gox, the defunct Japanese crypto exchange. Share prices of top BTC ETFs are already feeling the heat, with the potential for further volatility on the horizon.

Bitcoin ETFs, such as Franklin Templeton Digital Holdings Trust, EZBC VanEck Bitcoin Trust HODL, and iShares Bitcoin Trust IBIT, have become the new gold standard for spot BTC holders since U.S. regulators greenlighted publicly traded funds in January. These funds offer robust investor protections and security protocols, but have traded at persistent premiums to net asset value (NAV) since inception. As of early July, shares of the top five Bitcoin funds traded at an average premium of almost 10%.

ETFs rely on a select group of professional market makers, known as authorized participants, to keep share prices in line with the fund’s underlying NAV. However, only a handful of APs are equipped to handle BTC spot trading, making ETF shares vulnerable to sharp price swings in volatile markets. The ongoing liquidations by Germany and Mt. Gox threaten to bring billions of dollars of sustained selling pressure, leading to wider ETF price swings and potential arbitrage opportunities for traders.

Seasoned BTC traders have capitalized on NAV discounts in the past, with shares of Grayscale Bitcoin Trust trading at discounts approaching 15% in late 2020. Traders who bet otherwise saw unprecedented gains when the fund’s ETF application was approved in January, leading to a premium in share prices. Hedge funds reportedly locked in discounts exceeding 20% during this period.

While a Grayscale-sized arbitrage may not come around again, significant opportunities still await savvy traders. In May, shares of BlackRock’s IBIT ETF briefly dipped to a discount of almost 5% as institutional holders rebalanced amid market volatility. Other funds, including FBTC, BITB, and ARK Shares Bitcoin ETF, traded at discounts of nearly 10% simultaneously.

With heightened market volatility expected due to impending BTC liquidations, traders should keep an eye out for similar ETF arbitrages in the coming months. ETFs sponsored by blue-chip asset managers, such as EZBC, HODL, and IBIT, are offering steep discounts on management fees, with some waiving fees completely until 2022. Traders willing to weather today’s choppy waters could stand to benefit from a bullish resurgence in BTC before the end of the year.