Bitcoin ETFs: ‘Orange FOMO Poker Chips’ Retracting On-Chain Funds to TradFi

Although launching spot Bitcoin exchange-traded funds (ETFs) in the United States was supposed to draw more baby boomers into Bitcoin, these financial products might ultimately undermine on-chain adoption and liquidity. The primary concern is that ETFs could drain on-chain liquidity, according to Jim Bianco, the founder of the macro research firm Bianco Research. He pointed this out in a public statement on May 19: “Transferring funds off-chain into the realm of traditional finance through these ETFs won’t push digital assets towards the envisioned decentralized financial system. In fact, it may impede this objective.”

This warning emerged during a crucial period for Bitcoin’s (BTC) price, which is facing a significant resistance level. According to Markus Thielen, the head of research at 10x Research, Bitcoin could achieve new all-time highs if it manages to break past the $67,500 threshold. Instead of fostering increased adoption, these ETFs seem to be redirecting on-chain liquidity into traditional financial systems, perpetuating longstanding concerns for Bianco.

Evidence of this issue is found in Coinbase’s Q1 financial results. While the company’s revenue hit $1.64 billion, retail trading volume had plummeted to just half of its 2021 levels. In contrast, institutional trading volume rose to $256 billion in the first quarter, compared to $215 billion in Q1 2021. For Bianco, this trend illustrates that retail investors still find on-chain activities too complicated and therefore turn to traditional financial platforms.

Bianco elaborated on social media, suggesting that users find holding Bitcoin through traditional financial brokers more convenient. He mused, “Do retail investors prefer holding Bitcoin receipts through ETFs on the NYSE instead of directly engaging with the new decentralized financial system?”

This situation poses a significant dilemma for Bitcoin’s narrative as a decentralized alternative to the traditional fiat financial system. Bianco remarked that if the ultimate aim is to build a new financial system, then ETFs, which redirect funds back into traditional finance, are counterproductive.

ETFs have not succeeded in attracting baby boomers as intended. Statistics show that over 85% of Bitcoin is owned by retail investors, with only about 10% held by hedge funds. Bianco pointed out that contrary to what was initially forecasted, only a small fraction of baby boomers have added Bitcoin to their portfolios through ETFs.

Despite recent inflows into U.S. Bitcoin ETFs after a three-week period of negative outflows, these products still do not appear to be the catalyst for mass adoption. Dune data indicates that U.S. Bitcoin ETFs accumulated more than $200 million in net inflows recently, but the overall impact on genuine Bitcoin adoption is questionable.

Retail investor behavior also appears to be heavily influenced by price movements. The average purchase price for spot Bitcoin ETFs ranged between $58,000 and $59,000. Significant sell-offs occurred when Bitcoin dipped below $60,000, indicating that retail traders are primarily driving these actions.

The influx of institutional funds into ETFs has been a critical factor in driving Bitcoin’s price to new highs. By mid-February, Bitcoin ETFs represented about three-quarters of new investments in the cryptocurrency, helping it surpass the $50,000 mark. The future implications of this trend for the broader Bitcoin ecosystem remain to be seen.