According to Bloomberg, signs of stress are becoming evident across spot-Bitcoin exchange-traded funds (ETFs) as the cryptocurrency's value declines. Some of the largest ETFs tracking Bitcoin experienced the most significant discounts to the value of underlying assets in their brief history on Tuesday, following a roughly 5% slump in Bitcoin. The downward trend continued on Wednesday, with Bitcoin dropping as much as 5.6%.
The $16 billion iShares Bitcoin Trust, among others, has been affected by this trend. These discounts may indicate the inherent frictions in overlapping the traditional market with Bitcoin. This is because shares in the funds can only be created and redeemed in exchange for cash rather than 'in-kind' exchanges for Bitcoin itself. However, such price deviations are usually short-lived due to the creation-redemption mechanism of ETFs.
Despite this, the discounts highlight how Bitcoin's volatility may pose larger risks to ETF investors than funds focused on traditional financial assets. Concurrently, the volatility creates profitable opportunities for specialized trading firms known as authorized participants, who are responsible for keeping the fund prices in line with their net asset values.
Expectations for fund flows were surpassed after the ETFs were launched, breaking multiple records in the more-than $8 trillion US industry. There are high hopes that more institutions will adopt spot-Bitcoin ETFs as they establish a track record. However, Bitcoin's price has historically been influenced by the macro-economic environment. A case is being made for the Federal Reserve to signal a delay in rate cuts after officials conclude a policy meeting Wednesday, which could be a challenging backdrop for speculative assets like digital tokens.