Spot Bitcoin ETFs: The Effect of Fund Flows on Bitcoin Price Formation

Abstract

Inflows to the newly established bitcoin exchange-traded funds (ETFs) surpassed $20 billion in the first several weeks of trading and are considered record-high by ETF standards. In this article, we provide an early examination of the bitcoin spot ETFs listed on US exchanges and their effect on bitcoin price formation. We establish several empirical facts: 1) daily capital flows to new spot bitcoin ETFs exceed $500 million or roughly 10,000 bitcoins, and surpass bitcoin mining production by the factor of 5; 2) net flows to ETFs are a strong positive predictor of bitcoin price levels with the R-squared of 95%; 3) most bitcoin price changes occur outside ETF trading hours; 4) an increase in bitcoin price leads to abnormal ETF trading volume; 5) inflows to bitcoin ETFs correlate with outflows from gold ETFs. Overall, during the period studied, capital flows to spot-bitcoin-ETFs emerge as a dominant single factor predicting bitcoin valuation effects. "IBIT is the fastest-growing ETF in the history of ETFs.