Despite the promise of attracting more baby boomers to Bitcoin,…

Despite the promise of attracting more baby boomers to Bitcoin, U.S.-based Bitcoin exchange-traded funds (ETFs) could pose a greater risk to on-chain adoption and liquidity.

One of the biggest concerns about ETFs is how they can cannibalize on-chain liquidity, according to Jim Bianco, founder of macro research firm Bianco Research, who wrote in a May 19 post:

“Drawing money off-chain into the world of Tradfi in the form of an orange FOMO poker chip will not move digital assets to the promised land of a new decentralized financial system. “If anything, it hinders the achievement of this goal.”

This warning comes during a crucial week for Bitcoin (BTC) price, which is trading below a crucial resistance line. Bitcoin could rise to all-time highs if it can decisively break above the $67,500 level, said Markus Thelen, head of research at 10x Research.

However, rather than facilitating further adoption, ETFs appear to be pulling on-chain liquidity into the world of traditional finance (TradFi), which has been a long-standing concern of macro researchers.

This is evidenced by Coinbase’s first-quarter financial results, which showed that revenue reached $1.64 billion even though retail trading volume was only half of 2021 levels. Meanwhile, institutional trading volume rose to $256 billion in the first quarter from $215 billion in the first quarter of 2021.

According to Bianco, this is a sign of Coinbase balancing institutional growth to offset declining retail trading:

“Above, $COIN tells us that retail still thinks going online is too difficult, and $COIN is too restrictive? Do they prefer to own BTC in a Tradfi brokerage account? In other words, are they satisfied with an ETF that says they own Bitcoin in a regulated account rather than adopting the new financial system directly?

In any case, the findings could raise a problematic question about Bitcoin’s narrative as a decentralized alternative to the monetary financial system. Bianco wrote:

“If the goal is to develop a new financial system, an ETF that pulls money back into the Tradfi world will not reach that promised land.”

Furthermore, ETFs have also failed to attract baby boomers, as more than 85% of the underlying Bitcoin is held by retail investors, with only 10% owned by hedge funds. According to Bianco:

“Over the course of the quarter, we were confidently told that boomers were calling their wealth managers and asking them to get into Bitcoin. This is not the case for 95+% of BTC spot ETF holdings.

Inflows from US Bitcoin ETFs turned positive in the week of May 6, after a three-week decline in net negative outflows. US Bitcoin ETFs have amassed more than $200 million in cumulative net inflows over the past week, according to Dionne data.

Weekly net inflows of Bitcoin ETFs in dollars. Source: Dune

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Bitcoin ETF price with average buy price indicates retail trading behavior

The average purchase price for spot Bitcoin ETFs ranges between $58,000 and $59,000. There was a massive sell-off when Bitcoin fell below the $60,000 level at the beginning of May, suggesting that retail investors are behind the majority of these moves.

“When the price reached this level on May 1, these ETFs had record outflows. Now that the price is well above this average price, outflows have stopped. “This is Dejean’s behavior,” Bianco said.

Despite The Promise Of Attracting More Baby Boomers To Bitcoin,...
Average buy point for spot Bitcoin ETF flows. Source: Jim Bianco

Institutional inflows from ETFs have been a significant part of Bitcoin’s current rally to all-time highs. By February 15, Bitcoin ETFs accounted for about 75% of new investment in the world’s largest cryptocurrency as it crossed the $50,000 mark.

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