How the emergence of ETFs could reduce Bitcoin volatility

One of the key elements of Bitcoin (BTC)’s success has been the emergence of new trading infrastructure and investment products that allow it to reach new investors. This trend has now accelerated with the emergence of Bitcoin spot ETFs (exchange-traded funds).
Beyond liquidity providers and trading desks, we have no idea how these innovations will change the structure of the Bitcoin market.
As the Bitcoin market structure matures, volatility can be expected to decrease. Here we take a look at some of the key changes surrounding the emergence of physical ETFs and how they could be driving this change.
ETFs as market reference prices
It is a well-known fact that Bitcoin trading volume increased significantly with the introduction of ETFs. In particular, a disproportionately large portion of this increase in trading volume occurred between 3:00 PM and 4:00 PM ET, primarily close to ETF price fixation.
The chart below shows Bitcoin’s daily trading volume percentage for the 30 minutes starting at 3:00 PM and 3:30 PM (ET) for the major trading pairs. Volume during these two periods accounted for less than 5% of daily volume, but now accounts for 10-13%.
(Trading volume for 30 minutes from 15:00/light blue, 15:30/red compared to daily trading volume)
ETF price revisions provide a transparent and consistent reference point recognized by market participants, consolidating large transactions into a common time period and reducing market impact and overall market volatility. It becomes possible.
A new options market for ETFs
All three exchanges currently listing Bitcoin spot ETFs have already applied to the SEC to allow them to list ETF options. The SEC review takes about 1 to 8 months, and there are problems with the clearing and settlement process.
If ETF options are approved, the Bitcoin options market is likely to become significantly active. The Bitcoin options market is currently limited to investors trading on offshore exchanges, which are inaccessible to Americans, and platforms that are accessible only to large financial institutions such as CME.
By allowing options on Bitcoin spot ETFs, the options market could expand significantly beyond these two markets. The Bitcoin options market should continue to give importance to Bitcoin in 2024, even after its massive growth in 2023.
As the options market develops further, volatility will decrease as investors will be able to pursue a wider range of investment strategies and liquid ETFs will become more liquid. It also magnifies the importance of events that drive price movements, such as expirations and dealer positioning.
20 years of ETF performance meets the Bitcoin revolution.
It is very interesting to see how the ETF revolution is currently benefiting the Bitcoin market. The emergence of Bitcoin spot ETFs has led to increased participation and will likely continue to do so, similar to the gold ETFs of the early 2000s.
More than two weeks have passed since the Bitcoin spot ETF was introduced, and daily trading volume has already exceeded $1.5 billion (about 219 billion yen, equivalent to 146 yen per dollar). For comparison, this figure is approximately 20% of Bitcoin spot market trading volume on a good day.
As innovation in cryptocurrency (virtual currency) ETFs increases, transactions related to them will expand, which will contribute to lowering Bitcoin volatility and increasing Bitcoin maturity.
｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda ｜Image: Shutterstock ｜Original article: How the launch of a spot ETF could weaken Bitcoin’s volatility

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