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- Bitcoin ETFs have opened up trading opportunities for sophisticated traders.
- Arbitrage strategies and timing the market can help investors rack up returns, too.
- And consider costs, as ETF management fees can eat into long-term profits.
The launch of Bitcoin exchange-traded funds has opened up opportunities as seasoned professionals look to gain an edge in cryptocurrency markets.
Several considerations are worth measuring for the average investor looking to emulate professional traders and squeeze the most out of their investment.
Here are several areas to focus on to trade like a professional.
Time your trades
Bitcoin ETFs operate only during traditional stock market hours, unlike the 24/7 cryptocurrency markets, presenting unique trading opportunities.
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Bitcoin futures have shown varying performance across different trading sessions — over the past month, European trading sessions have offered the best returns.
DL News reported earlier this month that Bitcoin futures returns on Binance, Bybit, OKX, and Deribit during European sessions were over 18% since mid-January.
That’s a big jump compared with those generated during US and Asian trading hours, which were about 12% and 5%, respectively.
The reason for the European advantage?
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“The data on the ETF net flows is being published around the London open,” B2C2 chief risk officer Adam Farthing, told DL News at the time. “That has been the market’s main driver.”
Arbitrage
The rollout of Bitcoin ETFs in the US opens fresh arbitrage playgrounds for savvy professional traders, BitMEX co-founder Arthur Hayes said in January.
Bitcoin’s market is now exposed to a “predictable and long-lasting arbitrage opportunity” thanks to the ETF’s net asset value, pegged daily to a CF Benchmarks index price of Bitcoin at 4 pm in New York, according to Hayes.
This index gathers prices from six exchanges but notably leaves out Binance, the behemoth of Bitcoin trading volume.
This exclusion creates an “unnatural state of play” where fund managers can’t tap into Binance’s optimal pricing, Hayes said.
Instead, they’re limited to trading on the six approved exchanges, potentially missing out on better deals elsewhere. For Hayes, this scenario is ripe for arbitrage.
He sketches a scenario where traders can exploit the situation by anticipating whether ETF managers must create or redeem shares, depending on whether the ETF trades above or below its intraday net-asset value or NAV.
The predictable nature of this valuation provides a clear arbitrage opportunity because traders know exactly when the ETF’s NAV will be recalculated and what benchmark it will use.
If the market price of the ETF’s shares deviates significantly from its NAV, traders can exploit this difference.
This activity affects supply and demand, influencing Bitcoin’s price on the constrained exchanges.
The arbitrage strategy involves comparing Bitcoin prices between a less liquid exchange from the CF Benchmarks and Binance.
Traders can buy low on one exchange and sell high on the other, potentially “front-running” the ETFs’ share adjustments.
Consider your costs
The added benefit of having a range of Bitcoin ETF providers to choose from means there is increased competition among fee offerings, ultimately leading to a reduction in the costs impacting total returns.
BlackRock, the world’s largest asset manager with $10 trillion in assets under management, is charging an annual fee of 0.25%.
Rivals Fidelity and Ark Invest, the third and fourth largest ETF Providers by assets, meanwhile, charge 0.25% and 0.21%, respectively.
However, those fees still may be too high for traders who can trade cryptocurrencies directly on exchanges.
Savvy traders accustomed to the intricacies of crypto trading may not swing to ETFs, Jonathan de Wet, chief investment officer at Zerocap, told DL News.
Traders using Binance to execute spot purchases pay fees of up to 0.1% depending on the size of their trades, according to the exchange’s website.
Kraken, another major exchange, charges up to 0.16%.
Bitcoin ETF fees, meanwhile, could erode net returns over the long term, he said.
“Even 25 basis points per annum, over 10 years, can chew away the long-term return profile when compared to cold custody of Bitcoin itself,” he said.
Grayscale’s ETF is at some 1.5% per year, he noted.
“This can really impact overall performance.”
Sebastian Sinclair is a markets correspondent for DL News. Have a tip? Contact Seb at [email protected].