Many investors are worried as bitcoin’s value has fallen by around 70% since its peak in November 2021. Meanwhile, market sentiment is at an all-time low on analyst expectations of a major recession. This is particularly evident with the decline in stock markets, as measured by the S&P 500 and Nasdaq 100 indices, which is having a major impact on how people invest in BTC in regulated markets.
Bitcoin investment vehicles have taken a hit
Looking at the Grayscale Bitcoin Trust, the share price has fallen significantly from its peak of around $56 to $11.94. At the same time, the stock values of 3iQ CoinShares Bitcoin ETF and Purpose Bitcoin Canadian ETF both fell sharply.
Grayscale Bitcoin Trust (GBTC) has fallen low to $11.94 from its peak. Source: TradingView
Despite the shares’ significant discount, GBTC’s daily trading volume has fallen drastically to 3.075 million. It suggests that institutional investors are skeptical about bitcoin-related financial products in the regulated market, or simply believe that the bear market is not over yet.
GBTC’s daily trading volume is down sharply to 3.075 million despite the shares’ generous discount. Source: YCharts
Additionally, given current market conditions, certain trusts and ETFs are gradually selling their holdings. For example, the total amount of BTC held by the Grayscale Bitcoin Trust has decreased since it peaked in February 2022. Additionally, the total number of bitcoins held by various trusts and ETFs has declined sharply since the market peaked in May 2021.
The Sharpe ratio shows that GBTC is a poor investment with a very low risk-adjusted performance relative to the return on investment. In fact, the Sharpe ratio recently fell to 0.453 after declining over time. This implies that while GBTC’s volatility is quite high, the projected return on investment is rather modest.
loss after loss
The current pioneering crypto investment vehicles in regulated markets, including trusts and ETFs, have displayed the bearish signal to some extent. Despite the significant discount at which GBTC was sold, daily trading volume is steadily declining and several trusts and ETFs, such as Grayscale Bitcoin Trust, have been asked to sell their BTC holdings.
The total number of BTC held by trusts and ETFs has fallen sharply since May 2021. Source: CryptoQuant
The current bitcoin investment vehicles in regulated markets like trusts and ETFs have shown the bearish signal to some extent. Although GBTC has been trading at significant losses, daily trading volume continues to decline and some trusts and ETFs, including Grayscale Bitcoin Trust, have been encouraged to sell their bitcoin holdings.
The Sharpe ratio tells us that GBTC is a bad asset with a very low risk-adjusted performance. Source: YCharts
Since GBTC shares sold or bought by institutional investors are reported on a quarterly basis, many recent trades may not yet have been quoted. However, these figures above could give us some clues as to what is actually happening behind the scenes with Bitcoin.
Retailers may only recognize that a local bottom has been reached after it has already occurred, as in the case of institutional investors who bought GBTC in late June just ahead of the July rally.
In particular, the Sharpe ratio shows that GBTC’s return on investment is rather low and that this asset appears to be quite risky. Therefore, at this point, investors would be ready to start hedging against Bitcoin’s rising negative downside risk.
Featured image from Unsplash, charts from TradingView.com, Ycharts and Cryptoquant
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