Navigating the GBTC Unwind: A Turning Point for Bitcoin Markets?

The market now understands that the BTC spot ETF approval has created an unexpected liquidity event. The Gray Scale Bitcoin Trust (GBTC) is acting like a bad debt overhang for the market. In this article, my aim is to start the conversation about how much selling pressure this will exert on the market. That way you might know whether to sell now, or whether to buy the dip, or how to treat the current environment.
An exercise like this one is prone to a great deal of noise, so we shall settle for a back-of-the-envelope calculation. Let's start with what is going on exactly.

1 The GBTC Unwind

GBTC is the largest spot BTC ETF in the world. The reason for this, largely, turns on its first-mover status. It was a trust, originally, which for some time, granted traditional financial markets their only access to Bitcoin. 
Now that the trust has successfully converted into an ETF, initial depositors have been able to redeem for the first time in years. FTX, now in bankruptcy proceedings, sold about $1b of its holdings in GBTC (source).
GBTC itself, moreover, appears set up to unwind materially. They charge 1.5% for managing their ETF on an annual basis, and that's about 5x the industry standard (source). This 5x fee structure sets up a dynamic whereby current GBTC holders are incentivized to sell their position and buy one of the many competitors, such as IBIT, which currently has no fees, and after the first 6 months of incentive onboarding, will charge only 0.33% annually.
The cycling among ETFs is market efficiency at work. Evidence from the first period of operation for these funds supports this view of matters. Below is a compilation of BTC flows in the top 10 ETFs (source). Focus specifically on the Total Flows 7 Days column and the Assets column.
In a line, investors are dumping GBTC, which still has $21.5b remaining, and cycling that into other ETFs, such as IBIT. Yet that is crucially not the entire story.
If you navigate your attention to the final column on the right, you'll notice a negative 7-day flow (in blue). This means that investors are not buying the other ETFs at the rate that they are buying BTC. Some of those sales are permanent -- people deciding they've made enough money, or want to reduce their exposure, or whatever.
Our question, then, is: how far will this unwind go?

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2 Some Estimates

It seems likely that, unless GBTC changes its price structure, its fund will lose about 80% of its AUM. Why would people want to pay more for the exact same offering elsewhere? Some inertia and laziness might leave 1 out of 5 investors holding their position.
This means that their AUM will fall to about $4.3 billion = $17.2 billion more in sales.
Looking at the rollover numbers, they are relatively healthy. But if this trend continues for some time, I expect a higher attrition rate -- somewhere in the neighborhood of 20%. This means that we could reasonably expect another $3.44b in further net sales of BTC.
The market has, I think, priced in quite a bit of this activity--selling down BTC about 20% from its recent high at $49,000 to $39,000. The data from Binance's perpetuals market supports this view. Below is a heat map and I've circled in white the area with a high concentration.
There are no further areas of such high concentration in the chart at present. This means that most of the forced selling has already exited the market. On the other hand, if BTC returns to above $41,000 short sellers will be liquidated (the yellow lines at the top) and those liquidations will continue until just shy of $43,000.

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3 Concluding Thoughts

Many things could alter the above analysis. GrayScale might wake up and decide to fix their product. I do not presently understand their motivation except, perhaps, to vacate some of the bankruptcy claims against DCG (which owns GrayScale products and Genesis, which imploded after FTX).
As a note, these considerations are likely to affect ETH, should its spot ETF be approved too (unless GrayScale changes its view at that point).
It may be that investors see these cheap levels of BTC and decide it's finally time to buy. The broader market economy, recall, is doing well in the United States. The S&P500 has recently reached all-time highs. And the Chicago Fed's 105-component index suggests that financial conditions are as loose as they were during the COVID crash.
In the image below, neutral conditions are at the 0 point (midline). Restrictive when above that (as you will witness during the 2020 COVID crash), and loose when below that midline.
In general, as those conditions loosen there is more liquidity in the market and prices in traditional equities and digital assets (cryptos) rise. When the Federal Reserve began to raise interest rates in November of 2021, the crypto market began its decline. When the Fed loosened rates beginning in 2023, both markets rose.
This macroeconomic data suggests that there is ample liquidity in the market to support more BTC buying. The analysis of the GBTC selling data suggests that such demand is likely to be met with a backlog of eager sellers for about a month--or however long it takes GBTC to unwind. That means, I think, that we are facing a crab market (sideways action) for a period of approximately 30 to 45 days (other things remaining equal).
If you are bullish on the digital asset space, and encouraged by the positive liquidity picture in the macro economy, this might be a time to buy. I personally follow whatever my algos tell me to do.
Happy Trading!

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