FalconX acquisition of 11 billion ETF giant! Bitcoin trading pricing power reshuffle

FalconX acquired 21Shares this week, which will add prime brokerage services to this encryption investment management company. 21Shares manages over $11 billion in assets across dozens of exchange-traded products (ETPs). FalconX was valued at $8 billion in its 2022 funding round, with a volume exceeding $2 trillion, serving more than 2,000 institutional clients.

FalconX and 21Shares Vertical Integration Rewriting Industry Rules

(Source: X)

The amount of the transaction has not been disclosed, but it will combine major brokerage infrastructure with one of the largest encryption ETP issuers, forming vertical integration that could reshape the way Bitcoin and Ethereum funds are traded and the way their underlying assets are tracked. FalconX was valued at $8 billion in its 2022 funding round, and its FalconX Bitcoin volume has exceeded $2 trillion, serving over 2,000 institutional clients.

21Shares was founded by Hany Rashwan and Ophelia Snyder in 2018, in partnership with ARK Invest to operate the ARK 21Shares Bitcoin ETF (ARKB) and the 21Shares Ethereum ETF (TETH), achieving staking in 2025. The company's product catalog listed on exchanges in Europe, the UK, and Switzerland includes single-asset ETPs for tokens such as Solana, Avalanche, Chainlink, Polkadot, and XRP, as well as multi-asset products, including the Crypto Basket 10 Core and the Bitwise Select 10 co-branded fund.

The company plans to combine its brokerage platform with 21Shares' product line to accelerate the adoption of digital asset investment tools in the U.S. and international markets. 21Shares CEO Russell Barlow stated, “Our goal is to make cryptocurrency investment accessible to everyone through industry-leading exchange-traded products. Now, FalconX will help us speed up and expand our business. We will work together to innovate and meet the evolving needs of global digital asset investors.”

The core advantage of vertical integration lies in the control of the entire value chain. Traditionally, ETF issuers relied on external brokers for primary market creation and redemption, and this separated structure increased costs and friction. The integration of the FalconX Bitcoin trading platform with 21Shares ETP issuance allows the entire process to be completed within a single entity, significantly enhancing efficiency.

First-Level Market Mechanism Reform: Who Will Price Bitcoin

The integration of comprehensive brokerage services combined with changes in issuer control has altered who accesses the primary market, the speed of risk mitigation, and the cost of hedging. When issuers create and redeem credit, securities lending, derivatives, and over-the-counter liquidity through the primary market, market makers can hedge at a lower basis, cheaper borrowing, and immediate cross-margining.

The compression of the risk premium embedded in quotes has narrowed the bid-ask spread in the secondary market and tightened the net asset value tracking, especially during opening and closing times and volatile trading periods. This mechanism change directly affects the pricing efficiency of FalconX Bitcoin trading. As more companies can act as authorized participants through Prime's infrastructure, the access range has expanded. Centralized onboarding, intraday financing, and straight-through processing workflows have reduced the minimum real creation scale and the operating capital that dealers must commit to.

Lower operational friction means that arbitrage triggers occur at smaller mispricings, thereby pulling prices back to asset net value more quickly and stabilizing premiums and discounts. The impact on FalconX Bitcoin trading is profound, as it allows ETF prices to more closely track Bitcoin spot prices, reducing tracking errors.

The Five Impacts of Vertical Integration on Bitcoin Trading:

Hedging costs reduced: Internal hedging processes eliminate middleman markups, reducing overall costs.

Improved Lending Efficiency: The internal lending ledger provides cheaper financing, reducing the risk of interest rate spread widening.

Arbitrage speed increases: Lower operational friction allows price discrepancies to be corrected more quickly.

Increased liquidity depth: A single risk book allows for larger-scale internal transactions, reducing market impact.

Tracking Error Reduction: Closer asset net value tracking enhances the quality of ETF products.

Improved inventory and financing efficiency. Quality institutions' lending books and internal customer flows can provide borrowing for short positions and deliver underlying currencies for physical baskets, thereby reducing the squeeze of hard-to-borrow assets and avoiding the widening of spreads. Single risk books, net spot positions, perpetual contracts, and options targeting primary market liquidity allow traders to pre-hedge commodities and internalize more risk, thereby shrinking their footprint in the public market and limiting slippage on large orders.

Price Power Transfer: From Decentralized to Centralized Market Structure

The price discovery mechanisms of different exchanges are becoming increasingly tight. Since there is only a single counterparty coordinating over-the-counter trading crosses, primary market creation, and exchange quotations, the secondary market relies more on the primary market mechanisms rather than chasing futures or offshore liquidity. This reduces tracking errors and enhances the depth of stocks listed in Europe, the UK, and Hong Kong, while physical exchanges can prevent discounts from persisting during periods of regulatory permitted pressure.

This change has a profound impact on FalconX's pricing power for Bitcoin trading. In a traditional decentralized market structure, the price of Bitcoin is determined by the supply and demand of multiple exchanges, with cryptocurrency trading platforms each forming their own independent price discovery centers. However, when FalconX integrated major brokerage services and ETP issuance, it effectively gained control over the pricing power in the primary market.

The creation and redemption mechanism of the primary market is the core of ETF pricing. When authorized participants (APs) create or redeem ETF shares through FalconX, FalconX needs to buy or sell the corresponding amount of Bitcoin in the spot market. This operation directly affects the market price of Bitcoin. When a single entity controls the primary market process of an ETP worth 11 billion dollars, its trading behavior will have a systemic impact on the entire market.

The integration process requires structural safeguards. Information barriers and clear conflict policies remain crucial to ensure that the client flow of major institutions does not favor the issuer's products or designated market makers. This is a primary concern for regulators: while vertical integration enhances efficiency, it may also create conflicts of interest. When executing client orders, will FalconX prioritize the interests of its own ETP products? This necessitates strict internal firewalls and regulatory oversight.

The jurisdictional rules still stipulate whether the physical mechanism, staking, or 24/7 window operates. However, stricter hedging costs, cheaper borrowing, faster financing, and broader access for authorized participants represent the operational leverage that compresses spreads and deepens liquidity through vertical integration. These technical improvements will ultimately translate into an enhanced experience for investors: lower trading costs, smaller bid-ask spreads, and tighter asset net value tracking.

SEC regulatory easing paves the way for altcoin ETFs

This acquisition occurred five weeks after the U.S. Securities and Exchange Commission (SEC) removed the final regulatory hurdle for spot ETFs linked to assets other than Bitcoin and Ethereum, paving the way for Solana, Dogecoin, and other altcoin products. This timing is no coincidence; it demonstrates FalconX's strategic vision: to rapidly expand its product lineup as the regulatory environment improves.

21Shares has listed single-asset ETPs covering tokens such as Solana, Avalanche, Chainlink, Polkadot, and XRP on exchanges in Europe, the UK, and Switzerland. These products have not yet been approved in the United States, but as the SEC's regulatory stance shifts, they are likely to become candidates for the next wave of US ETF products. After FalconX's acquisition of 21Shares, it will have a ready-made product framework and operational experience, allowing it to quickly submit applications for altcoin ETFs to the SEC.

From the perspective of FalconX's Bitcoin exchange, the launch of altcoin ETFs will significantly expand its business scope. Although Bitcoin and Ethereum are the largest encryption assets by market capitalization, the total market capitalization of the altcoin market is also enormous and more volatile, which means more trading opportunities and fee income. If FalconX can replicate its success with Bitcoin ETFs and apply this model to altcoins like Solana and XRP, it will become the undisputed leader in the encryption ETF market.

21Shares' diversified asset products, including Crypto Basket 10 Core and the Bitwise Select 10 co-branded fund, also provide FalconX with a differentiated competitive advantage. These basket-type products allow investors to allocate multiple encryption assets at once, similar to index funds in traditional finance. As more institutional investors seek exposure to the encryption market but do not want to take on the risks of selecting coins, the demand for such products may grow rapidly.

Synergy of 2,000 institutional clients and 11 billion dollars in assets

FalconX serves over 2,000 institutional clients, who will now be able to seamlessly access 21Shares' $11 billion ETP product line. This combination of client base and product line creates strong cross-selling opportunities. Institutions that originally used FalconX for over-the-counter Bitcoin trading can now easily shift to ETP products for better liquidity or compliance. Conversely, 21Shares' ETP investors can also access FalconX's deep liquidity pools and derivatives services.

This synergy will be particularly evident in FalconX's Bitcoin trading business. Institutional investors often need to use spot, ETFs, and derivatives simultaneously to execute complex investment strategies. For example, an institution may hold a long position in the 21Shares ETF while using futures on the FalconX platform for hedging or leverage. When these two services are provided by the same entity, trade execution is smoother, margin efficiency is higher, and risk management is more centralized.

This acquisition also enhanced FalconX's position in its competition with rivals such as Galaxy Digital. Although Galaxy Digital is competitive in the institutional brokerage business, its ETP product line is not as rich as that of 21Shares. Through this acquisition, FalconX has compensated for the shortcomings of its product line and formed a more complete service ecosystem.