Translation: Blockchain in Vernacular
As 2023 draws to a close, the U.S. Securities and Exchange Commission (SEC) is debating whether to approve a Bitcoin spot ETF to begin public trading, and there has been much discussion about the extent to which this impending approval or rejection is priced into the market. Now, five months later, we have data. In this article, we’ll take a look at the most prominent Bitcoin spot ETFs, their metrics, and where they might be headed in the future.
The first Bitcoin spot ETFs were launched on January 11, 2024. The U.S. Securities and Exchange Commission (SEC) approved 11 new Bitcoin spot ETFs the day before. These ETFs track the current price of Bitcoin, allowing investors to more easily gain exposure to Bitcoin without having to directly purchase and hold the cryptocurrency. These funds do this by actually holding a large number of Bitcoins in wallets managed by a custodian. As a result, the value of the ETF shares is tied to the current market price of Bitcoin, allowing investors to indirectly participate in the cryptocurrency market through a familiar and regulated investment vehicle.
Since launching in early January 2024, the largest Bitcoin spot ETFs, such as BlackRock’s IBIT and Fidelity’s FBTC, have grown significantly and increased trading volume. For example, IBIT has amassed an impressive $18 billion in assets under management. The surge in Bitcoin ETF trading volume, led by IBIT, is a clear sign that traditional investors are beginning to take notice of its existence. Major U.S. banks, such as Morgan Stanley and UBS, are even rushing to offer Bitcoin ETFs to their clients, further solidifying their legitimacy in the eyes of mainstream investors.
1. Market Overview
While there are many new Bitcoin spot ETFs trading, this article focuses on the five with the largest assets under management (AUM). Currently, they are: GBTC, IBIT, FBTC, ARKB, and BITB. The following chart shows the current size of these funds:
AUM (Assets Under Management) (USD Million) — June 18, 2024
While all Bitcoin spot ETFs share the same core objective, some key differences may explain why investors prefer some funds over others. These differences include factors such as accessibility, fees, custody options, and initial promotional offers.
Fees Expense ratios vary across these ETFs, with GBTC being the most expensive at 1.5%, while IBIT and FBTC are relatively cheap at 0.19% and 0.20%, respectively. ARKB charges 0.90% and BITB charges 0.20%.
Promotional Offers Some ETFs offer promotional offers. For example, IBIT waived its fees for a certain period, and EZBC waived its fees for up to $5 billion in assets.
Custodians These ETFs use various custodians to hold their Bitcoin. GBTC and IBIT use Coinbase Custody Trust, while other ETFs may use different custodians.
Holdings It is worth noting that these ETFs may hold different amounts of Bitcoin, which may affect their liquidity and tracking accuracy. ETFs that hold more Bitcoin may be more liquid and better able to track the price of Bitcoin because they can buy and sell more Bitcoin as needed.
At launch, many ETF providers offer their services at a discount or for free to promote acceptance of their newly launched products. This gives IBIT products, for example, at least some advantages over GBTC products for a period of time.
2. BTC market dynamics
When the Bitcoin ETF began trading on January 11, 2024, the price of Bitcoin was approximately $46,632. By March 2024, Bitcoin's market value had grown significantly, reaching a peak of $73,000. To what extent can this price movement be attributed to the increased demand for Bitcoin associated with ETFs? While inflows into Bitcoin ETFs since January have indeed contributed to some of the rise in Bitcoin prices, it is only one of several factors. The increased legitimacy and investor access brought by ETFs has positively impacted market sentiment and demand. In the following sections, we explore some of the variables associated with ETF flows and how they relate to broader market dynamics.
The total market value of major Bitcoin spot ETFs currently traded in the United States has exceeded $79 billion. Considering that GBTC already held 619,000 Bitcoins when it launched its spot ETF, this means that as of June 18, 2024, the total net inflow is about $40 billion.
By analyzing the incremental distribution of Bitcoin ETF inflows and outflows, such as data provided by Block, we can see which products contribute the majority of capital flows. IBIT funds managed by BlackRock, and Fidelity's FBTC fund have accounted for the majority of ETF inflows so far, while Grayscale's GBTC has almost entirely seen outflows.
Despite the overall net positive inflows, some of the initial momentum has faded since mid-March of this year. However, since then, inflows have increased slowly but steadily. The trading value of Bitcoin spot ETFs has steadily increased, with cumulative daily trading volume reaching $300 billion as of this writing.
An interesting metric that may be initially overlooked is who is buying these new financial products. Despite the fact that ETFs and native digital assets have two primarily different target audiences, it is surprising to see who is using this new investment vehicle to gain exposure to Bitcoin. Not only are large funds like the Wisconsin Pension Plan, which added over $150 million in Bitcoin spot ETF exposure to its portfolio, but also some smaller local institutions are doing the same. Several financial service providers are also adding Bitcoin to their balance sheets through spot ETFs. For example, Hightower Advisors ($68 million), Bracebridge Capital ($434 million), and Cambridge Investment Research ($40 million), among many others.
Rising demand driven by increased accessibility of Bitcoin through ETFs could have a significant impact on Bitcoin’s long-term price stability. Bitcoin’s market price is derived from its supply and demand. Since the halving in April, the average daily supply has decreased from 900 Bitcoin to just 450 Bitcoin.
On some days, we saw inflows as high as 10,000 Bitcoin. This means that if the inflow rate remains at this level, the exchange may experience a supply shock in the future, which could significantly increase the price of Bitcoin. Historically, the impact of increased demand on Bitcoin price stability can be observed one year after each halving, when Bitcoin prices rise significantly. Furthermore, the supply shock will continue as long as prices do not reach the point where retail investors are willing to sell and stop "HODLing" to meet the demand generated by ETF inflows.
Finally, it may also be interesting to look at the relationship between the asset management firms that offer these financial products and the Bitcoin mining companies.
Overall, Bitcoin ETFs have significantly impacted the market by driving demand and enhancing legitimacy. Major ETFs have attracted significant inflows, reflecting growing investor interest. Bitcoin ETFs have been adopted by a variety of players, from large pension plans to smaller institutions, highlighting their usefulness in portfolio construction.
3. Looking to the future: Are new ETFs coming out?
The launch of the next cryptocurrency ETF is already in sight, as the SEC has approved multiple Ethereum ETFs in May 2024. So far, there are no detailed information about the structure, management, and investment strategies of these ETFs, but it will soon be learned that the structure of the ETH ETF will be similar to that of the Bitcoin ETF. The most important point is: although the SEC has not officially stated so, by approving these ETFs, it has actually declared ETH to be a commodity. However, ETF issuers will not be able to stake ETH initially. All applicants for ETH ETFs have been approved, including the following:
Grayscale Ethereum Trust
Bitwise Ethereum ETF
iShares Ethereum Trust (BlackRock)
VanEck Ethereum Trust
ARK 21Shares Ethereum ETF
Invesco Galaxy Ethereum ETF
Fidelity Ethereum Fund
Franklin Ethereum ETF
Even VanEck released the first commercial: https://x.com/vaneck_us/status/1793755768837251281.
After the approval of a Bitcoin ETF earlier this year, and the recent approval of an ETH ETF, it was only a matter of time until the next cryptocurrency would be introduced to traditional financial markets via an ETF. Just this week, on June 27, VanEck filed for a Solana spot ETF!
4. Summary
The emergence of Bitcoin spot ETFs has undoubtedly reshaped the cryptocurrency investment field, providing traditional investors with a regulated and accessible way to participate in the Bitcoin market. In the five months since their launch, the ETFs have demonstrated strong growth and significant market impact, reflected in capital flows and Bitcoin price volatility. Significant participation from a variety of investors, including large pension funds and smaller institutions, highlights the broad acceptance and potential of these financial products.
The SEC’s recent approval of an Ethereum ETF marks another pivotal moment in the mainstreaming of cryptocurrency investing. As these ETFs continue to evolve and attract more investors, they are likely to play an increasingly important role in integrating cryptocurrencies into the broader financial markets. The success of the Bitcoin spot ETF sets a precedent for future cryptocurrency ETFs, boding well for the continued integration of traditional finance and digital assets.