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Author: Frankfurt School Blockchain Ce; Translation: Plain Blockchain
As 2023 draws to a close, the U.S. Securities and Exchange Commission (SEC) is deliberating on whether to approve Bitcoin spot ETFs for public trading, sparking extensive discussions on how the market will react to the impending approvals or rejections. Now, five months later, we have pertinent data. In this article, we delve into the most prominent Bitcoin spot ETFs, their metrics, and their future trajectories.
The initial Bitcoin spot ETFs launched on January 11, 2024. The SEC approved eleven new Bitcoin spot ETFs the previous day. These ETFs track the current price of Bitcoin, allowing investors easier access to Bitcoin without the need to directly purchase and hold cryptocurrencies. They achieve this by holding substantial amounts of Bitcoin in wallets managed by custodians. Thus, the value of ETF shares is linked to the current market price of Bitcoin, enabling investors to indirectly participate in the cryptocurrency market through a familiar and regulated investment instrument.
Since their launch in early January 2024, the largest Bitcoin spot ETFs such as IBIT by BlackRock and FBTC by Fidelity have significantly grown and increased their trading volumes. For instance, IBIT has amassed an impressive $18 billion in assets under management (AUM). The surge in Bitcoin ETF trading volumes, led by IBIT, signals traditional investors’ growing interest in their legitimacy. Major U.S. banks like Morgan Stanley and UBS are even vying to offer Bitcoin ETFs to their clients, further solidifying their credibility among mainstream investors.
1. Market Overview
While numerous new Bitcoin spot ETFs are trading, this article focuses on the top five by assets under management (AUM) currently: GBTC, IBIT, FBTC, ARKB, and BITB. The following chart displays the current scale of these funds:
AUM (Million USD) — June 18, 2024
Although all Bitcoin spot ETFs share the same core objective, key differences might explain why investors prefer certain funds over others. These differences include accessibility, fees, custodian choices, and initial promotional offers.
Fees vary among these ETFs, with GBTC being the most expensive at a 1.5% fee ratio, while IBIT and FBTC are relatively cheaper at 0.19% and 0.20%, respectively. ARKB charges a 0.90% fee, and BITB charges 0.20%.
Some ETFs offer promotional discounts. For example, IBIT waived its fees for a period, and EZBC waived fees within a range of $5 billion in assets.
Custodians vary among these ETFs for holding their Bitcoin. GBTC and IBIT use Coinbase Custody Trust, while other ETFs may use different custodians.
Portfolio composition is notable, as ETFs may hold varying amounts of Bitcoin, which can affect their liquidity and tracking accuracy. ETFs with larger Bitcoin holdings may have better liquidity and can better track Bitcoin prices by buying and selling more as needed.
Upon launch, many ETF providers offered their services at a discount or free to promote acceptance of their newly launched products. This gave products like IBIT an edge over GBTC for a period.
2. BTC Market Dynamics
When Bitcoin ETFs began trading on January 11, 2024, Bitcoin was priced around $46,632. By March 2024, Bitcoin’s price had significantly surged, reaching a peak of $73,000. To what extent can this price movement be attributed to increased Bitcoin demand related to ETFs? While inflows into Bitcoin ETFs since January have indeed contributed to some extent to the rise in Bitcoin prices, it is just one of several factors. ETFs have positively influenced market sentiment and demand by enhancing legitimacy and investor access. The next section explores variables related to ETF flows and their relationship with broader market dynamics.
Currently, the total market value of major Bitcoin spot ETFs trading in the United States has exceeded $79 billion. Considering GBTC held 619,000 Bitcoins at the launch of its spot ETF, this translates to approximately $40 billion in net inflows as of June 18, 2024.
Analyzing incremental distributions of Bitcoin ETF inflows and outflows, as provided by Block data, reveals which products have contributed most to fund flows. Managed by BlackRock, the IBIT fund and Fidelity’s FBTC fund have dominated ETF inflows so far, while Grayscale’s GBTC has seen almost entirely outflows.
Although there has been an overall positive net capital inflow, momentum has slowed since mid-March this year. Nevertheless, inflows have steadily increased, albeit at a slower pace. The trading value of Bitcoin spot ETFs has steadily grown, with cumulative daily trading volumes reaching $300 billion as of the writing of this article.
An interesting indicator initially overlooked is who is purchasing these new financial products. Despite ETFs targeting fundamentally different audiences than native digital assets, it’s surprising to see which entities are utilizing this new investment tool to gain exposure to Bitcoin. Not only are large funds like Wisconsin Retirement System incorporating over $150 million of Bitcoin spot ETF exposure into their portfolios, but smaller regional institutions are also taking similar actions. Several financial service providers are also adding Bitcoin to their balance sheets through spot ETFs, such as Hightower Advisors ($68 million), Bracebridge Capital ($434 million), Cambridge Investment Research ($40 million), and many others.
The demand-driven rise in Bitcoin accessibility facilitated by ETFs could significantly impact Bitcoin’s long-term price stability. Bitcoin’s market price derives from its supply and demand dynamics. Since the halving in April, daily supply has decreased from 900 Bitcoins to just 450 Bitcoins.
Some days witness inflows as high as 10,000 Bitcoins. This suggests that if inflows continue at this rate, trading platforms could face supply shocks in the future, potentially significantly increasing Bitcoin prices. Historically, the impact of increased demand on Bitcoin price stability can be observed in the year following each halving, when Bitcoin prices have significantly risen. Moreover, as long as prices do not reach a point where retail investors are willing to sell and stop ‘HODLing,’ supply shocks will persist to meet the demand generated by ETF inflows.
Finally, examining the relationship between asset management companies providing these financial products and Bitcoin mining companies could also be intriguing.
In conclusion, the advent of Bitcoin spot ETFs undeniably reshapes the cryptocurrency investment landscape, offering regulated and accessible avenues for traditional investors to participate in the Bitcoin market. Over the past five months since their launch, these ETFs have demonstrated robust growth and significant market impact, reflected in fund flows and Bitcoin price fluctuations. Substantial participation from various investors, including large pension funds and smaller institutions, underscores the broad acceptance and potential of these financial products.
The recent approval of Ethereum ETFs by the SEC marks another pivotal moment, signaling the mainstreaming trend of cryptocurrency investments. As these ETFs evolve and attract more investors, they may play an increasingly crucial role in integrating cryptocurrencies into broader financial markets. The success of Bitcoin spot ETFs sets a precedent for future cryptocurrency ETFs, heralding a bright future for continued integration of traditional finance with digital assets.