Evaluating the impact and future role of Bitcoin Spot ETFs after 5 months of trading
As 2023 came to a close with the SEC deliberating on whether or not spot Bitcoin ETFs should receive approval to begin public trading, there was rampant discussion about to what extent this upcoming approval or rejection was priced in. Now, 5 months later, we have the data. In this article, we will take a look at the most notable Bitcoin spot ETFs, their metrics, and where they appear to be heading.
The first spot Bitcoin ETFs were introduced on January 11, 2024. The U.S. Securities and Exchange Commission (SEC) approved 11 new spot Bitcoin ETFs a day prior. These ETFs track the current price of Bitcoin while making it easier for investors to gain exposure to Bitcoin without having to purchase and hold the cryptocurrency directly. These particular funds achieve this by actually holding a substantial amount of Bitcoin in a wallet 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.
The largest spot Bitcoin ETFs, such as BlackRock’s IBIT, and Fidelity’s FBTC have seen noticeable growth and trading volume since their launch in early January 2024. IBIT, for example, has already amassed an impressive $18 billion in assets under management. The surge in trading volumes for Bitcoin ETFs, with IBIT leading the charge, is a clear sign that traditional investors are taking notice of their existence. Major U.S. banks, like Morgan Stanley and UBS, are even competing to offer Bitcoin ETFs to their clients, further solidifying their legitimacy in the eyes of mainstream investors.
Market Overview
While there are many new Bitcoin spot ETFs trading, this article focuses on the five with the largest amount of assets under management (AUM). These are currently: GBTC, IBIT, FBTC, ARKB, and BITB. The graph below shows the current size of these funds:
While the core objective of all spot BTC ETFs is the same, some key differences may explain why investors prefer certain funds over others. These include accessibility, fees, choice of custodian, and initial promotional offers, among other factors.
- Fees
The expense ratios of these ETFs vary, with GBTC being the most expensive at 1.5%, and IBIT and FBTC being relatively cheaper at 0.19% and 0.20% respectively. ARKB charges 0.90%, and BITB charges 0.20%.
2. Promotions
Some of these ETFs have promotional offers. For example, IBIT has waived its fee for a certain period, and EZBC has also waived its fee for up to $5 billion in assets.
3. Custodians
The ETFs use various custodians to hold their Bitcoin. GBTC and IBIT use Coinbase Custody Trust, while other ETFs may use different custodians.
4. Holdings
It’s worth noting that the amount of Bitcoin held by these ETFs can vary, which could affect their liquidity and tracking accuracy. ETFs with larger Bitcoin holdings may be more liquid and better able to track the price of Bitcoin, as they have more Bitcoin available to buy or sell as needed.
At launch, many ETF providers are offering their services at a discount, or free of charge to boost the acceptance of their newly introduced products. This gives the IBIT product, for example, a certain advantage over GBTC, at least for the time being.
BTC Market Dynamics
When the BTC ETFs began trading on January 11th, 2024, Bitcoin was trading at around $46,632. By March 2024, Bitcoin’s market value saw a significant increase to a local high of $73,000. To what extent can this price movement be attributed to an increase in demand for BTC linked to the ETFs? While BTC ETF flows have certainly played a role in Bitcoin’s price increase since January, it is only one of several factors. The increased legitimacy and investor access provided by ETFs have positively influenced market sentiment and demand. In the following section, we will look at some of the variables linking ETF flows with broader market dynamics.
The major spot BTC ETFs trading in the USA currently have a combined market capitalization of over $79B. Considering GBTC was already holding 619,000 Bitcoin when they launched their spot ETF this implies a total net inflow in the ballpark of $40B as of June 18th, 2024.
Looking at an incremental breakdown of BTC ETF inflows and outflows, such as the one made available by the Block, allows us to see which products are responsible for a majority of these flows. The BlackRock-managed fund IBIT, followed by Fidelities FBTC makes up most of the ETF inflows to date, while Grayscale’s GBTC has almost exclusively seen fund outflows.
While there has been a net-positive fund inflow, some of the initial momentum has been lost around mid-March of this year. Nonetheless, there has been a slow but steady increase since then. The trading value of Bitcoin spot ETFs has been growing steadily, reaching a cumulative daily volume of $300B at the time of writing.
One interesting metric that was potentially overlooked initially is who is purchasing these new financial products. While it was clear that ETFs and native digital assets have two largely separate target audiences, it is surprising to see who is using this new investment vehicle to gain Bitcoin exposure. Not only large funds like the Wisconsin Pension Plan, which added over $150M of Bitcoin Spot ETF exposure to their portfolio but also several smaller local institutions are doing the same. Several financial services providers are also adding Bitcoin to their balance sheets via spot ETF. Examples include Hightower Advisors ($68M), Bracebridge Capital ($434M), and Cambridge Investment Research ($40M), among many others.
The rising demand for Bitcoin driven by increased accessibility through ETFs is likely to have a significant long-term impact on Bitcoin’s price stability. The market price of Bitcoin is derived from its supply and demand. Since the Halving in April, the average daily supply shrunk from 900 Bitcoin to only 450.
On some days we have seen inflows of as much as 10,000 Bitcoin. This means that if the inflows stay around this rate, exchanges could experience a supply shock in the future which may increase the price of Bitcoin drastically. Historically, the impact of rising demand on Bitcoin’s price stability can be observed one year after each halving, when Bitcoin prices have surged significantly. Furthermore, a supply shock persists as long as the price has not reached a point where retail investors are willing to sell and stop “hodling” to feed the demand generated from ETF inflows.
Finally, it may also be interesting to look at the relationships between the asset management companies providing these financial products, and the Bitcoin mining companies.
All in all, Bitcoin ETFs have significantly impacted the market by driving demand and enhancing legitimacy. Major ETFs have seen substantial inflows, reflecting growing investor interest. Diverse participants, from large pension plans to smaller institutions, have adopted Bitcoin ETFs, highlighting their usefulness in portfolio building.
Future Outlook: New ETFs on the horizon?
The next crypto ETF launch is already on the horizon because in May 2024, the SEC approved multiple Ether ETFs. Until now, there has not been any information about the ETFs’ structure, management, and investment strategies but it’s close at hand that the ETH ETF structure will be similar to Bitcoin ETF’s structure. The most important takeaway: Although the SEC has not officially formulated it this way, it has de facto declared ETH a commodity by approving the ETFs. However, ETF issuers will not initially be able to stake ETH. All applicants for the ETH ETF got approved, which are 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
VanEck even published the first commercial: https://x.com/vaneck_us/status/1793755768837251281
After the approval of the Bitcoin ETF earlier this year, as well as the recent approval of the ETH ETF it is only a question of time until the next cryptocurrency will be brought into traditional financial markets via ETFs. Just this week, on June 27, VanEck filed for a Solana-Spot-ETF!
Summary
The advent of Bitcoin spot ETFs has undeniably reshaped the cryptocurrency investment landscape, offering a regulated and accessible means for traditional investors to engage with Bitcoin. Five months post-launch, these ETFs have demonstrated robust growth and substantial market impact, reflected in both asset flows and Bitcoin price movements. The significant participation from a diverse range of investors, including large pension funds and smaller institutions, underscores the broad acceptance and potential of these financial products.
The SEC’s recent approval of Ethereum ETFs marks another pivotal moment, suggesting a trend toward the mainstreaming of cryptocurrency investments. As these ETFs continue to evolve and attract more investors, they will likely play an increasingly crucial role in integrating cryptocurrencies into the broader financial markets. The success of Bitcoin spot ETFs sets a precedent for future cryptocurrency ETFs, signaling a promising future for the continued convergence of traditional finance and digital assets.
About the authors
Julian Proft is a crypto expert with over three years of expertise in project management and digital marketing. Julian holds a Master in Management (M.Sc.) which he completed in Germany and the United States with a focus on Game Theory, Social Philosophy, and Digital Marketing. Julian is passionate about fostering the adoption of cryptocurrencies and developing brand strategies. He formerly worked for the Frankfurt School Blockchain Center. You can follow and contact Julian on LinkedIn and Medium.
Cedric Heidt is a research associate at the Frankfurt School Blockchain Center (FSBC) and an all-around crypto enthusiast. His main focus is currently on the sustainability aspects of Bitcoin, play-to-earn gaming, and decentralized finance in general. You can contact him via LinkedIn or by mail.
