Assessing the impact and future role of Bitcoin spot ETFs after 5 months of trading

Author: Frankfurt School Blockchain Ce; Compiler: Vernacular Blockchain

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 extensive discussion on how well the upcoming approval or rejection is priced into the market. Now, five months later, we have the data. In this article, we’ll take a look at the most prominent Bitcoin spot ETFs, their metrics, and where they’re 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 buy and hold the cryptocurrency directly. 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 their trading volumes. For example, IBIT has accumulated 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 starting to pay attention to its existence. Major U.S. banks, such as Morgan Stanley and UBS, have even rushed to offer Bitcoin ETFs to their clients, further solidifying their legitimacy in the eyes of mainstream investors.

1. Market Overview

Although 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 chart below 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 inexpensive at 0.19% and 0.20%, respectively. ARKB charges a 0.90% fee and BITB charges a 0.20% fee.

• Promotional Offers Some ETFs offer promotional offers. For example, IBIT waived its fees for a certain period, while EZBC also waived its fees up to $5 billion in assets.

• Custody These ETFs use a variety of 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 the acceptance of their newly launched products. For example, this gives IBIT products at least some advantage 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, the market value of Bitcoin had grown significantly, reaching a peak of $73,000. To what extent can this price change be attributed to the increase in demand for Bitcoin associated with ETFs? While inflows into Bitcoin ETFs since January have certainly contributed to some of the gains in Bitcoin prices, this is only one of several factors. The increased legitimacy and investor access that ETFs bring has positively impacted market sentiment and demand. In the following sections, we will explore some of the variables associated with ETF flows and how they relate to broader market dynamics.

The total market capitalization of major Bitcoin spot ETFs currently traded in the United States has exceeded $79 billion. Considering that GBTC already holds 619,000 Bitcoins when it launches its spot ETF, this means that as of June 18, 2024, total net inflows are around $40 billion.

By analyzing the incremental distribution of Bitcoin ETF inflows and outflows, such as the data provided by Block, we can see which products contribute the majority of fund flows. The IBIT fund managed by BlackRock, as well as Fidelity's FBTC fund have accounted for the majority of ETF inflows to date, while Grayscale's GBTC has been almost entirely outflows.

Despite 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 indicator that may be initially overlooked is who is buying these new financial products. Although 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 Bitcoin exposure. Not only are large funds like the Wisconsin Pension Plan, which added more than $150 million in Bitcoin spot ETF exposure to its portfolio, but there are also smaller local institutions that 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.

The upward demand driven by the increased availability of Bitcoin through ETFs could have a significant impact on Bitcoin’s long-term price stability. The market price of Bitcoin is derived from its supply and demand. Since the halving in April, the average daily supply has been reduced from 900 Bitcoin to just 450 Bitcoin.

On some days, we have seen inflows as high as 10,000 Bitcoin. This means that if the inflow rate remains at this level, the exchange platform may experience a supply shock in the future, which could significantly increase the price of Bitcoin. Historically, the impact of increased demand on Bitcoin’s price stability can be observed one year after each halving, when Bitcoin prices have increased significantly. Moreover, as long as the price has not reached a point where retail investors are willing to sell and stop “HODLing”, the supply shock will continue to meet the demand generated by the ETF inflows.

Finally, it may also be interesting to look at the relationship between the asset management companies that provide these financial products and the Bitcoin mining companies.

Overall, Bitcoin ETFs have significantly affected the market by driving demand and enhancing legitimacy. Major ETFs have already 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 Ahead: Are New ETFs Coming?

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 on 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 pledge 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

After the approval of the Bitcoin ETF earlier this year, and the recent approval of the 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 applied for a Solana spot ETF!

4. Conclusion

The emergence of Bitcoin spot ETFs has undoubtedly reshaped the cryptocurrency investment landscape, providing traditional investors with a regulated and accessible way to participate in the Bitcoin market. In the five months since their launch, these ETFs have demonstrated strong growth and significant market impact, reflected in fund flows and Bitcoin price volatility. Significant participation from a variety of investors, including large pension funds and smaller institutions, highlights the widespread 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, heralding a bright future for the continued integration of traditional finance and digital assets.