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One Week Later – What Effect Have the ETFs Had on the Market?

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ETFs

Last week marked a monumental moment for Bitcoin and the broad cryptocurrency market as the first spot BTC exchange-traded fund (ETF) was finally approved in the US after years of delays and rejections.

It all started in 2013 when the first application for a spot in the Bitcoin ETF was filed by the founders of the crypto exchange Gemini, Cameron and Tyler Winklevoss. Then, in 2017, Grayscale tried converting its trust into an ETF. But it was finally, in Jan. 2024, that the Spot Bitcoin ETF became a reality in the US.

A day after the US Securities and Exchange Commission's (SEC) X (previously Twitter) account was compromised to tweet out a fake Bitcoin ETF approval, SEC chairman Gary Gensler, who is a crypto skeptic, along with commissioners Hester Peirce and Mark Uyeda, approved the first-ever spot Bitcoin ETF. Still, Gensler reinforced the agency's negative stance on crypto, stating, “We did not approve or endorse bitcoin” and that “investors should remain cautious.”

Notwithstanding Gensler's remarks, the long-awaited approval of the Bitcoin ETFs came on the same day, fifteen years ago, when Hal Finney posted “Running Bitcoin” on X. Besides Bitcoin's pseudonymous creator, Satoshi Nakamoto, Finney was the first person to download and run Bitcoin software. 

At the time, Bitcoin was a niche asset that went on to become a trillion-dollar asset at its peak, in line with Finney's belief that Bitcoin would grow quickly. He also noted in an email that one day, BTC would be worth $10 million each, estimating a fraction of total global household wealth would move into cryptocurrency. Now that the ETF approval has finally come, it is expected to send Bitcoin skywards. 

“BTC ETFs and other similar products are great for crypto and will cause a high amount of demand for BTC that will likely drive up the price of BTC.” 

– Dave Hendricks, Founder and CEO of Vertalo, an SEC-registered digital transfer agent that enables the digital asset ecosystem

This bullishness comes from the fact that the ETF presents not just a regulated but familiar investment vehicle for mainstream investors. This will allow them to trade BTC prices via traditional brokerage accounts. As a result of this approval, those investors who have been curious but didn't want to invest directly in Bitcoin will be attracted to these products, resulting in Bitcoin seeing “incremental demand.”

Earlier this month, a survey published by Bitwise and VettaFi noted that about 80% of financial advisers said that they were either not able to buy crypto for their clients or unsure if they could. Out of those who were interested in buying Bitcoin, 88% said they were waiting for the SEC to approve the ETF.

According to Goldman Sachs, Bitcoin ETFs will allow institutional investors to engage more actively in arbitrage strategies and options hedging in addition to benefiting from better liquidity and investor protection without having to assume the risks of self-custody while the likes of Blackrock and Fidelity lends “experience and credibility in managing these vehicles.”

“For the first time in a long time, the bitcoin markets will have a predictable and long-lasting arbitrage opportunity,” said Arthur Hayes, ex-CEO of BitMEX, who expects these products to pop up in major Asian markets like Hong Kong, which service “China southbound flow.” 

All the Activity: Who Won the Spot Bitcoin ETF Race?

On the first day of the launch, the Spot Bitcoin ETFs collectively recorded $4.6 bln in daily volume. In comparison, ProShares' futures-based Bitcoin ETF (BITO) did $1 bln in trading volume while seeing $570 million in inflows on its first day in Oct. 2021. Still, “Easily the biggest Day One splash in ETF history,” commented Eric Balchunas, ETF analyst at Bloomberg Intelligence.

Last Thursday, however, as several spot ETFs debuted on US exchanges, BITO had outflows of 3,000 BTC, a move likely driven by user-friendly spot-based ETFs. As JPMorgan analysts led by Nikolaos Panigirtzoglou wrote in their research report, those who hold their crypto in fund format could shift from GBTC and futures-based ETFs to cheaper spot ETFs.

Now, this Tuesday, the total volume across ten spot Bitcoin ETFs jumped past $1.8 billion, with Grayscale, BlackRock, and Fidelity leading this activity by accounting for $1.6 billion of this volume. Interestingly, this volume surpassed the trading volume for all 500 ETFs launched in the US in 2023, which came at a mere $450 million, as per Balchunas. Meanwhile, over the first three days of trading, the total volume across all the new spot Bitcoin ETFs jumped to almost $10 billion.

BlackRock's iShares Bitcoin Trust (IBIT) is currently the clear winner in terms of attracting net inflows, with nearly $500 million over the past three days. According to CC15Capital, BlackRock's Bitcoin ETF has 11,439 BTC, Fidelity's Wise Origin Bitcoin Fund (FBTC) has 9,750 BTC, and ARKB currently holds 2,535 BTC. Grayscale, meanwhile, has 605,891 BTC. These Bitcoin holdings, however, may not be up to date. 

Other similar products are offered by Bitwise, Invesco, VanEck, Franklin Templeton, Valkyrie, and WisdomTree. 

When it comes to Grayscale's Bitcoin fund, while it leads in total trading volume, it isn't because of inflows but rather outflows. According to Balchunas, BlackRock's product is “most likely to overtake GBTC as Liquidity King” by seeing continuous inflows. 

Grayscale's $28.58 billion Bitcoin Trust ETF (GBTC) has been converted over from the existing fund, which was launched a decade ago. On Tuesday, Grayscale sent 9,000 BTC more to an exchange, as per data from Arkham Intelligence, after outflows resulted in the firm selling 2,000 Bitcoin last week.

Ever since the ETF approval, the fund has been seeing sizable outflows as investors took the opportunity and rushed to exit after its discount narrowed to its lowest level in almost three years. According to YCharts, the GBTC discount is currently at 1.18%, reduced from the steep 48.3% in late Dec. 2022.

It was in February 2021 that the GBTC premium suddenly became a discount due to the minimum six-month lock-up period, which trapped investors in the fund due to unwillingness to sell shares at continually worsening discounts.

Just in the last three days, an estimated $1.1 billion has flowed from GBTC, as per Bloomberg ETF analyst James Seyffart. The outflows GBTC is seeing are outpacing the inflows other Bitcoin ETFs are recording. 

Another reason for Grayscale's outflows is its high fees at 1.5% compared to competitors. But in the light of several spot Bitcoin ETFs now live, it won't work in favor of Grayscale anymore. 

Already, in the race to win over investors, Franklin Templeton reduced the fee of its product from 0.29% to 0.19%. This 10 basis-point cut down had Franklin Templeton replacing Bitwise, which charges 0.2% to become the cheapest amongst the new investment products. 

The fund manager also waived off fees until Aug. 2, 2024, till its fund achieves an AUM of $10 billion. Hours after the approval of its product, the 76-year-old asset manager with $1.5 trillion in AUM also put laser eyes on its logo featuring Ben Franklin.

As the ETF war rages on, crypto asset manager CoinShares also utilized its option to buy Valkyrie Investments's ETF unit as a result of the approval of Valkyrie's Bitcoin Fund (BRRR), which made its debut by seeing $9.3 million in trading volume.

According to CoinShares CEO Jean-Marie Mognetti, the firm wants to extend its European success, where it dominates over 40% of all AUM in crypto ETPs in the US. The acquisition will add around $110 million to CoinShares' $4.5 bln AUM.

Meanwhile, fueled by the spot Bitcoin ETFs launch, total inflows into crypto investment products (ETPs) reached $1.18 billion last week, as per the report from CoinShares. While impressive, the numbers were not record-breaking as back in Oct. 2021, the launch of Bitcoin futures ETFs resulted in an inflow of $1.5 billion in one week.

Setting the Stage for Mainstream Giants

While spot Bitcoin ETFs are already operational in Europe, Canada, and Australia, the approval by the SEC is seen as a big game changer in the crypto space. This marks a significant milestone for the industry as it will expand investor access to the crypto king. Bitcoin ETFs are traditional financial vehicles that give both retail and institutional investors easier exposure to BTC.

2024 is certainly shaping up to be the year that traditional finance (TradFi) finally makes its presence known in the crypto space. Approval of several Bitcoin ETFs sets the stage for asset manager behemoths like BlackRock and Fidelity and banking giants like JPMorgan and Goldman Sachs' entry into the Bitcoin market. 

As Dave Hendricks from Vertalo highlights:

“This development draws positive attention to other things like Institutional blockchain (what Vertalo does). The fact that so many large financial institutions are on-board is a BIG deal.”

This trend not only validates the sector but also signals a significant shift in how traditional financial markets are beginning to embrace and integrate with innovative digital assets and blockchain technology.

Originally anti-establishment, today, Bitcoin has been adopted on Wall Street, which could see widespread growth as an alternative asset. However, the entry of mainstream giants in the crypto space raises the question of whether their participation undermines crypto's disruptive ethos and affects the power dynamics in the decentralized sector. 

Will these massive entities dictate Bitcoin's direction in the post-ETF world, where they are likely to own a large chunk of its supply? This could certainly lead to the creation of new Bitcoin whales. 

It is just the beginning, though. As BlackRock's ETF went live, CEO Larry Fink began praising the crypto industry, which he once called an “index of money laundering.” But now, in an interview with CNBC, he said he has become “a big believer” in Bitcoin, which “is similar to gold in that it's a scarce asset.”

The ETFs, meanwhile, are “step one in the technological revolution in the financial markets,” which Fink is ready to take forward with yet another product in the form of a spot ETH ETF. 

With almost a dozen spot Bitcoin ETFs finally live and trading in the US, speculators are looking at Ethereum as the next likely candidate for spot ETF approval, for which the process has already started. VanEck and Ark 21Shares filed the paperwork for the same with the SEC back in September, while BlackRock did in November. Such approval would legitimize Ethereum for the TradFi world, leading to increased interest and investment in Ethereum-based projects that could foster growth in the ecosystem. 

“I see value in having an Ethereum ETF,” said Fink. “These ETFs are stepping stones towards tokenization, and I believe that's where we're headed.” While Bitcoin can provide protection against geopolitical risks, tokenization, according to Fink, can help eliminate issues related to money laundering and other forms of corruption. 

What's Next? Crypto Post Spot Bitcoin ETF

Already, the euphoria surrounding the Bitcoin ETFs has given way to a rout. 

The listing of new Bitcoin funds, as expected, was a ‘sell the news' event that saw the price of BTC surging past its two-year high of $49,000 only to lose about 12% of its value since then to now trade at $42,762, as per CoinGecko. The price started rallying in Sept. 2023 when it was trading around $25k, nearly doubling in value without significant pullbacks.

The share of Coinbase (COIN), the publicly-listed crypto exchange that provides custody services to most of the ETF issuers, has also taken a dip to $133.88, down from $187.4 on Dec. 29. The total crypto market cap meanwhile has slid down from $1.858t last week to be now at $1.768 trillion.

This is because the approval was much anticipated, hence the run-up for months. The same phenomenon was also seen during previous landmark events like the Bitcoin Futures listing in Dec. 2017 and Coinbase's stock market listing in April 2021.

In the short term, the price of Bitcoin is likely to be topped out. Many are now expecting the price to break down and fall below the $40,000 psychological level in the near term. Given that BTC rose more than 150% in 2023, it would be a typical correction. However, with lower US treasury yields and an optimistic outlook for the Federal Reserve's early rate cuts, the risk of downside may be limited. Meanwhile, the long-term expectations remain bullish, fueled by the demand for ETFs. 

As 21Shares President Ophelia Snyder said in an interview, the initial trading volumes reflect pent-up demand, and she expects: 

“A second wave of activity in the coming weeks and months as this becomes more mainstream.” 

However, it's “a mistake” to focus on short-term flows, said Snyder, noting it's “crazy short-sighted and largely not the point,” as “it's going to ramp over time.” 

Market analysts see Bitcoin as a “transformative” force for the industry as it will allow traditional wealth management to access the largest crypto asset and bring in fresh capital in crypto from endowments, pensions, sovereign wealth, insurance companies, and retirement plans.

“The positive knock-on effects (second-order effects) for all things' Distributed Ledger Technology' (DLT) will drive the crypto markets higher. There will be strong capital flows from low-yield products into these ETFs, the larger crypto markets. Will drive more talk of tokenization despite most commentators not even understanding what that means.” 

– said Hendricks of Vertalo

According to market observers, the demand for Bitcoin ETFs could see billions of dollars in inflow. Standard Chartered analysts forecasted that these products may see $50-$100 billion inflows this year. The Bank also predicted that bitcoin could rise to levels closer to $200,000 by 2025-end, comparing the spot Bitcoin ETF to the first gold ETF, which was launched in Nov. 2004, following which the price of precious metal rose over 4x in seven years. More than $100 billion is currently invested in gold ETFs in the US. 

ETFs made it easy for investors to buy gold by simply clicking ‘buy' in their brokerage accounts, so Standard Chartered expects “bitcoin to enjoy price gains of a similar magnitude as a result of US spot ETF approval” only for them to materialize “over a shorter (one- to two-year) period.”

In fact, the correlation between Bitcoin and gold has been rising to new heights in recent months. The correlation currently stands at 0.76.

Meanwhile, ARK Invest CEO Cathie Wood, who continues to be immensely bullish on Bitcoin, said the largest cryptocurrency by market cap could reach $1.5 million in price by the end of this decade, raising her previous estimate by 50%, in light of the green light from the SEC. Meanwhile, a bear case, according to Wood, would see the BTC price rise to $258,500 and a base case of $682,800.

Another big bullish event to drive crypto prices higher is halving in the first half of 2024. All eyes are on the upcoming Bitcoin halving now, which will slash the rate of new BTC issued to miners from the current 6.25 to 3.125 BTC. At the same time, the historic approval of Bitcoin ETF has opened the door for other cryptocurrencies, with Ethereum in the lead. Together, these events will drive the crypto market prices and mainstream adoption higher.

Click here to learn all about investing in Bitcoin.

Gaurav started trading cryptocurrencies in 2017 and has fallen in love with the crypto space ever since. His interest in everything crypto turned him into a writer specializing in cryptocurrencies and blockchain. Soon he found himself working with crypto companies and media outlets. He is also a big-time Batman fan.