The launch of spot Bitcoin ETFs: two months later

Spot bitcoin Exchange Traded Funds (ETFs) have been launched in the US on 10 January. We are now two months later. They have attracted an unexpected high number of investors, breaking records in terms of inflows and trading volumes. With the Bitcoin reaching a record high of $69.000 early March.

The introduction of spot Bitcoin ETFs and the bullish market trends signal a significant shift towards the mainstream acceptance of cryptocurrencies giving a broader set of investors a new avenue to invest.

In this block I like to answer some questions such as what are those ETFs, how do they work, what may they bring and what are the risks. How did they perform up till now and what do we see as the way forward.

SEC approval

The SEC finally gave the greenlight to the listing and trading of 11 spot Bitcoin ETFs in the US, with the first 10 funds launching on January 11, 2024. This after roughly a decade of lobbying and denying applications, on investor protection concerns. This approval followed after a federal appeals court ruling in August last year that the SEC improperly had rejected a spot BTC ETF approval by Grayscale, forcing the SEC to rethink its stance. This approval opens the door to cryptocurrencies for many new investors who don’t want to take the extra steps involved in buying actual Bitcoin.

Bitcoin Exchange Traded Funds (ETFs)

The list of approved spot Bitcoin ETFs includes several top investment firms such as BlackRock, Fidelity and Invesco. Next to these there are a number of  lesser-known firms, which primarily focus on cryptocurrencies, including Valkyrie, ARK, Bitwise, Franklin, VanEck, WisdomTree and Hashdex.

But what are Spot Bitcoin ETFs?

A spot Bitcoin ETF allows investors to gain exposure into an asset that tracks the price movement of Bitcoin. This without the complications and risks of owning Bitcoin directly, such as setting up crypto wallets and accounts with crypto exchanges, some of which have poor cyber security records and are prone to hacks.

These ETFs are listed and traded on tightly-regulated stock exchanges such as NASDQ, NYSE and CBOE. They are therefore easily accessible for a much broader group of investors such as through retail investors' existing brokerage accounts, which are also closely supervised.

This eliminates the need to interact directly with cryptocurrency exchanges, streamlining the process and making it more familiar and accessible to a broader range of investors. That makes them easy for investors and traders to buy and sell an asset tied to the current value of Bitcoin, and they're less costly than mutual funds.

How do Bitcoin ETFs work?

Bitcoin ETFs operate by allowing investors to buy shares that represent ownership in actual Bitcoins held by the fund. These issuers manage purchasing, storing, and safekeeping of bitcoin on behalf of ETF investors in exchange for an annual fund management fee.

Spot Bitcoin ETFs allow for shares of the fund to be created or redeemed based on market demand. In this way a spot Bitcoin ETF allows investors to gain exposure to the current price of Bitcoin without having to hold the asset itself.

This is in contrast to Bitcoin futures ETFs, which were approved for trading by the U.S. SEC in October 2021 and can only trade bitcoin futures. Futures are complex derivatives instruments that track potential future prices of the underlying asset.

And what may these spot Bitcoin ETFs bring?

The adoption of spot crypto ETFs is seen as a pivotal turning point in the crypto adoption cycle. By providing regulatory clarity and security the emergence of spot Bitcoin ETFs makes it easier, less riskier and cheaper for traders to take a stake in the digital currency using just their traditional broker. These funds may well open up Bitcoin to wider acceptance as a store of value thank to its increased accessibility, bringing more liquidity and stability in the Bitcoin market.

11 February 2024: Start spot Bitcoin ETF trading

Nine US Bitcoin ETFs debuted and started trading on January 11, while the more than decade-old Grayscale Bitcoin Trust converted into an ETF the same day. In anticipation of the great fierce competition for market share expected between the selected spot Bitcoin ETFs and resulting profitability challenges facing current ETF issuers, especially concerning operational costs and sustainability triggered them to lower or even waive fees at least for a limited time to attract investors and grab market share.

How did spot Bitcoin ETFs perform up till now?

The impact of the Bitcoin ETFs is already clearly visible.

We are now two months further and may say that the emergence of spot Bitcoin ETFs) has garnered significant attention showing high trades and inflows driven by a growing number of investors. This increase in investment highlights the growing acceptance and enthusiasm for Bitcoin among mainstream investors and represents a fundamental shift in the cryptocurrency landscape.

As institutional and retail investors seek diversified portfolios and alternative stores of value, spot Bitcoin ETFs have emerged as an attractive investment option. While much of the early investment in the Bitcoin ETFs has come from the retail side, now also institutional investors are entering the market in an accelerated way. After doing their due diligence they are now massively moving into the Bitcoin ETF space. This has dramatically increased in the last two weeks as Bitcoin’s price has rallied firmly.

Bitcoin inflow and trading

The demand for these ETFs far exceeded anyone's expectations. Since mid-February, day after day, spot Bitcoin ETFs are breaking records in terms of trading volumes and inflows.

Trading
The new spot bitcoin ETFs are attracting heavy trading. Since their launch relentless demand for spot Bitcoin ETFs has pushed the trading volumes to new daily records, highlighting the continuous upward movement in market volume.

Overall trading volume of the 10 Bitcoin ETFs as a group increased to a staggering all time high $7.7 billion worth of assets being traded on Wednesday February 28 alone. Thereby smashing the previous record of $4.7 billion from their first trading day on Jan. 11, a staggering 63.8% increase.

The bigger Bitcoin exchange-traded funds (ETFs) such as Grayscale, Blackrock and Fidelity have seen a definite pickup in interest of trading during the last weeks of February. Leading the charge is BlackRock with over $3.4 billion to account for nearly 44% of the total volume, broking its volume record for the third consecutive day, followed by Grayscale with $1.9 billion shares traded and Fidelity with $1.4 billion.

Inflows
Inflows into spot Bitcoin ETFs continue to hit new highs. While Grayscale continues to shed assets, the other nine spot Bitcoin ETFs are pulling in billions amid the cryptocurrency’s rally. And that is accelerating during the last weeks.

Spot Bitcoin ETFs have reached a significant milestone, recording a new all-time high (ATH) for daily inflows on February 28. The new bitcoin ETFs collectively inhaled a cumulative daily record inflow of $673 million in a single day. That's more than the first day of new product launches. Last week’s weekly inflow total for the funds was roughly $1.7 billion — second only to the amount of more than $2.2 billion seen from Feb. 12 to Feb. 16. 

Blackrock and Fidelity are leading
This surge was primarily driven by Blackrock which saw the highest daily inflows at $612 million and Fidelity at $245 million, taking in $857 million, representing 96% of total BTC ETF flows that day.

BlackRock and Fidelity Investments’ are thereby the clear leaders. Both Funds have captured 79% of total inflows since the SEC approved the assets Jan. 10, with Blackrock roughly $7.15 billion in inflows as of end of February. The Fidelity ranks second at $4.72 billion , The ARK ranks third at $1.563 billion, followed by the Bitwise with about $1.114 billion in inflows.

Grayscale
Grayscale is the only fund that has seen continuous net outflows since its launch due to the heavy selling of GBTC shares by FTX and other investors. It has recorded more than $8 billion in outflows since early January. The selling however has broadly eased since February, with daily outflows slowing to a daily average of $138 million in February from January’s $403 million.

Net inflows
Since their debut in January, the newly listed spot bitcoin ETFs – excluding Grayscale - have witnessed tremendous traction drawing in US$7.9 billion in net inflows in two months, underscoring the growing — and steady — appetite for spot Bitcoin ETFs.

Despite the significant outflows from Grayscale, the overall sentiment remains positive. The 10 US ETFs notched a record $673 million of net inflows on Wednesday, even with the outflows seen by Grayscale, with BlackRock alone pulling in $612 million of fresh funds on Wednesday, followed by Fidelity at $245 million. This edged the previous record set on Jan. 11 — the funds’ first trading day — during which $655 million entered the offerings.

Assets under Management
Spot Bitcoin ETFs have accumulated billions worth of assets since their launch despite being less than two months old. US spot ETFs overall now hold more than $ 47.7 billion under management at the end of February.

The Bitcoin ETFs with the most assets are Grayscale's GBTC, BlackRock's IBIT and Fidelity's FBTC. Greyscale continues to be the biggest fund, with $24.3 billion of assets under management, notwithstanding its outflows. Excluding Grayscale, the nine newly approved spot Bitcoin ETFs) now have over combined $17 billion worth of the asset under management. BlackRock crossed the $10 billion assets under management at February’s end, while Fidelity assets under management exceeding $6.3 billion and constantly growing 

Bitcoin rate
Since the Bitcoin ETF launch the Bitcoin price has shown a dramatic rise triggered by the enormous interest in spot ETFs, the influx of institutional participation and speculation ahead of the upcoming halving event in  April/May. This week the price of bitcoin has reached a record high on Monday, continuing its rapid resurgence that began in late 2023, surpassing the record all-time high of $69000 of November 2021. Bitcoin has gained 60% since the start of this year. As a result the Bitcoin market cap crossed the $1.1 trillion mark in mid-February for the first time in more than two years.

What may it further bring?

Forward second dairy acceleration

A secondary acceleration of flows into spot Bitcoin ETFs and a real breakthrough is expected when new players enter the market including traditional financial players from the US but also from the global financial system.

The increased access to the spot BTC ETFs open the doors for these new players, that have yet to offer Bitcoin access to their clients. Many of these firms are now executing due diligence procedures to be convinced these new products meet their requirements. Expectations are that many may allocate to Bitcoin within the next 12 to 18 months.

With the arrival of broker-dealers as well as preeminent large registered investment advisor (RIA) networks offering spot Bitcoin ETFs to their clients, these may bringing much more investments into these new products. These will inevitably contribute to the acceleration of net inflows.

Wealth managers

As Bitcoin is moving toward new records, their arrival of ETFs in January has opened the door to fresh investment, giving the likes of wealth managers and hedge funds a new avenue for sinking capital across the asset class. Inflows into the funds could see a second wind as more wealth managers get comfortable allocating on behalf of clients. Citigroup the New York-based global bank is already evaluating these products for individual Wealth clients.

Brokerage platforms
And we also see the growing appetite for Bitcoin among big financial institutions, including banks and brokerages, as more of their clients show interest in Bitcoin ETFs. A huge amount of assets under management (AUM) at these players remains untapped, awaiting activation. But that could change when they enter the Bitcoin ETF arena.

Last week Wells Fargo and Bank of America's Merrill Lynch brokerage unit announced that they will start offering the spot Bitcoin ETF to wealth management clients with brokerage accounts access on their brokerage platforms on an unsolicited basis. Citigroup, meanwhile, currently provides their institutional clients with access to the recently approved Bitcoin ETFs from an execution and asset servicing perspective. Citi Will let some customers trade Bitcoin ETFs.

Morgan Stanley, which is among the largest US broker-dealer platforms in the US, is deciding whether to offer spot Bitcoin ETFs to customers of its large brokerage platform. The bank is in the midst of performing its due diligence before adding select ETFs to its brokerage platform. 

If Morgan Stanley is considering offering its clients access to spot BTC ETFs, other firms are likely doing so as well. 

Registered investment advisors

Since spot bitcoin ETFs went live in January, chatter has increased about the imminent arrival of the big registered investment advisor (RIA) networks and broker-dealer platforms.

Carson Group, a $30-billion registered investment advisor (RIA) platform, approved four spot bitcoin ETFs, including those offered by BlackRock, Fidelity, Franklin Templeton and Bitwise. These approved spot bitcoin ETFs, are set to become accessible to financial advisors and their clients, marking an important moment for the adoption of cryptocurrencies within traditional investment circles. This enables more institutional investors can access cryptocurrency investment options through trusted advisors, further enhancing Bitcoin's credibility.

Growing competition between crypto ETFs?

And next to that a spot Ethereum ETF is the latest talk of the market. Traders also bet on the possibility of a spot ETH ETF approval in the US, a move that could significantly boost institutional appeal, but also intensive competition.

It’s important to note that just because spot bitcoin ETFs have been approved, that does not mean the SEC is certain to approve additional crypto ETFs. This notwithstanding Franklin Templeton, BlackRock, Fidelity, Ark and 21Shares, Grayscale, VanEck, Invesco and Galaxy, and Hashdex having all submitted applications for an ETH ETF.

The SEC has been cautious in the past about approving cryptocurrency ETFs due to concerns over market volatility, liquidity, and potential market manipulation. Because the spot ether ETFs would be a new product and require a rule change, the SEC must approve or deny them by a set deadline. VanEck's filing is first in line for a decision on May 23, while the deadline for Grayscale's ether application is June 18.

Nevertheless, as the market matures and regulatory frameworks become more robust, these concerns may be alleviated - especially after the successful launch of spot Bitcoin ETFs - paving the way for other Crypto ETFs.

Interest from across the globe

The introduction of Spot Bitcoin ETFs and the significant gains recorded in February reflects a maturing market that continues to attract investment and interest from across the globe. There is such a demand worldwide, especially for BlackRock’s Bitcoin ETF, that it seems quite likely to arrive everywhere over time.

Some managers of the new Bitcoin ETFs, first and foremost BlackRock, are working to bring their crypto derivatives also to foreign markets, starting for example from Brazil. Countries in Asia like Hong Kong and  South Korea are also discussing whether to allow sale of spot Bitcoin ETFs. While there is increased retail interest in Australia, as well as in Europe.

Who may survive: growing competition?

The arrival of Bitcoin spot ETFs is shaking up the cryptocurrency market, with fierce competition especially from big players like Blackrock and Fidelity. Bitcoin ETFs have been a huge success so far this year, but there is a firmly growing gap between the biggest issuers and the rest.

It will be a challenge for the smaller ETFs to compete with their biggest peers and survive. High operational costs and slashing fee cuts (price war) pose challenges for existing ETF issuers, as these could hit the profitability of a number of them. The growing gap between the biggest Bitcoin ETF issuers and the rest may lead the market to consolidate around the biggest players. With forecasts that of the present 10 Funds only half will survive.

The way forward

All these developments may definitely have their impact on the Bitcoin ETF market and as a result on the Bitcoin rate. A growing number of experts are very bullish on the future of the Bitcoin rate. If this buying trend continues its current daily growth rate Bitcoin could trigger a further breakout.

Should these financial firms from the traditional financial sector enter the Bitcoin ETF arena as is expected, various estimates suggest that spot Bitcoin ETFs would attract between $50 million and $ 120 billion in investments in the next five years.

With these extra tens of billions of dollars expected to flow into spot bitcoin ETFs in 2024, combined with the upcoming halving event could send soaring the rate passing $100000by year’s end. Longer term Bitcoin could even see a further and steady price increase. If this trend continues this could even driving the price of Bitcoin near $200,000 by the end of 2025, more than quadrupling the current value of the crypto coin.

Final thinking

The introduction and success of these new spot Bitcoin ETFs underline the continued innovation in the crypto sector and the unstoppable march of digital currencies towards mainstream financial integration. For the crypto industry, a spot bitcoin ETF is seen as a big win, boosting the legitimacy of the cryptocurrency industry and pushing bitcoin further into the mainstream.

The launch of the Bitcoin ETFs is however just the beginning of continued widespread adoption and education of what is possible with crypto. It should be seen as the start of a longer term process to see crypto as an integral part of the global financial system. This broad market access may pave the way for the global financial market to further bridge the gap between traditional finance and the digital world.

Traditional financial institutions will thereby have a significant role to play in determining how the crypto markets evolve.