Analysis of the impact and future role of Bitcoin spot ETF after 5 months of trading

As 2023 draws to a close, the U.S. Securities and Exchange Commission (SEC) is debating whether a Bitcoin spot ETF should be approved to begin public trading, and there is widespread discussion about the extent to which this upcoming approval or rejection will be digested by the market. Now, five months later, we have the data. In this article, we’ll take a look at the most well-known Bitcoin spot ETFs, their indicators, and where they might go in the future.

The first batch of Bitcoin spot ETFs will be launched on January 11, 2024. The U.S. Securities and Exchange Commission (SEC) approved 11 new Bitcoin spot ETFs the previous day. These ETFs track the current price of Bitcoin and allow investors to gain exposure to Bitcoin more easily without having to buy and hold the cryptocurrency directly. These funds do this by actually holding large amounts of Bitcoin in wallets managed by custodians. As a result, the value of ETF shares is tied to the current market price of Bitcoin, allowing investors to participate in the cryptocurrency market indirectly 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 trading volume. For example, IBIT has amassed 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 beginning to take notice of its existence. Major U.S. banks, such as Morgan Stanley and UBS, are even rushing to offer Bitcoin ETFs to their clients, further solidifying their legitimacy in the eyes of mainstream investors.

1. Market Overview

While 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) ($M) - June 18, 2024

While the core objectives of all Bitcoin spot ETFs are the same, there are some key differences May explain why investors prefer certain funds over others. These differences include factors such as accessibility, cost, hosting options, and initial promotional offers.

• Fees Expense ratios for these ETFs vary, with GBTC being the most expensive at 1.5%, while IBIT and FBTC are relatively cheaper at 0.19% and 0.20% respectively. ARKB charges a fee of 0.90%, and BITB charges a fee of 0.20%.

• 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.

• Custodians These ETFs use various custodians to hold their Bitcoins. GBTC and IBIT use Coinbase Custody Trust, while other ETFs may use different custodians.

• Holds It’s 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 Bitcoin's price 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 acceptance of their newly launched products. This gives IBIT products at least some advantage over GBTC products for a period of time, for example.

2. BTC market dynamics

When the Bitcoin ETF started trading on January 11, 2024, the price of Bitcoin was approximately US$46,632. By March 2024, Bitcoin's market value had grown significantly, reaching a peak of $73,000. To what extent can this price movement be attributed to the increased demand for Bitcoin associated with ETFs? While inflows into Bitcoin ETFs since January have indeed contributed to some of the rise in Bitcoin prices, it is only one of several factors. The increased legitimacy and investor access brought by ETFs has positively impacted market sentiment and demand. In the following sections, we explore some of the variables associated with ETF flows and how they relate to broader market dynamics.

The total market capitalization of the major Bitcoin spot ETFs currently traded in the United States exceeds $79 billion. Considering that GBTC already held 619,000 Bitcoins when it launched its spot ETF, this means that as of June 18, 2024, the total net inflow will be approximately US$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 the capital flows. The IBIT fund, managed by BlackRock, and Fidelity's FBTC fund have accounted for most of the ETF inflows so far, while Grayscale's GBTC has been almost entirely responsible for outflows.

Despite the overall net positive inflows, some of the initial momentum starting in mid-March this year has faded. Since then, however, inflows have slowly but steadily increased. The trading value of the Bitcoin spot ETF has grown steadily, with cumulative daily trading volume reaching $300 billion at the time of 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’s surprising to see who is leveraging this new investment vehicle to gain Bitcoin exposure. Not only are large funds like the Wisconsin Pension Plan adding over $150 million in Bitcoin spot ETF exposure to their portfolios, there are also smaller local institutions doing the same. Several financial services 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.

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

On some days we see inflows as high as 10,000 Bitcoins. This means that if the inflow rate remains at this level, the trading 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 price stability can be observed one year after each halving, when Bitcoin prices rise significantly. Furthermore, the supply shock will continue as long as prices do not reach the point where retail investors are willing to sell and stop “HODLing” to meet the demand generated by ETF inflows.

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

Overall, Bitcoin ETFs have significantly impacted the market by driving demand and enhancing legitimacy. Major ETFs have attracted significant inflows, reflecting growing investor interest. Bitcoin ETFs have been adopted by a variety of players, from large pension schemes to smaller institutions, highlighting their usefulness in portfolio construction.

3. Looking to the future: Will new ETFs be released soon?

With the SEC already approving multiple Ethereum ETFs in May 2024, the launch of the next cryptocurrency ETF is already in sight. So far, there are no details about the structure, management, and investment strategies of these ETFs, but it will soon be known that the ETH ETF will be structured similarly to the Bitcoin ETF. The most important point is this: by approving these ETFs, the SEC has effectively declared ETH as a commodity, although it has not officially said so. However, ETF issuers will not be able to stake 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

Even VanEck posted the A commercial: https://x.com/vaneck_us/status/1793755768837251281.

After the approval of the Bitcoin ETF earlier this year, and the recent approval of the ETH ETF, it is only a matter of time until the next cryptocurrency will be introduced to traditional financial markets via an ETF. Just this week, on June 27, VanEck applied for a Solana spot ETF!

4. Summary

The emergence of Bitcoin spot ETFs has undoubtedly reshaped the field of cryptocurrency investment, providing traditional investors with a regulated and accessible way to participate in the Bitcoin market. In the five months since their launch, the ETFs have demonstrated strong growth and significant market impact, reflected in capital flows and Bitcoin price volatility. Significant participation from a variety of investors, including large pension funds and smaller institutions, highlights the broad acceptance and potential of these financial products.

The SEC’s recent approval of an Ethereum ETF marks another key moment, signaling the move toward mainstream cryptocurrency investing. As these ETFs continue to evolve and attract more investors, they may play an increasingly important role in integrating cryptocurrencies into broader financial markets. The success of the Bitcoin spot ETF sets a precedent for future cryptocurrency ETFs, indicating a bright future for the continued integration of traditional finance and digital assets.

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