The Bitcoin ETF – a milestone despite the lack of a price explosion

By Alexander Bechtel

The US regulatory authority SEC approves a total of eleven Bitcoin ETF applications. A milestone for Bitcoin, but the hoped-for price explosion has failed to materialize. Here are the reasons.

Last week, the financial markets experienced one of those moments that could go down in history. It started on Tuesday with a post by the US Securities and Exchange Commission (SEC) on X (formerly Twitter): “The SEC grants approval for #Bitcoin ETFs for listing on all registered national securities exchanges,” it read. The Bitcoin community celebrated and the price of the cryptocurrency immediately shot up by USD 1,000. However, after just 30 minutes, the post was deleted and the price fell again. The SEC account had been hacked. Apparently, the two-factor authentication was not activated.

However, one day later on Wednesday, the SEC approved all eleven ETF applications. The Bitcoin ETF makes it easier to invest in the cryptocurrency. It is not necessary to deal with blockchain technology or the custody of tokens. All of this is taken over by issuers such as Blackrock, Fidelity, and VanEck as well as their service providers. In return, investors have to pay an annual fee. There had already been a price war in the run-up, with providers undercutting each other. At around 0.2-0.3%, the fees for managing the ETFs are well below the expectations of most experts. Some providers even waive fees completely for the first few months.

TickerIssuerFlows (mn)Volume (mn)FeeExchangeCustodian
IBITBlackrock$ 498$ 1,6260.25%NasdaqCoinbase
FBTCFidelity$ 422$ 1,1590,25%CBOEFidelity
BITBBitwise$ 238$ 2060.20%NYSECoinbase
ARKBARK / 21shares$ 105$ 4440.21%CBOECoinbase
EZBCFranklin Templeton$ 50$ 810.19%CBOECoinbase
BTCOInvesco / Galaxy$ 46$ 920.39%CBOECoinbase
BRRRValkyrie$ 28$ 120.25%NasdaqCoinbase
HODLVanEck$ 11$ 430.25%CBOEGemini
BTCWWisdomTree$ 1$ 110.30%CBOECoinbase
GBTCGrayscale– $ 579$ 4,1731.50%NYSECoinbase
Total$ 819$ 7,847
Sources: Bloomberg, Blockworks; first two trading days; last updated: Friday, 12 January 2024

Trading finally began on Thursday – more than ten years after Cameron and Tyler Winklevoss first attempted to launch a Bitcoin ETF on the market. The trading volume was impressive, totaling just under USD 8 billion in the first two days after admission. Net inflows, on the other hand, were solid but not exceptional at USD 819 million. The Bitcoin price remained stable on the day of the announcement before falling in the following days. The reasons for the subdued net inflows and the lack of a price rally are complex:

  • Priced-in expectations: The approval was probably already largely priced in. The Bitcoin price had already risen by over 50% in the past six months, which prevented a further price increase. After a short delay, the announcement turned into more of a “sell the news” event.
  • Selling pressure from the Grayscale Bitcoin Trust: While the majority of ETFs were set up from scratch, the Grayscale Bitcoin Trust grew out of the conversion of an existing fund into an ETF. For the first time since it was founded a good ten years ago, shareholders can now make withdrawals. Together with the high management fees of 1.5%, this is likely to have led to capital outflows totaling USD 571 million from the Grayscale ETF in the first two days of trading.
  • Demand from institutional investors will probably only increase slowly: Many Bitcoin enthusiasts expected investors to pounce on the Bitcoin ETF on the very first day of trading. They were hoping for scenes like during the launch of a new iPhone, with long queues the evening before and empty shelves shortly after the stores opened. But the reality is different: Die-hard Bitcoin fans are already invested via alternative channels. The new investors are mainly institutional ones such as hedge fuds and family offices. These investors had already shown interest earlier but were unable or not allowed to invest in Bitcoin directly. However, institutional investors are not known for rushing into a new asset class on the first day of trading. Extensive internal approval processes are often required. Institutional demand is expected to increase gradually over the next few months.
  • ETFs are generally not simply bought, but must be actively marketed: For ETF experts, the lack of a big run in the first few days of trading came as no surprise. It is not enough to simply have the Bitcoin ETF on the shelf, it must be actively marketed. This is because the actual target group consists of investors who have not previously considered Bitcoin as part of their investment portfolio. They must first be made aware of the new asset class through targeted information and educational work. However, the ETF providers’ distribution and sales machinery first has to get going, and that takes time. ETFs are not yet available on many platforms. Major US financial service providers such as Vanguard and Merrill Lynch are hesitant and have not (yet) offering the ETF. According to Galaxy Research, which has launched its own ETF in cooperation with Invesco, a ramp-up phase of three to four years is expected before the majority of US investment firms will offer access to the Bitcoin ETF. Based on these assumptions, Galaxy is forecasting a net inflow of USD 14.4 billion within the first twelve months. In the following years, this is expected to rise to USD 26.5 billion and USD 38.6 billion. The cumulative net inflow of all Bitcoin ETFs in the US would therefore amount to USD 79.5 billion after three years. In order to get to the total market capitalization of all Bitcoin ETFs in the US, we need to add the current USD 27 billion from the Grayscale Bitcoin Trust ETF, which would bring us to more than USD 106 billion. This may be somewhat optimistic, given that the market capitalization of all Gold ETFs in the US currently stands at around USD 100 billion.

The Bitcoin ETF in the US does hardly impact investors in Europe. The sale of US ETFs is not permitted in Europe, as they do not comply with local transparency requirements. In addition, the UCITS Directive in Europe prohibits the issue of ETFs with only one asset due to a lack of diversification. However, European investors have the option of acquiring physically backed Bitcoin ETCs and ETNs for some time now. These are structurally similar to ETFs, but they are debt securities of the issuer and not segregated. It is therefore advisable to keep an eye on the issuer’s solvency. The market capitalization of all physically backed Bitcoin ETCs and ETNs in Europe is currently around USD 3.5 billion – an amount that the net inflows into the US Bitcoin ETF market could reach in just a few weeks, if not days.

This article was originally published in Frankfurter Allgemeine Zeitung (FAZ) in German. For the original version, click here.

Disclaimer: The contents of the article reflect private opinions of the author and not directly those of DWS.

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