The Approval of Bitcoin Spot ETFs

Since their inception on 11 January 2024, the Bitcoin spot ETFs have been the hot topic in the world of crypto assets. Almost four months have passed since the Securities and Exchange Commission (SEC) of the United States has approved a total of eleven Bitcoin spot ETFs in the USA. Among the issuers of these spot ETFs are the world’s leading financial corporations such as BlackRock, Fidelity, Ark Invest and Franklin but also crypto native companies like Bitwise or Hashdex. We published a Fundamental on Exchange-Traded-Products in January, with an introduction to ETPs and ETFs specifically. You can read the article here.

Now it is time to look back on the first quarter of these newly issued spot ETFs in the U.S., assess the numbers and examine the potential for the coming months and years. We also want to talk about the probability for new spot ETFs for other crypto assets in addition to Bitcoin.

The Spot ETFs in Numbers

The eleven new spot ETFs have seen a total of $11.78 billion in net inflows since their first trading day on January 11, 2024. The Grayscale Bitcoin Trust (GBTC) was converted from a trust to an ETF on the day of the spot ETF launches and has seen steady outflows over the first few months of trading based on its non-competitive fee structure. Net outflows from the GBTC spot ETF amount to a total of $17.45 billion at the time of writing. We will further touch on these GBTC outflows in the following paragraph.

When looking at the total assets under management for all the Bitcoin spot ETFs, one can observe that as early as March, the daily assets under management for all spot ETFs, excluding the Grayscale Bitcoin Trust, had crossed the $30 billion mark for the first time, currently sitting at $31 billion at the time of writing, as visualized in the chart below.

The daily cumulative volume (in USD) for all the Bitcoin spot ETFs has amounted to more than $200 billion in April and is currently at $246 billion of total volume since inception.

As mentioned earlier, we want to dig a little deeper into these flow numbers from the new spot ETFs. While most of the spot ETFs have seen net inflows since their inception, there is an important exception, as the table below shows. In the table, net inflows for the respective spot ETF are marked green, and net outflows are in red.

The outflows from GBTC can partly be attributed to investors moving away from GBTC because of the higher fees; GBTC charges 1.5% while other ETFs like BITB or IBIT charge 0.2% or 0.25% respectively. On the other hand, there is also some inorganic sales activity to report: Many of the estates that went bankrupt in 2022 were large holders of GBTC because they were trying to profit from the premium discount arbitrage trade. The bankrupt crypto exchange FTX sold around $1 billion of GBTC shares during the first few weeks after the launch, and the bankrupt crypto lender Genesis has completed the sale of its GBTC shares, as it was announced at the beginning of April 2024. These inorganic GBTC sales are deemed to stop at some point after bankruptcy estates are through with their forced selling. A noteworthy development over the last few days is that GBTC has now experienced its second day of net inflows. While last Friday, May 3, 2024, the net inflow for GBTC was $63 million, it recorded its second net inflow day yesterday, May 6, with $3.9 million of inflows. This development could be an early sign, that these inorganic sales are coming to an end.

When looking at the inflows of the spot ETFs, BlackRock’s IBIT stands out with total inflows of over $15.47 billion, followed by Fidelity’s FBTC with more than $8.12 billion and ARKB of Ark Invest & 21 Shares with over $2.24 billion of net inflows. No ETF during the last 30 years had a launch as successful as BlackRock and Fidelity’s Bitcoin spot ETFs: BlackRock’s IBIT had almost $4.2 billion in assets as of February 9, while Fidelity’s FBTC amassed almost $3.5 billion. These numbers put both ETFs at the top of the podium for assets accumulated after one month on the market, according to Bloomberg Intelligence ETF expert Eric Balchunas. On April 23, 2024, the Bitcoin ETF of BlackRock reached another historic milestone of 71 consecutive days with net inflows, putting it into the top 10 of exchange-traded funds with the longest daily streaks of inflows.

These numbers have even surprised ETF experts around the world, as Dominic Weibel, Head of Research at Bitcoin Suisse emphasizes: “A look at the top 30 ETFs ranked by assets after 50 days of trading reveals that (out of 11’338 funds), four BTC ETFs made the list, with Fidelity and Blackrock ETFs leading by a substantial margin even if we adjust older ETFs for inflation.”

The Way Forward

The inflows for the spot ETFs have already exceeded expectations and broken records, and it is interesting to put it into perspective as to how big the proportion of the total potential investors is who, as of today, do not have access to the products yet, and how this number is expected to evolve over time. When an ETF launches, it is not immediately available for everyone upon launch. Some of the biggest wealth managers, such as Morgan Stanley, UBS, or Wells Fargo, likely still have to get their own internal approval for the spot ETFs, meaning that there are still a lot of potential investors who do not have access to these ETFs just yet. There are arguments to be made that these numbers will continue to ramp up over the coming months and years because the spot ETFs are only open for about 20 to 30% of the potential investors overall. As wealth platforms such as Morgan Stanley and UBS will likely announce their internal approvals in the coming months, this number will increase, and inflows will likely continue to rise for years to come.

Ethereum Spot ETFs

Up until now, we have only mentioned Bitcoin spot ETFs. One might wonder: Are there also spot ETFs for other crypto assets? While there are ongoing discussions about Ethereum spot ETFs in the U.S., the decision to approve such exchange-traded products has yet to be made by the Securities and Exchange Commission. The final deadline for the decision on the Ether spot ETF applications of VanEck is set for 23 May 2024 and ETF experts such as Eric Balchunas or James Seyffart are not giving them a lot of chances of being approved in May. The decision on the Ether spot ETFs is expected to be a one-decision-for-all-applications once again, as with the Bitcoin spot ETFs in January. We are skeptical of an approval in May as well because many of the indicators are currently pointing towards a rejection. For example, the prediction market platforms such as Polymarket, which, at the time of writing is showing a 7% chance of approval in May. The Grayscale Ethereum Trust (ETHE) discount to the net asset value (NAV) is another possibility to assess the probability; with an increasing discount serving as an indication of an Ether spot ETF rejection. At the time of writing, the ETHE discount has been rising and is sitting at -23%.

One can argue that a delay of the approvals will be better for the crypto market, since most of the Bitcoin spot ETF issuers are still having conversations around Bitcoin, and as mentioned above, the Bitcoin ETFs have not even been internally approved on the major wealth platforms. It might actually be beneficial for the whole crypto market, if the traditional investors have enough time to get familiar with Bitcoin and then at a later date engage with Ethereum and all other crypto assets.

While the Securities and Exchange Commission (SEC) in the U.S. is still deciding whether they should approve Ether spot ETFs or not, the Hong Kong Securities and Futures Commission has taken the first step through the door on April 15, 2024, and has approved both Bitcoin and Ethereum spot ETFs.

Bitcoin and Ethereum Spot ETFs in Hong Kong

The Hong Kong Securities and Futures Commission approved several spot ETFs managed by China Asset Management, Harvest Global, Bosera and HashKey. The Bitcoin and Ethereum spot ETFs in Hong Kong did start trading on April 30, 2024. The question now arises, whether these approved spot ETFs in Hong Kong will have a similar effect on the crypto markets as the products in the U.S.; Analysts of K33 Research have published an analysis in this regard, highlighting the difference in the order of magnitude between the existing futures products in the U.S. and Hong Kong respectively. According to K33, the two already available Bitcoin futures ETFs in Hong Kong hold a BTC exposure of roughly 2’000 BTC; this represents about 2.8% of the exposure of similar U.S.-based futures ETFs. The flows during the first trading days in Hong Kong support this assumption, as the total flow after the first three trading days amounts to only $22.5 million. It remains to be seen how the flows of the new spot ETFs in Hong Kong will actually develop over the coming months.

Conclusion

To summarize, the first few months of the newly launched Bitcoin spot ETFs in the U.S. have been record-breaking. Many of the ETFs are among the most successful ETFs in history and still in their early stages with some of the biggest wealth platforms not yet being able to buy or offer the products. We expect the spot ETFs to continue to grow in the coming months and years. When looking at the probabilities of a potential approval of Ether spot ETFs in the U.S., experts, prediction markets and other indicators such as the ETHE discount to NAV are showing a similar picture: ETH spot ETFs are not likely to be approved on 23 May 2024, the day of the final deadline for the VanEck application. While the regulators in Hong Kong have already approved Ether spot ETFs alongside the Bitcoin spot ETFs on 15 April 2024, the impact on the market is expected to be of a much smaller order of magnitude when compared to the U.S. products. We will continue to observe the developments regarding the spot ETFs and will circle back to this in the continuing articles part of this series to ensure that we are all up to date with the newest trends and developments when it comes to ETFs.