January 16, 2024
Greg Cipolaro

Research Weekly - 3,845 Days


  • In a momentous event and one filled with last minute drama, spot bitcoin ETFs are approved and begin trading in the US.
  • We view the launch of the ETFs as a resounding success. Public market investors now have access to low-cost investment vehicles that closely track the price of bitcoin, are available through existing investment avenues, and benefit from the protections of the nation’s securities laws.
  • Net flow of funds for the ETFs has been $965M (including seed funds), a strong start thus far. However, spot price is down from the launch driven euphoria as investors set unreasonably high launch expectations.
  • The fee wars are a great benefit to investors. Outside of Grayscale, ETF sponsors collectively generate only $1M in annual revenue after fee breaks
  • The Grayscale (GBTC) and the ProShares (BITO) ETFs have fared surprisingly well so far, ceding little share, despite high fees and/or structural disadvantage.
  • The robust trading volumes on the first two days failed to accurately predict inflows but might be more attributable to existence of arbitrage for market makers given the initially high premium to NAV (mid-single digits percent).
  • The dust should settle from the launch in the next trading session or two, and then all eyes will turn to the halving in April, which we view as more of a price cycle marker than an important economic event outside of the mining community.

A Momentous Week

3,845 days. More than 10 and a half years. That’s how long it has taken from the filing of first ever bitcoin ETF registration statement, the Winklevoss Bitcoin Trust, in 2013 until approval by the SEC last Wednesday. Frozen yogurt. Vine. The Harlem Shake. “What Does the Fox Say?” 2013 might be remembered for some shortly lived trends, one of them (for the digital asset community) is certainly sub $100 bitcoin.  Since the filing of the first ETF registration statement until its approval, the value of bitcoin has compounded at an annual rate of 82.0%, making it one of the best, if not the best, investments over that period. Despite the significant changes in the landscape of bitcoin markets since that initial filing, these remarkable returns were achieved without the safeguards provided by the nation's securities and exchange laws. It was only through the legal system's intervention, which compelled the top financial and markets regulator to reverse its disapproval order (thank you checks and balances), that investors were able to gain access to this asset class with the protection of the nation’s securities laws.

Drama Filled Finale

The final approval, however, was not without last minute drama. While we had expected multiple ETFs to be simultaneously approved, we certainly did not predict a hack of the SEC’s Twitter (X) handle falsely prematurely announcing the ETF’s approval, such a divisive vote amongst SEC commissioners, one in which Chair Gary Gensler cast the deciding vote, or the public comments by many of the commissioners (Gensler - approved, Uyeda - approved, Pierce – approved, Crenshaw – not approved), many of which took issue with many of the aspects of bitcoin. The SEC is not a merit-based regulator, meaning its approval is not an explicit endorsement of the underlying investment, pointed out in Gensler’s statement. However, many of Commissioners' statement criticized many aspects of bitcoin and its use cases, all of which could be leveled at cash and fiat currencies. As for the idea that many metals have industrial and consumer use cases, only 6.5% of new gold supply in 3Q23 went to consumptive uses like dentistry, electronics, and other industrial applications (reference). The rest, a whopping 93.5%, went into store of value applications (jewelry, bars and coins, and central bank holdings). Bitcoin might be mostly used for investment purposes, but to not acknowledge that the same is true for gold is to be dismissive of the facts.

ETF Launches Have Been an Unequivocal Success So Far

It may not be obvious given by the underlying price action since the ETFs launched, but let us state something important. The bitcoin ETFs have been an unequivocal success so far. The ETFs raised hundreds of millions of new investment into bitcoin, given investors access to the asset class in a familiar way, given investors protections afforded by our nation’s securities and exchange laws, reduced fees, and reduced portfolio issues with existing exchange and broker dealer traded alternatives, including tracking error, discounts/premiums to NAV, and roll costs (all associated with owning derivatives based ETFs or closed-end funds). Each of these bring significant benefits to the investing public who desire access to the asset class.  

ETFs Raise Nearly $1B Net, But Expectations Ran Away from Reality

The rub, however, and one we pointed out several times, was that investor expectations for the launch of the ETFs in terms of demand was nothing short of Herculean. This is why spot price has disappointed since the actual launch of the ETFs, despite their success. Active investment management, predicting the undulations in markets, is not one of absolutes, but one of expectations, and clearly in this case, investors ran away with their imaginations.

On an absolute basis, however, the collective launch of bitcoin ETFs (so far) have been phenomenal, raising $965M net for the purchase of bitcoin. In making this calculation, one must include the initial fund AUM (seed investments) and then add on daily fund flow estimates. We are commonly seeing the omission of seed funds and thus the collective impact of these fund launches (not just day 1 and 2 fund flows) is widely underestimated by the street.

Weekly 1-Jan-16-2024-01-47-02-7872-PM

Another Day or Two is Needed for a Final Tally

The $830.8M of net fund flows less seed funds since trading began is impressive, but by looking at the launch of GLD in 2004 and BITO in 2021, it is clear that we need another day or two of trading to get accurate measurement of launch demand. BITO fund flows dried up on day 4 at $1.22B while GLD dried up on day 3 at $1.13B in 2004 ($1.84 in today’s dollars). While it trailed off significantly on day 2 of trading, the spot bitcoin ETF complex still showed $205.0M of net inflows. Trading on day 3 (Tuesday) will be critical to judge the full launch of these ETFs, although there are worries about the ramp of redemptions of GBTC given the increasing outflows in that product. Only $579.1M of net outflows so far for GBTC has to be considered a massive win for the Grayscale team given their product is nearly 6x the weighted average fee of the rest of the spot ETF complex.

iShares, Fidelity, and Bitwise Funds Lead the New Breed

Grayscale, of course, had a massive lead in the assets under management (AUM) department coming into the launch of the spot ETFs. This is why seed funds and purchase commitments were so important to the launch of the new entrants. From the data we have so far, iShares (BlackRock), Fidelity, and Bitwise are the clear top 3 new entrants.

A couple of other funds got a quick start off the blocks, however. VanEck benefitted from at a $72.5M seed investment prior to the start of trading and Bitwise likely benefitted from a prearranged investment from crypto fund Pantera, which if executed fully (up to $200M), would account for most of the fund’s AUM. However, these two funds saw no demonstrable inflows on day 2 of trading.

Weekly 2-Jan-16-2024-01-52-55-8152-PM

Fee Wars Leave Little for Wall Street, Benefitting Investors

Before their launch, investors were wondering what fees might be for these funds. Low fees are seen as an important factor in an ETF’s success, but many did not foresee how low fees ultimately went. Stated fee rates went as low as 0.19%, with many funds offering to waive their management fee entirely for some period (6 – 12 months) on a certain amount of AUM. Grayscale lowered its fee from 2% to 1.5%, willing to accept some share losses (the jury is still out on the final impact), but is clearly unwilling to play the race to zero game the rest of the industry is currently engaged in.

Collective annual fees (excluding fee breaks) to sponsors after the launch amount to a little over $400M, with only $3.8M divvied between the 10 new challengers, and this is before fee breaks. With fee breaks, annual revenue for all sponsors excluding Grayscale amount to only $1M. Almost all the ETF industry revenue in its current form goes to Grayscale. We would guess 5 – 10 bps of AUM goes to the custodians (mostly Coinbase) and other service providers. This analysis doesn’t even include the initial setup costs and legal fees associated with just getting these funds to the starting line.

Weekly 3-Jan-16-2024-02-43-23-9495-PM

ProShares Bitcoin Strategy ETF (BITO) is Unscathed Thus Far

One of the biggest surprises thus far, aside from Grayscale retaining most of its AUM, is how little the biggest futures-based ETF, BITO, has been affected. In fact, on the first day of trading it gained a massive amount of AUM. There could be a variety of reasons why BITO initially saw inflows, including demand for shorts/hedging, but since the beginning of trading of the spot ETFs, BITO has only seen net outflows of $17.9M. While it may be early to judge the ultimate impact on BITO, we would consider the current state a win for ProShares given the product’s high fee (0.95%), tracking error to spot, and roll costs.

Weekly 4-Jan-16-2024-02-49-40-2840-PM

Trading Volume Fails to Predict Fund Flows

One of the wildly incorrect assumptions about the inflows into the new ETFs was that they would be somehow predicted by first day trading volume. The purported heuristic was that inflows would be approximately equal to turnover (dollar trading volume). With massive trading volumes on the first day, there were expectations for big first day inflows, which failed to materialize. Maybe it will take another day or two of trading for AUM to materialize (BITO did $1B of turnover on day 1 and hit $1B of inflows by day 3), but thus far this heuristic has been wildly off so far. It is entirely possible that this was simply not a great heuristic (we are not ETF experts ourselves so have a very limited sample set), but as the table below shows, the numbers are all over the place. At this point, we’d be surprised to see $3B - $4B of net inflows once the dust settles, so it may just be that this was not a great metric.

But this also begs the question as to why there was so much turnover on the first two trading days. For example, the iShares Bitcoin Trust (IBIT) traded over a billion dollars the first day but only resulted in $112M in fund flows. One reason could be the premium to NAV at which most funds were trading (at times mid to high single digits percentages) incentivized abnormally high trading volume for market makers and Authorized Participants who were engaged in arbitrage activities. While the premium to NAV eventually shrunk into the first day close, this profit opportunity could’ve motivated abnormally high trading activity compared to other ETF launches.

Weekly 5-Jan-16-2024-02-51-29-7054-PM

What’s Next for Bitcoin?

The ETFs were a momentous event long anticipated by investors. But with the event beginning to recede into the rearview mirror, many are asking what is next for bitcoin? First, we would like to see another few days of trading volume before the final verdict on their success is in. After that, we would expect the onslaught of inflows and outflows to abate. Maybe products like GBTC and BITO see continued outflows (it would be hard for us to imagine major inflows for either product at least) for a sustained period, but if investors are redeeming one spot bitcoin ETF for another, there should not be any net new demand for bitcoin.

After the dust settles on the ETFs, the next catalyst investors should look forward to is the halving in mid-April. At the halving, the number of new bitcoins that are produced drops by 50%, from 900 bitcoins to 450 per day ($18M reduction in supply issuance at $40K/BTC). We view this event as less of an economic catalyst ($18M/d is very small in the grand scheme of bitcoin trading volume) and more of a psychological one because the dates of bitcoin’s halvings have roughly bisected cyclical peaks in its price. Bitcoin seems to be following a similar pattern as previous cycles following a steep drawdown, but there's of course no guarantee that that will continue (it remains one of bitcoin's enduring mysteries).

However, we are encouraged the path bitcoin has taken. After all, who would have guessed that at this time last year, when the industry was still in a state of shock following the collapse of FTX, that we would finally have multiple spot ETFs available to US investors? Admittedly, that was certainly not something on our radar. So while we are appreciative of the journey the past year, we also remain humble in our predictions about the road ahead.

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