Insight
January 17, 2025
The spot bitcoin ETFs hit an important milestone this week, their one-year anniversary. Trading, which began on January 11, 2024, was one of the most important market developments in 2024, an event that ushered in billions of dollars of investment into bitcoin. While retail investors (non-13F filers) are still the largest holders of these ETFs (78.5% of the AUM), these instruments have greatly eased the bitcoin investment process for hedge funds, independent investment advisors, and pension funds. And while the biggest unlock may still be to come, the wealth management arms of the big banks, their success one year in has been nothing short of remarkable.
To show just how remarkable the launch of the ETFs has been, we analyze the cumulative fund flows of the bitcoin ETFs against the launch of SPY (SPDR S&P 500 ETF) and GLD (SPDR Gold Shares, originally streetTRACKS Gold Shares). A caveat, however. While ETFs are ubiquitous today, SPY was novel in 1993 when it launched, the first of its kind, and its long-term success was not evident in an era where index mutual funds were just beginning to gain traction. GLD was also the first of its kind when it launched in 2004, the first commodity-backed ETF. While the case for ETFs had already been proven out by then, a physically-backed single commodity ETF had never been launched, and there was initial skepticism about the mechanism to ensure the ETF’s physical gold backing.
The bitcoin ETFs have benefitted greatly from the foundational market developments established by SPY and GLD, which paved the way for innovative financial products by proving the viability of ETFs and overcoming initial skepticism about novel investment structures. Still, the differences are remarkable - $36.6B of net inflows for spot bitcoin ETFs, $4.8B for GLD, and $1.0B for SPY (all figures have been adjusted to today’s dollars).
The price of gold had solid performance in 2023 and 2024, up 25.5% and 14.6% respectively. Even with that solid performance, however, we wondered what impact the launch of “digital gold” ETFs, bitcoin-backed, had on real gold ETFs. The following graph shows the cumulative net flows for physically-backed gold ETFs traded in the US, eight in total, beginning a year ahead of the launch of spot bitcoin ETFs. While gold outflows seemed to increase around the launch of bitcoin ETFs, as perhaps investors rotated from gold to bitcoin, the gold ETF outflows started well before the bitcoin ETFs launched. It looks to us that the launch of bitcoin ETFs may have hastened gold ETF outflows, but did not cause them.
While the bitcoin ETFs prioritize ease of use, regulatory oversight, taxation simplification, and simplicity for most investors, direct ownership isn’t without its advantages. These include privacy with address-linked identities rather than 13F shareholder filings, flexibility and liquidity with 24/7 trading, lower costs, tax strategies (lack of wash sale rules), and reduced concentration risk with a few custodian service providers.
Bitcoin had a volatile week this week, falling through $90K at one point on Monday, the first time it hit this level since the November election. While bitcoin ultimately bounced back, breaking $100K again later in the week, the drop and lethargic trading since bitcoin’s election-driven all-time high of $108K on December 17th has resulted in questions about bitcoin’s drawdowns. We went through a detailed cycle analysis previously, looking at drawdowns in each prior upcycle, and while the prior cycle analysis has not changed, the current cycle could use an updated look.
The following graph charts bitcoin’s current price cycle since bottoming in November 2022. Since we last wrote, bitcoin underwent a 26.1% drawdown (close to close) following its March 2024 high. Price subsequently rebounded and then broke $108K in the wake of the election before falling through $90K this week. Bitcoin had fallen 12.8% during this time.
Including the summertime drawdown and assuming the recent 12.8% decline marks the worst of the current downturn, we incorporate these data points into our table tracking drawdowns of more than 10%. As shown in the table, such drawdowns are a common occurrence, even during the "up" phase of the cycle. The 26% peak-to-trough decline from close to close in the summer (33.6% from intraday high to intraday low) has been relatively shallow compared to previous cycle drawdowns. With the next potential catalyst for bitcoin likely tied to the inauguration and subsequent executive or legislative actions—such as the establishment of a U.S. Bitcoin strategic reserve—we believe the cycle still has room to advance. However, investors should remain aware that drawdowns are a normal feature of market cycles, even during periods of upward momentum.
Donald Trump is set to be sworn into office next week, and with that comes his first chance to enact some of his bitcoin and cryptocurrency proposals. At the top of the list is a potential proposal for a strategic bitcoin reserve (SBR). While the substance of the Trump plan may be revealed shortly after inauguration, the lead up to the event hasn’t been without its drama.
At the center of the controversy have been bitcoins already controlled by the US government, approximately 198.1K bitcoins ($20B) according to data provider Arkham Intelligence. These coins have been obtained through the civil forfeiture process in high-profile criminal cases, such as the hackers of the Silk Road darknet market (Individual X and James Zhong) and the 2016 hack of the Bitfinex exchange, as well as many other smaller civil forfeitures.
Within the past 2+ weeks, obstacles have been removed for the return or sale of most of those coins, 164K bitcoins in total or 83% of the US government’s holding. This includes 69,369 bitcoins from the Silk Road hacker “Individual X” as well as 94,643 bitcoins recovered from Bitfinex hacker Ilya Lichtenstein. In the case of the Bitfinex coins, those coins were cleared to go back to Bitfinex, the original owner. In the case of the Silk Road coins, at the end of last year, Battle Born Investment’s motion to stay a judgment enforcement was denied, paving the path for those coins to be sold.
While the government has yet to move coins associated with either case, there has been a worry that the US government would hastily sell its bitcoins ahead of the inauguration. While the US government has sold bitcoin since the election, data from Arkham Intelligence indicates the US government has disposed of 10K of the 208K bitcoins it owned before the election, or about 4.8%.
With inauguration day on Monday, we’ll just have to wait and see what specific policies are unveiled, with the forfeited coins possibly used as the foundation of an SBR.
Bitcoin rallied 9.2% on the week, climbing back above the $100,000 mark, though the ride was not without volatility. Since reaching its all-time high in mid-December, prices have remained largely rangebound as traders await the next major catalyst. Funding rates on Binance perps flipped negative last Friday, showing trader interest in shorting the market. Flows into the bitcoin ETFs reversed, with investors pulling $1.2 billion from spot ETFs over four consecutive days, from Friday to Wednesday.
On Monday, bitcoin briefly dipped to $89,000 as weakness in broader risk markets spilled over into cryptocurrency. The post-election rally appeared to lose momentum, and market analysts debated whether bitcoin had formed a "head and shoulders" pattern, a bearish technical signal that could indicate further price declines ahead.
But a lower-than-expected CPI reading on Wednesday reversed course for bitcoin, re-instilling some animal spirits and sending it back through $100K. Now, all eyes are turned to the inauguration on Monday and the policies Trump might announce.
Politics and Regulation:
Trump Plans to Designate Cryptocurrency as a National Priority - Bloomberg
Trump's New SEC Leadership Poised to Kick Start Crypto Overhaul, Sources Say - Reuters
New Trump Ends Crypto Community's Government 'Harassment' - NY Post
BitMEX Hit with Additional $100 Million Fine Over Bank Secrecy Act Violations: Report - The Block
US State Regulators Fine Block Inc $80 Million For Insufficient Money Laundering Controls - Reuters
Investing:
Bitcoin ‘Debasement Trade’ Is Here to Stay: JPMorgan - Cointelegraph
Fundstrat's Tom Lee Calls for Bitcoin's End of Year Target as High as $200K- $250K - CoinDesk
Companies:
Bitcoin Is Luring More Companies and Their Cash - NYT
Retail Trading Platform Etoro Files for US IPO And Chases $5bn Valuation - FT
Tether Licensed in El Salvador, Strengthening Focus on Emerging Markets and Innovation - Tether
Michael Saylor's MSTR Added Another 2,530 Bitcoin - CoinDesk
Jan 20 - Inauguration Day
Jan 29 - FOMC interest rate decision
Jan 31 - CME expiry
Feb 12 - CPI release
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