Insight
January 19, 2023
Thursday marked the 5th trading day of spot bitcoin ETFs in the US, and given the timing around fund flows, we wanted to take an updated look at their progress. Judging by other high-profile ETF launches, it can take several days (a seasoning period) for the dust to settle after launches. However, unique factors associated with the mechanics of some of these ETFs might take this seasoning period, which usually looks to be 3 - 5 days, a bit longer. Our initial conclusion from the first two trading days after approval remains unchanged, though. The collective launch of spot bitcoin ETFs in the US has been a resounding success, one that mimics the launch of the ProShares Bitcoin Strategy (BITO) ETF, the most prominent of the futures-based ETFs in the US, but one that falls short of the impossibly lofty expectations set by the Street.
Five days post-launch we have a solid view of flows into (and out of) the various bitcoin ETFs. Looking at the launches of BITO and GLD, it took 4 - 5 trading days for the initial flows to come into those funds. Complicating matters a bit in the bitcoin ETF's case is the presence of one massive existing player, the Grayscale Bitcoin Trust (GBTC), which converted into an ETF. The entire spot bitcoin ETF complex started with over $28B in AUM on day one, a very different environment than the launch of SPDR Gold Shares (GLD). As a result, the common observation that bitcoin ETFs have surpassed the iShares Silver Trust ETF (SLV) $9.8B in AUM is frankly, uninteresting.
Since the launch of spot ETFs 5 days ago, collectively they’ve accumulated a net $1.1 billion of daily fund flows. Including the initial seed funds brings that cumulative total raised by the spot ETFs to $1.25 billion. Daily fund flows have been highly variable since day 2 of the launch with the outflows from GBTC sometimes being overwhelmed by inflows into the newcomers, but not always. Still, we consider $1.1B of cumulative daily fund flows 5 days into launch very good on an absolute basis, albeit short of the fantastical beliefs some in the industry held.
Given the sponsor fee differential between GBTC at 1.5% and the new ETF challengers, many of which are entirely waiving fees for certain AUMs and durations, a big question is how much AUM would GBTC lose? Thanks to 5 days of trading, we have a picture, but one that is likely incomplete. First, on the data, through the first 5 days, GBTC has seen cumulative outflows of $2.2B, amounting to 7.8% of its AUM at the beginning of the ETF trading process. We’d call that a win, so far. But many in the industry are wondering why that number isn’t higher given the fee differential.
One obvious reason is taxes. For anyone holding GBTC in a tax exempt or deferred account (IRA, 401K), holding at an unrealized loss, or for a tax-exempt entity (a non-profit), the conversion to a lower cost ETF is a no brainer. For those subject to capital gains taxes, however, the calculus is not so straight forward. Many may decide the fee differential is a cheaper alternative than triggering capital gains tax on low-cost GBTC.
One not so obvious reason is that there are transaction fees associated with the cash redemption of shares. These variable fees likely act as an impediment to the unfettered redemption of GBTC shares. It is also likely one of the reasons why shares continue to trade at a discount to NAV (47 bps for Thursday’s close). We have yet to see a slowing of daily redemptions so it might be the case that the queue of investors redeeming shares takes some time to fully work itself out. If those redemptions reach an undesirable level by Grayscale, it always has the option to lower fees as a competitive response.
The collective launch of the bitcoin spot ETFs is tracking right in line with the November 2021 launch of BITO after 5 days. BITO launched at the highs, some might say it caused the peak, of the previous cycle and so benefitted from a very different market environment. While there should be little doubt the launch of the spot ETFs has been beneficial to the price of bitcoin, we are not of the mindset that this is a cyclical high (but could very well be a midcycle highpoint).
The launch of the spot ETFs, however, is well below the 2004 launch of the GLD ETF (when adjusted to today’s dollars). There certainly have been ETF launches in the past few years that have far surpassed the launch of GLD, with some generating over $2B of first day inflows, but for a single commodity fund, we think GLD is the right benchmark and remains the gold standard, pun intended.
Two funds have clearly separated themselves from the pack of newcomers, the iShares Bitcoin Trust from BlackRock and the Fidelity Wise Origin Bitcoin Fund. Both funds have surpassed a billion dollars in AUM, and given the size of these issuers, it is not surprising to see them lead the pack. There is a noticeable gap between these two issuers and the next cohort of newcomers, Bitwise and ARK 21Shares. Their performance is impressive given that both firms (we are considering 21Shares here, not ARK) are crypto natives, while other traditional market players, even ones with substantial reach and AUM in the ETF space, have not fared as well. The ProShares Bitcoin Strategy ETF (BITO) continues to fare extremely well, showing only $165M of outflows.
We are continuing to watch net flows for the aggregate spot complex as well as for the individual funds themselves. As GBTC outflows have ramped since the first trading day, they have been more than balanced by inflows to other funds, creating net demand for spot bitcoin. We would be wary if the outflows from GBTC continue at a similar pace as supply backlog continues to get worked out but aren’t matched by commensurate inflows to other funds. Of course, the reverse could happen as well, where demand for the new ETFs, which remains healthy through day 5, outpaces supply from GBTC. Ultimately, given these unique dynamics, it may take more than just 5 trading days to have a full opinion on what has transpired. However, we are confident that despite bitcoin’s appreciation occurring in the lead up to the launch, the launch of spot ETFs will ultimately be seen as beneficial to unlocking access to bitcoin to a new investor class.
Bitcoin fell 12.1% on the week investors continue to digest the impact of the spot ETF launches. Since intraday high of $49,048 just after the start of ETF trading last Thursday, the price of bitcoin is down 17.1%, making this event, despite its absolute success, another “buy the rumor, sell the news” event, not some new strange market adage. Equity markets were flat to up on the week, as the S&P 500 was flat and Nasdaq Composite up 0.6%. Bonds fell on back of persistent inflation data, with investment grade corporate bonds down 1.0%, high yield corporate bonds down 0.5%, and long-term US Treasuries down 3%. Gold was up marginally, while oil rose 2.9%.
OakTree's Howard Marks on Gold vs. Bitcoin: Podcast - Bloomberg
Best Short Call of 2023 Belongs to Amateur ‘Dirty Bubble’ Sleuth James Block - Bloomberg
BlackRock Says Its Spot Bitcoin ETF Is Attracting a Diverse Investor Base - The Block
ProShares Files for Five Leveraged and Inverse Bitcoin ETFs - The Block
Superintendent Adrienne A. Harris Announces $8 Million Penalty Against Genesis Global Trading - NY DFS
Core Scientific Core Scientific, Inc. Plan of Reorganization Confirmed by Bankruptcy Court - Core Scientific
Tether Purchased 8.8K Bitcoin at End of Q4 - CoinDesk
Jan 26 - CME expiry
Jan 31 - FOMC interest decision
Feb 13 - January CPI reading
Mid April - Bitcoin block reward halving
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