US Spot Bitcoin ETF Approved: What’s Next? Analysis of Market Dynamics and Global Growth Prospects | by Wheatstones | Coinmonks | Feb, 2024

In a historic move, the US Securities and Exchange Commission (SEC) has granted approval for the first spot Bitcoin exchange-traded funds (ETFs), marking a significant milestone for the cryptocurrency market. This decision, long-awaited by enthusiasts and industry stakeholders, is poised to attract a wave of new retail and institutional investors to the digital asset space. Among the 10 ETFs greenlit for listing, prominent sponsors include established giants such as Fidelity and Invesco, alongside digitally focused newcomers like Grayscale and Ark Invest.

The SEC’s approval comes after months of heightened anticipation and a notable legal battle, notably with Grayscale’s legal victory. For nearly a decade, the regulatory body had resisted the introduction of spot Bitcoin ETFs, citing concerns about the susceptibility of cryptocurrencies to manipulation and fraud. However, Grayscale’s successful challenge to the SEC’s rejection of an earlier spot Bitcoin application, with a federal appeals court ruling it as “arbitrary and capricious” in August, has proven to be a turning point.

This regulatory green light now allows both US institutional and retail investors direct exposure to Bitcoin through a regulated product. Importantly, it mitigates the risks associated with purchasing from unregulated exchanges, providing a more secure avenue for market participation compared to ETFs tied to Bitcoin futures that often come with higher costs.

As we delve into the implications of this groundbreaking decision, this article will explore what the approval of spot Bitcoin ETFs means for investors, the cryptocurrency market, and the broader financial landscape.

Exchange-Traded Funds have risen to prominence as a versatile investment vehicle, combining the flexibility of individual stocks with the diversified approach of mutual funds. Operating similar to mutual funds, ETFs are pooled investment securities designed to track or outperform specific indices, sectors, commodities, or other assets.

ETFs transform into registered investment companies upon regulatory approval, acquiring and securing assets outlined in their filings. These assets are then packaged into tradable securities for investors. Easily accessible on various online platforms, retirement account providers, and investment apps, ETFs offer investors a cost-effective means of diversifying their portfolios.

While ETF transactions may involve costs, they are generally designed to be affordable. These investment tools span various categories, including stock ETFs, industry ETFs, commodity ETFs, currency ETFs, bond ETFs, and more.

Spot Bitcoin ETFs allow investors to mirror Bitcoin’s price movements within their regular brokerage accounts, providing a seamless and potentially secure pathway to Bitcoin exposure. Similar to ETFs tracking renowned indexes like the S&P 500, spot Bitcoin ETFs offer investors exposure to the fundamental components of the cryptocurrency without requiring ownership of each individual Bitcoin.

Ten asset managers sought approval for these pioneering ETFs, with major players such as BlackRock, boasting over $9 trillion in Assets Under Management (AUM), Fidelity with $4.5 trillion AUM, and Franklin Templeton and Invesco, each managing $1.5 trillion AUM, leading the charge.

While Europe has seen its fair share of physically backed Exchange Traded Products (ETPs), the recent approval of spot Bitcoin ETFs in the United States heralds a new chapter in the global cryptocurrency landscape. It prompts us to explore what sets these US-based spot ETFs apart. What makes them stand out in a market where physically backed offerings are not entirely novel?

In Europe, traditional ETFs adhere to the UCITS (Undertakings for Collective Investment in Transferable Securities) framework, emphasizing diversification by holding a basket of investments. This regulatory requirement restricts traditional European ETFs from holding a single asset or commodity, such as Bitcoin.

As a result, European investors have leaned towards Exchange Traded Notes (ETNs) as their preferred avenue for Bitcoin exposure. Despite their existence for years, the largest Bitcoin ETP in Europe has a fund size just over 1 billion EUR, showcasing a more subdued uptick in comparison.

Fee Dynamics:

In the fee realm, US ETFs generally boast lower costs than their European UCITS counterparts. The disparity becomes even more pronounced when comparing the fees of the recently approved US spot Bitcoin ETFs with existing Bitcoin ETPs in Europe. The average Total Expense Ratio (TER) for the 10 largest ETNs in Europe stands at 1%, while the US Bitcoin ETFs, excluding Grayscale, average an impressively lower fee of 0.29%. This threefold difference underscores a significant cost advantage for US investors.

Credit Risk and Security:

European ETNs, despite being “physically backed,” carry inherent credit risks as they are senior, unsecured, unsubordinated debt issued by financial institutions. In the event of financial distress, the assets held on the issuer’s balance sheet, including physically backed Bitcoin, may be used to settle the issuer’s debts. This poses a unique concern for investors, as they may lack direct ownership or claim to the physically backed assets, relying on the creditworthiness of the issuing institution. In essence, the credit risk associated with European Bitcoin ETNs makes them generally riskier than their US ETF counterparts.

In the dynamic competition between European and US Bitcoin Exchange Traded offerings, the advantages of lower fees, robust regulatory frameworks, and heightened security measures contribute to positioning the recently approved US spot Bitcoin ETFs as a more superior and appealing investment option. This holds particularly true for investors such as pension or insurance funds. Therefore, when it comes to single-asset ETFs, US exchange-traded products emerge as a considerably superior option.

Having underscored the superiority of US exchange-traded products, especially in the realm of single-asset ETFs, it becomes imperative to delve deeper into the potential growth trajectories of two key players: the recently approved US spot Bitcoin ETFs and the well-established Gold spot ETF that made its debut in 2003.

This comparison carries significant weight as it pits two single-asset US ETFs — both classified as commodities by regulatory bodies, including the SEC — against each other. While gold stands as a timeless commodity, often viewed as a store of value, Bitcoin, hailed as “digital gold,” rides the wave of the ever-evolving cryptocurrency landscape. By examining their historical trajectories and potential future paths, we aim to draw insightful parallels.

Gold-backed ETFs

Since their inception in 2003, gold-backed ETPs have experienced robust growth globally, collectively holding an impressive 3,235 tonnes of gold valued at a staggering US$214 billion as of December 2024 (World Gold Council, Jan 2024). While the lion’s share of AUM resides in the US and Europe, Asia has become a noteworthy participant in the world of ETFs.

At the forefront of gold-backed ETFs stands the SPDR Gold Shares (GLD), commanding a significant $55.5 billion in Assets Under Management. Launched on November 18, 2004, GLD has played a pivotal role in shaping the landscape of gold investments. By the end of November 2004, within just eight trading days, GLD amassed a significant $1.6 billion in assets. Please refer to the details below:

When examining fees, GLD imposes a 0.40% charge, encompassing various expenses such as custodian fees, legal costs, and marketing expenditures. In stark contrast, major Bitcoin ETFs, including Fidelity and BlackRock, feature an average issuer fee of 0.29%, with Franklin Templeton leading at 0.19%. Notably, Bitcoin ETFs, on average, undercut their gold counterparts by a noteworthy 0.10%.

Bitcoin ETFs

Shifting our focus to the emerging landscape, nine recently introduced spot Bitcoin ETFs in US (along with Grayscale’s conversion into ETF) have gained significant attention since January 11. When evaluating the same timeframe of the initial eight trading days, similar to GLD, these ETFs have seemingly set records by accumulating an impressive $4.9 billion in inflows. However, it’s crucial to note that the inflow data is distorted due to the inclusion of Grayscale Bitcoin Trust (GBTC).

Established as a trust in 2013, GBTC initially operated with a high 1.5% fee. Upon approval, GBTC transitioned into a spot ETF, holding an impressive 619,000 Bitcoins, while maintaining the same 1.5% fee structure. As a result of this high fee, outflows from GBTC since January 11 amount to $3.95 billion.

Subtracting the outflows from GBTC, the net capital inflows into Bitcoin ETFs reach $965 million over the initial eight trading days. This subtraction is a deliberate strategy aimed at fostering a fair comparison, guarding against potential distortions stemming from capital rotation driven by GBTC’s high 1.5% fee. Our emphasis stays on the new capital entering spot Bitcoin ETFs, excluding the scenario in which all current Grayscale holders sell GBTC and choose one of the other nine Bitcoin ETFs merely due to lower fees.

Details are outlined below for reference:

The comparative analysis brings forth Bitcoin’s notable achievement, showcasing an impressive net inflow of $965 million in new capital. In comparison, SPDR Gold, considered the second most successful ETF launch in history (Morningstar, 2023), accrued $1.6 billion in the first eight trading days, making Bitcoin’s performance commendable.

While these observations offer insightful comparisons, it’s essential to highlight that a substantial amount, at least $1 billion worth, of GBTC’s Bitcoin has not undergone rotation into the other nine Bitcoin ETFs. This revelation comes from the disclosure that FTX’s bankruptcy estate has liquidated 22 million shares, equating to nearly $1 billion, from Grayscale Bitcoin Trust since its conversion into an ETF (Reuters, 2024).

This aspect introduces the likelihood that, in practical terms, Bitcoin ETFs could be on par with gold in the context of net inflows of new capital over the first eight trading days.

Bitcoin ETFs In Europe

In our examination of Bitcoin’s performance, we initially assessed the spot ETF performance of Bitcoin in comparison to gold in the US, emphasizing Bitcoin’s noteworthy success over a concise timeframe. Expanding this comparative analysis, we now redirect our focus to the European market, where we examine the growth trajectories of gold-backed and Bitcoin ETPs. Our specific attention is on the timeframes required to reach $1 billion in AUM.

Please refer to the diagram below, illustrating the growth of gold-backed ETPs in the European market.

According to historical data, the inaugural gold ETP in Europe was introduced, listed on the London Stock Exchange in December 2003. It took approximately two years for the gold ETP to achieve $1 billion in AUM.

Shifting our focus to Bitcoin, the initial Bitcoin ETP in Europe, known as BTCE Bitcoin ETP, launched on Deutsche Börse’s Xetra platform in Germany on June 8, 2020. Remarkably, BTCE surpassed $1 billion in AUM within a mere seven months (hanETF, 2021), signifying an impressive achievement. Importantly, this milestone was reached in less than a third of the time it took for gold to achieve a comparable level of AUM growth.

Given that our data illustrates a parallel growth pattern between Bitcoin and gold, both in the European market over the long term and in the US market during the initial launch week, it’s reasonable to use the growth of gold spot ETFs in Europe and the US as a comparable metric. This approach allows us to formulate informed forecasts for Bitcoin’s performance in US and European ETFs over the next five years.

Given the notable parallels in the performance of gold-backed ETFs and Bitcoin ETFs in both the US and Europe, we can capitalize on this data to formulate well-informed forecasts regarding the potential growth of Bitcoin spot ETFs in terms of AUM over the next five years.

Let’s examine the performance of gold ETFs in North American and European markets since their launch over the subsequent five years. See below:

As indicated by the data above, in the five years following the launch of the first gold ETF in the US, the total AUM of all gold exchange-traded products in Europe and the US reached $67.8 billion.

Considering the highly correlated growth patterns observed between gold ETFs and Bitcoin ETFs, our anticipation is that Bitcoin has the potential to achieve, at the very least, an equivalent level of AUM by the year 2028.

This expectation is particularly strengthened by recent developments in Europe where major asset managers such as CoinShares, WisdomTree, and Invesco have all announced significant fee reductions for their physically backed Bitcoin ETPs by over 60% (Financial Times, 2024). These substantial price cuts align with the new competitive landscape introduced by Bitcoin ETFs in the US.

The Asian Market

Gold ETFs in Asian markets experienced remarkable growth in both 2016 and 2020, culminating in an impressive AUM totaling $9.7 billion as of January 2024.

The noteworthy ascent of Asian gold-backed ETFs traces back to December 2010 when Lion Fund Management in China pioneered the launch of the country’s first gold ETF. Lion Fund successfully raised over 3.2 billion yuan (US$483 million) for its gold ETF under the Qualified Domestic Institutional Investor scheme (Asia Asset Management, Dec 2010).

This groundbreaking gold product effectively marked China’s initial foray into ETFs providing exposure to physical gold. Its primary investment focus lay in overseas ETFs tracking international gold prices.

Having obtained approvals from both the State Administration of Foreign Exchange and the China Securities Regulatory Commission, institutional and retail investors gained access to the fund through banks.

See below:

Since China entered Asian markets with a gold ETF in December 2010, the AUM of gold has climbed from $800 million to $2.4 billion by November 2011, marking a threefold increase in just under 12 months.

Looking ahead, we anticipate the launch of a Bitcoin spot ETF in China within the next three months. As of January 2024, China’s 6th largest public fund manager, Harvest Fund, with $210 billion in AUM, has applied for a Bitcoin spot ETF with the Hong Kong Securities and Finance Commission (SFC), and it’s expected to launch after the Chinese New Year in February, according to a report from Tencent News.

In another report, Hong Kong-based financial services firm Venture Smart Financial Holdings is also expected to launch its Bitcoin spot ETF in the first quarter of 2024. Brian Chan, the group head of investment and product at the company, stated, “Our goal is $500 million in assets under management by the end of this year” (Bloomberg, 2024).

Furthermore, in an interview with Caixin, a Chinese financial news outlet, Livio Weng, Chief Operating Officer of Hong Kong-licensed crypto exchange HashKey, stated that ten major fund managers are exploring the possibility of introducing spot Bitcoin ETFs in Hong Kong (Caixin, 2024).

In light of these unfolding developments, our forecast predicts that Bitcoin ETFs originating from Chinese and Asian markets will contribute an additional $3 billion to the overall Assets Under Management of Bitcoin spot ETFs, encompassing Europe, the US, and Asia. This cumulative figure is anticipated to reach $70.8 billion by the year 2028.

DISCLAIMER: The information contained in this article is for educational purposes only and does not constitute any form of advice or recommendation by Wheatstones, and is not intended to be relied upon by users in making (or refraining from making) any investment decisions.

References:

(1) Ptak, Jeffrey, CFA. (Jun 27, 2023). “The Most Successful ETF Launch of All Time Raises Questions.” Morningstar. (Online) Available at: morningstar.com/alternative-investments/most-successful-etf-launch-all-time-raises-questions

(2) Reuters. (Jan 22, 2024). “FTX Sold About $1 Billion of Grayscale’s Bitcoin ETF Since Its Approval — CoinDesk.” (Online) Available at: reuters.com/technology/ftx-sold-about-1-bln-grayscales-bitcoin-etf-since-its-approval-coindesk-2024–01–22

(3) HanETF. (March, 2021). Press Release: “Team Behind $1 Billion Bitcoin ETP to List the First Litecoin ETP on Deutsche Börse’s Xetra.” (Online) Available at: hanetf.com/article/715/team-behind-1-billion-bitcoin-etp-to-list-the-first-litecoin-etp-on-deutsche-brses-xetra

(4) Tasman-Jones, Jessica. (Jan, 2024). “Hong Kong-Based Firm Targets Spot Bitcoin (BTC) ETF Launch in First Quarter.” Financial Times. (Online) Available at: ft.com/content/3e980139-c81d-4991-b1d5–860915b82455

(5) Asia Asset Management. (Dec, 2010). News: “China’s Lion Fund Management Launches Country’s First Gold Fund.” (Online) Available at: asiaasset.com/post/2358-f8e7cee1b0874f28af57a897d7b0cff3

(6) Droulers, Annabelle. (Jan, 2024). “Hong Kong Firm Targets Spot Bitcoin (BTC) ETF Launch in First Quarter.” Bloomberg. (Online) Available at: bloomberg.com/news/articles/2024–01–19/hong-kong-firm-targets-spot-bitcoin-btc-etf-launch-in-first-quarter

(7) Caixin. (Jan, 2024). Press: “About Ten Fund Companies Are Preparing to Launch Virtual Asset Spot ETFs in Hong Kong.” (Online) Available at: finance.caixin.com/2024–01–10/102154969.html