The launch of the first spot bitcoin ETFs in the US was met with much anticipation and excitement, but also with a bitter taste of disappointment for many investors. The new funds, which buy and hold bitcoin on behalf of shareholders, failed to boost the price of the leading cryptocurrency, which dropped nearly 20% in less than two weeks. What went wrong and what does it mean for the future of bitcoin ETFs?
Spot bitcoin ETFs are exchange-traded funds that track the price of bitcoin by directly purchasing and storing the digital asset in a custodial service. Unlike bitcoin futures ETFs, which track the price of bitcoin futures contracts traded on regulated exchanges, spot bitcoin ETFs aim to provide a more direct exposure to the underlying asset.
The US Securities and Exchange Commission (SEC) approved the first batch of spot bitcoin ETF applications on January 10, 2024, after years of rejections and delays. The approval was seen as a major milestone for the crypto industry, as it opened the door for more institutional and retail investors to access bitcoin in a regulated and convenient way.
The first spot bitcoin ETF to start trading was the BlackRock Bitcoin Trust (BRCO), which launched on January 11, 2024. It was followed by several other funds, including the iShares Bitcoin Trust (IBIT), the VanEck Bitcoin Trust (HODL), the Fidelity Wise Origin Bitcoin Trust (FBTC), and the Grayscale Bitcoin Trust (GBTC), which converted from a trust to an ETF.
The spot bitcoin ETFs attracted a lot of attention and demand, with a combined trading volume of $4.5 billion on the first day, according to Yahoo Finance data. GBTC accounted for roughly half of the volume, while BRCO saw roughly a quarter of the volume.
Spot bitcoin ETFs: A disappointing performance
Despite the high expectations and enthusiasm, the spot bitcoin ETFs did not deliver a positive impact on the price of bitcoin, which plunged from around $49,000 on January 11 to around $39,000 on January 23, a drop of nearly 20%. This was a frustrating experience for many investors, especially those who bought shares in the spot bitcoin ETFs on their first day, who could be down as much as 20% in less than two weeks.
There are several factors that could explain the poor performance of the spot bitcoin ETFs, such as:
- The spot bitcoin ETFs were priced in after a long period of anticipation and speculation. Bitcoin rallied up to 80% from $27,000 to $49,000 between BlackRock’s initial ETF filing last June and their launch on January 11, 2024. The approval of the spot bitcoin ETFs was already factored in by the market, and any buying pressure associated with the funds was overshadowed by the selling pressure.
- The spot bitcoin ETFs faced competition from the bitcoin futures ETFs, which launched in October 2021 and have lower fees and higher liquidity. The ProShares Bitcoin Strategy ETF (BITO), the largest bitcoin futures ETF, has an expense ratio of 0.95%, while the spot bitcoin ETFs have fees ranging from 0% to 1.5%. The bitcoin futures ETFs also have higher trading volumes and lower tracking errors than the spot bitcoin ETFs, which could make them more attractive for investors.
- The spot bitcoin ETFs triggered a massive outflow from the Grayscale Bitcoin Trust (GBTC), which had a negative effect on the price of bitcoin. GBTC, which was the largest bitcoin fund before converting to an ETF, saw $2.8 billion worth of bitcoin pulled out as $3.95 billion was funneled into the new spot bitcoin ETFs, according to Blockworks. Some of the investors who redeemed their GBTC shares for bitcoin may have sold the bitcoin in the market, creating downward pressure on the price.
Spot bitcoin ETFs: A long-term perspective
While the spot bitcoin ETFs have disappointed many investors in the short term, they could still have a positive impact on the crypto market in the long term. Some of the potential benefits of the spot bitcoin ETFs are:
- The spot bitcoin ETFs could increase the adoption and awareness of bitcoin among institutional and retail investors, as they provide a regulated and convenient way to access the digital asset. The spot bitcoin ETFs could also attract more investors who prefer a direct exposure to bitcoin rather than a derivative product like the bitcoin futures ETFs.
- The spot bitcoin ETFs could reduce the volatility and improve the efficiency of the bitcoin market, as they increase the liquidity and transparency of the spot market. The spot bitcoin ETFs could also reduce the premium or discount of the bitcoin funds to their net asset value (NAV), which is the value of the bitcoin owned by the ETF. The spot bitcoin ETFs have a creation and redemption process that allows authorized participants to exchange shares for bitcoin or vice versa, which could help keep the fund price close to the NAV.
- The spot bitcoin ETFs could pave the way for more innovation and diversification in the crypto space, as they set a precedent for the approval of other crypto-related ETFs, such as spot ETFs for other cryptocurrencies like ethereum or litecoin, or thematic ETFs for decentralized finance (DeFi) or non-fungible tokens (NFTs). The spot bitcoin ETFs could also spur more competition and innovation among the existing crypto funds, as they lower the fees and improve the services for the investors.
