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Approval of 11 Spot Bitcoin ETFs: The Dawn of a New Era

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Approval of 11 Spot Bitcoin ETFs

Key Highlights

  • The U.S. Securities and Exchange Commission (SEC) has approved 11 new spot Bitcoin (BTC) Exchange-Traded Funds (ETFs). This marks a significant shift from previous futures-based ETFs to spot-based ones.
  • Key players in this new ETF market include BlackRock, Fidelity, and Grayscale. The move is expected to impact Bitcoin’s market and its wider acceptance in traditional financial systems.
  • The eleven spot Bitcoin ETFs recently approved have already recorded nearly USD 1.25 billion inflows.

Introduction

The recent approval of 11 spot Bitcoin ETFs by the SEC is a monumental event in the cryptocurrency world. This development, unprecedented in its scale, signifies a major leap in integrating cryptocurrency into the traditional financial infrastructure. For Bitcoin investors, this week was a rollercoaster, with BTC prices reaching multi-year highs and then plummeting by over 18.5%, influenced by derivatives leverage and spot profit-taking.

Spot vs. Futures ETFs

Before diving into the differences between spot and futures ETFs, let’s clarify the history of Grayscale’s Bitcoin Trust (GBTC). GBTC was one of the earliest investment vehicles offering exposure to Bitcoin in a form that was more familiar to traditional investors. It allowed investment in Bitcoin without the challenges of buying, storing, and safekeeping Bitcoins directly. However, GBTC often traded at a significant premium or discount to the actual underlying Bitcoin value. This means the share price of GBTC did not accurately reflect the value of the Bitcoin it held. When demand was high, shares could trade at a premium (a price higher than the Bitcoin value), and at times of low demand, it could trade at a discount (a price lower than the Bitcoin value). Now, let’s compare Spot and Futures ETFs in the context of crypto-based ETFs:

Spot ETF vs Futures ETF

The Need for ETFs in Bitcoin Investment

Despite Bitcoin being available for mining, purchase, and trading for over a decade, the introduction of ETFs plays a crucial role in aligning cryptocurrency with the current financial market infrastructure. This is particularly important for those not actively involved in modern, decentralized finance methods like yield-farming. The high-net-worth (HNW) channel alone, holding USD 30 trillion of assets (Source: cnbc, exemplifies the vast potential of cryptocurrency investment through ETFs. If even a fraction of these assets moves into crypto, it could significantly impact the market.

The Key Players

Among the key players in this new ETF market, BlackRock’s iShares ETF stands out, having recorded nearly USD 1701 million in inflows in five days. Fidelity is another major participant, with USD 3061 million in trading volume. Grayscale, with its significant Bitcoin holdings and an established reputation in the cryptocurrency world, remains a pivotal player. These firms are leading the charge in bringing Bitcoin to mainstream investors, although some market participants, like Vanguard, remain cautious.

Impact on Bitcoin and the Cryptocurrency Market

The approval of these ETFs marks a significant milestone in Bitcoin’s journey towards mainstream acceptance. With institutional investors now able to participate more easily, the demand for Bitcoin is expected to grow significantly. We expect inflows of USD 50-100 billion into the spot ETF this year according to our calculations.

This influx of institutional money could increase Bitcoin’s liquidity and dampen extreme price fluctuations. Furthermore, the entry of these ETFs into the market could set a precedent for additional cryptocurrencies, potentially leading to spot ETFs for other digital assets like Ethereum. The SEC’s decision reflects a growing acceptance of cryptocurrency, especially among younger investors who prefer crypto over traditional mutual funds.

Daily Flows of BTC Spot ETFs

Despite significant sales of GBTC shares (majorly FTX owned), amounting to up to 1 billion USD, total ETFs have experienced nearly 1.1 billion USD in net inflows.

Daily Volume of BTC Spot ETFs

Global Overview and the European Context

In the global context, Bitcoin spot ETFs are already available in Canada and Europe, with varying degrees of accessibility to retail investors. The European market, in particular, has turned to collateralized Exchange-Traded Products (ETPs) as a workaround for regulatory restrictions, providing a structured yet flexible way for investors to engage with cryptocurrency.

Regulatory Divergence between the US and EU

The investment landscape for Exchange-Traded Funds (ETFs) exhibits significant differences between the United States and the European Union, primarily due to divergent regulatory frameworks. In the US, ETFs, including those for cryptocurrencies like Bitcoin, tend to be more cost-effective and liquid. This efficiency stems from a well-established market structure and favorable regulatory environment. However, the situation in the EU presents a contrasting scenario.

The European Union’s regulatory framework, particularly the UCITS (Undertakings for Collective Investment in Transferable Securities) and MiFID (Markets in Financial Instruments Directive) regulations, has created a barrier that effectively shields its capital markets from US-domiciled ETFs. This protectionist stance creates a unique scenario, particularly for cryptocurrency investment vehicles such as a non-UCITS US spot BTC (Bitcoin) ETF. Due to these regulatory hurdles, such an ETF may not be available or appealing to EU retail investors, potentially limiting its market share in comparison to European Exchange-Traded Products (ETPs).

Investing in US ETFs within the EU is typically restricted to professional investors and comes with a range of tax disadvantages. These include estate tax, potential capital gains, and taxation on dividends and interest. As a result, even for investments in US equities, European investors tend to favor Irish domiciled ETFs, despite the generally lower cost of US-domiciled ETFs.

When it comes to the cryptocurrency market, the implications are even more pronounced. A non-UCITS US spot BTC ETF is likely to be inaccessible to EU retail investors and may be shunned by European professional investors, depending on the tax implications in their respective jurisdictions. This preference and regulatory alignment mean that a US spot ETF, despite potentially being more cost-effective, is unlikely to gain significant market share compared to European ETPs.

In terms of pricing, most European single coin BTC ETPs are priced around 1-1.5%. However, there are more attractive options available.

Market Dynamics and GBTC's Dominance

In the first week of trading, the ETF market witnessed substantial activity. BlackRock’s iShares ETF led the charge, with remarkable inflows and trading volumes, followed closely by Fidelity and other issuers. Despite significant outflows from the now converted GBTC ETF product, it remains a dominant player, holding a vast amount of Bitcoin and accounting for a significant portion of the trade volume. This reshuffling in the ETF space highlights the dynamic nature of the market as it adapts to these new products.

Spot Bitcoin ETF Market Share

The Global Perspective of ETF Holdings

On a global scale, U.S. spot ETF products now hold a substantial percentage of global ETF holdings, a testament to the significant impact of these approvals. This rapid accumulation of assets under management (AUM) and trading volumes marks one of the most significant ETF launches in history, signaling Bitcoin’s increasing acceptance as alternative assets and maturity.

Bitcoin Holdings by ETF

Custodial Services and Coinbase's Role

Coinbase, one of the few regulated crypto custodians in the US, plays a pivotal role in this new era of Bitcoin ETFs. Most ETF providers have chosen Coinbase as the regulated custodian for their BTC holdings, underscoring the importance of secure and reliable custodial services in the burgeoning ETF market.

Implications of the ETF Approval and Halving in 2024

Looking ahead, the approval of a spot BTC ETF is set to be a landmark event for the USD 1.7 trillion digital asset industry. The influx of institutional investors will likely increase Bitcoin’s demand and value. Analysts predict a massive inflow into the spot ETF, potentially reshaping the cryptocurrency’s valuation. The institutional inflows will further solidify cryptocurrencies as an established asset class, with higher liquidity and reduced price volatility. The approval also paves the way for spot ETFs in other cryptocurrencies, with Ethereum being the next watch.

Conclusion

The SEC’s approval of 11 spot Bitcoin ETFs is not just a triumph for the cryptocurrency world but also a landmark event for the traditional financial system. It represents a blending of the new digital asset class with established financial structures, potentially paving the way for broader acceptance and integration of cryptocurrencies. As the industry observes the unfolding impact of this decision, the focus is on how Bitcoin and the wider crypto market will evolve in this new era of institutional participation.

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Authors

Yves Longchamp

Head of Research AMINA Bank AG

Sonali Gupta

Senior Research Analyst AMINA India

Rishabh Nagar

Research Analyst AMINA India

Anirudh Shreevatsa

Research Analyst AMINA India

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