Spot Bitcoin ETF frenzy in the US

The newly approved spot Bitcoin exchange traded funds (ETFs) in the US have attracted massive investor interest during their first two days of trading with trading volumes close to 8 billion US dollars. Those issued by BlackRock’s iShares and Fidelity saw inflows of almost half a billion dollars each. The question now is whether US financial institutions will jump on the Bitcoin bandwagon or remain on the sidelines.

The trading volume of these 11 ETFs totaled 4.6 billion dollars on their first day. “Easily the biggest Day One splash in ETF history,” Bloomberg’s ETF analyst Eric Balchunas said. Market experts cite likely inflows of 20, 50, and even 100 billion US dollars in the coming years as realistic figures.

“The spot Bitcoin ETFs approvals are very important for institutional investors. They will now be able to easily allocate assets to Bitcoin. Even 1 percent of the $6 trillion managed in 401k [pension] plans represents massive amounts. That would be the equivalent to $600 billion invested, while the current market capitalization of Bitcoin is roughly $850 billion,” Dr. Efi Pylarinou, a Swiss-based Global Fintech and Blockchain Advisor told Lykke in an interview.

It's not just pension funds that have been on the sidelines ahead of this long-awaited approval on Jan 10. So have family offices, mutual funds, endowments and foundations, and corporations.

The Bitcoin ETF saga has indeed been ongoing for over a decade. A first application was filed to the Securities and Exchange Commission (SEC) by the Winklevoss twins in 2013. It was eventually rejected by the US regulator citing an immature Bitcoin market. Additional applications followed. Meanwhile, Canada took the lead and approved the first spot Bitcoin ETF in 2021. The SEC did not venture as far that year and instead settled for approving Bitcoin futures ETFs.

What is the difference between a futures ETF & Bitcoin spot ETF?

An exchange traded fund is a fund that, as its name states, trades on an exchange. ETFs typically track an index or a specific asset, be it a commodity or a cryptocurrency. There are spot-based ETFs, like the ones just approved in the US, and futures-based ETF.

The latter category has been trading in the US since 2021. Contrary to spot ETFs, futures ETFs do not hold the actual underlying asset but provide exposure to the asset by tracking the price development of its futures contracts. This means there might be significant price differences from the underlying asset’s spot price.

The issuers of the spot-based ETFs own Bitcoins that they have bought on authorized crypto exchanges or from existing Bitcoin holders. The newly approved spot Bitcoin ETFs are now trading on the three largest US stock exchanges: the New York Stock Exchange (NYSE), Nasdaq and the Chicago Board Options Exchange (CBOE).

SEC remains a staunch opponent of cryptocurrencies

“The SEC narrative remains anti-crypto despite the ETF approvals,” Dr. Pylarinou underlined. The Chairman of the SEC, Gary Gensler, did indeed not mince his words following the SEC’s approval of the first spot Bitcoin ETFs in the US.

“While we approved the listing and trading of certain spot bitcoin [exchange traded products] ETP shares today, we did not approve or endorse bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto,” Gensler said in a statement.

“Despite the SEC`s anti-crypto stance, these approvals are a major vote of confidence for digital assets overall, for institutional investors, those handling pension funds, mutual funds, etc. Up until now their exposure to Bitcoin has been negligible, if any mainly because of the US regulatory uncertainty and the operational complications,” Dr. Pylarinou said.

Over the past years, the SEC has launched numerous enforcement actions against crypto players in the US. The centralized crypto exchanges Binance, Coinbase and Kraken have, for example, all been charged for operating unregistered securities exchanges. US celebrities, including Lindsay Lohan, Jake Paul and Aliaune Thiam, have been charged for illegally promoting cryptocurrencies. A full list of the regulator’s crypto assets and cyber enforcement actions can be found here.

ETFs likely to disrupt numerous areas of the financial market

Moving forward, Dr. Pylarinou will primarily focus on the following developments in the US, given the high popularity of ETFs in the region:

• The capital inflows and trading volumes of these spot Bitcoin ETFs in 2024.
• The potential inclusion or exclusion of these new spot Bitcoin ETFs by major distributors of investment products such as Citi, Merrill Lynch, Edward Jones, UBS, etc. Notably, Vanguard has already declined to list these ETFs.
• The survival of the 11 asset managers in the business, considering these ETFs are low-margin financial products and not all issuers will succeed in growing their assets under management (AUM).
• The potential approval for the issuance of spot Ethereum ETFs.
• The possibility that the issuance of spot Bitcoin ETFs will lead to the inclusion of Bitcoin in a widely used index beyond the dedicated crypto indices.
• The potential dismissal of the energy-consuming narrative of Proof of Work (PoW).
• The impact of spot Bitcoin ETFs on existing Bitcoin futures ETFs
• The effect of Bitcoin ETFs on the leverage on crypto exchanges, as the illiquidity of Bitcoin (i.e., the Hodlers) may increase if these ETFs grow rapidly.
• The impact on the number of non-custodial wallets.
• The risk of a black swan event on Coinbase, which is the custodian for most of the Bitcoin Spot ETF issuers.
• The effect on top USD-backed stablecoins - Tether and USDC.