Spot bitcoin ETFs have arrived in the U.S. to much fanfare and as expected, they’ve thus far delivered what everyone outside looking in sought: easy access to bitcoin.
As an industry, it took us about 10 years to get here. We are now collectively relishing this win for ETFs as the champion structure for broad low-cost market access. When we talk about bitcoin ETFs being a bridge between TradFi and DeFi, it’s been rewarding to see how true that is – the buzz these ETFs have generated among folks who talk crypto has been incredible to see. Suddenly, ETFs as a structure are part of everyone’s conversation whether they were ETF investors before or not.
The real winner in all of this is the end investors. They now have ample product choice that enables access in a new way at lower costs.
It’s been quite a solid start to a new year in ETFs. What comes next could be even more interesting.
Flows Are Strong, But It’s About The Long Game
Early-days asset flows into spot bitcoin ETFs haven’t disappointed. Some early estimates put initial bitcoin demand through ETFs in their first week at nearly 100,000 coins (reports @BitcoinMagazine). The inflows – part seed money, part organic creations – confirm pent up demand for bitcoin in a regulated vehicle. Spot bitcoin exposure can now easily fit into asset allocation models and broader portfolios in the advisory and institutional channels, and adoption is only expected to grow as product due diligence begins. And word on the street is that due diligence is only now getting started.
Last week, Hashdex and the ETF Think Tank hosted a 5-hour X Spaces (Twitter) conversation with a number of macro and crypto experts about the state of all things bitcoin and global macro economy. It was a real-time capture of the wisdom of the crowds – or the prevailing narratives – surrounding markets right now.
One of the insights that came out of that conversation is that we may have been talking about bitcoin for a number of years now, but financial advisors – as fiduciaries – have hardly scratched the surface on the massive due diligence task of understanding this asset class and fitting it within a client portfolio.
Hashdex, a firm that has been managing spot bitcoin ETFs globally and has one bitcoin fund listed in the U.S.,highlighted that in Brazil, for instance, the conversations around spot bitcoin exposure through ETFs is now institutional in nature some 3 years since their fund first came to market – a fund that gets more attention today than the country’s broad equity benchmark.
“The evolution of understanding of this asset class is now moving beyond retail,” Hashdex’s CIO Samir Kerbage said in the Spaces. “The challenge institutions face is reputational risk – that’s a big concern they have. But the SEC approval of ETFs alleviates that and makes bitcoin investable for them.”
We may all be caught up on the immediate news and moves in the aftermath of the ETF launches, but we really should be talking about the long game. Seeing this space flourish and expand is going to take time – a long time.
Frank Holmes, CEO & CIO of U.S. Funds and Chairman of Hive Digital, compared bitcoin adoption to gold, the ownership of the latter being largely what he calls a Boomer “love trade.” Gold is typically bought out of love for the asset, or out of fear for the economic outlook. “Bitcoin has a different demographic reach than gold. It’s not Boomers, it’s Millennials, who have a different psychology,” he said. “But the transfer of wealth we are going to see is going to a crowd that’s confident on bitcoin. The growth is going to become significant.”
The” there’s only growth ahead” narrative was strong among the participants on the Spaces conversation, which included advisors, CIOs, bitcoin miners, investors, and macro strategists – folks you may want to follow on social media as thought leaders in this segment. Names include @SamirKerbage, @michael_venuto, @APompliano, @GarethSoloway, @LanceRoberts, @ZachKBradford, @1MarkMoss, @pboockvar, @JasonLes_, @LynAldenContact, @dmoses34, @jameslavish, @EconguyRosie, @Gary_Brode, @MarkYusko, @CaitlinLong_, @fgthiel, @bulldogholmes, @WOLF_Financial and @EricBalchunas.
Other key takeaways from the conversation included:
- “Cracks are emerging.”
Understanding the impact of macroeconomic conditions is crucial for informed decision-making in this space. The overarching theme among just about everyone on the Spaces last week was caution.
Market conditions in 2024 aren’t exactly suggesting an environment of aggressive risk taking, they said. Why? It’s a mixed bag, really. This year we are faced with a U.S. presidential election, a tense geopolitical environment globally, sticky inflation (despite what Fed says), and some early signs of consumer in trouble vis-à-vis earnings misses by companies such as Discover Financial.
Beyond all that, the market expects a handful of Fed interest rate cuts this year, which could at first be supportive but could also suggest the economy isn’t that strong. Caution ahead was the call of the day, which could keep a lid on risk assets, including bitcoin.
That said, a money-printing Fed feeding the flames of the currency debasement crowd, the growing concerns about mounting deficits, eyes on the debt refinancing coming on in the next couple of years, as well as inflation and recession woes could all bode well for bitcoin (and gold) prices going forward. There’s also the upcoming bitcoin halving in the spring which some believe may support prices, though its actual impact on the market remains speculative.
Again, it’s a mixed bag for 2024 where words like uncertainty and caution are driving the narrative about the outlook for the investing environment. Bitcoin will have to find its way in that landscape.
- Bitcoin miners are key to the outlook for bitcoin.
Bitcoin miners face many market risks, including those tied to energy prices as well as bitcoin prices. An election year could also bring additional risks to miners as regulators struggle to agree on bitcoin as an asset. As miner @ZachKBradford put it, there’s a “clear political divide” when it comes to support for bitcoin and blockchain, and there’s a lot more education needed among Congressional seats before the segment can be on more solid ground.
The recent rally we’ve seen in tech names may also weigh in the near term on miner stocks (and blockchain players more broadly) because they aren’t exactly undervalued at current levels.
But the key takeaway here is that continued expansion of the network and innovation is going to be critical for the growth of bitcoin in the future. That’s especially true when you think about the next wave of ETF product innovation many expect will follow spot bitcoin ETFs. Demand and adoption will require miners to keep their foot on the gas – and hopefully friendly regulation on their side.
- Volatility is a big part of the bitcoin story. ETFs may impact that.
Some macro strategists in our Spaces conversation pointed out that they aren’t yet comfortable with how to value bitcoin as an asset. What’s more, they were quick to note that the volatility in bitcoin makes it incredibly difficult, if not impossible, to consider it for their accounts. These are real friction points for advisors as well.
In fact, the case for bitcoin as a store of value or digital gold due to its limited supply is challenged by the level of volatility of the asset. However, the arrival of ETFs and the expected growth of assets – and broadening of access — could dampen volatility of bitcoin overtime as ETFs bring new bitcoin buyers and additional liquidity to the space. That’s one of the arguments (or hope?) anyway.
- Bitcoin ETFs are similar, but there are key differences among firms behind them.
There isn’t a lot of difference when it comes to spot bitcoin exposure through ETFs. Most of the funds in the market today offer similar access, custodied in the same way through the same partner. Perhaps you could argue single custodial risk is a form of concentration risk to be considered in a bitcoin ETF. There are exceptions, so look under the hood.
More broadly, however, what’s initially emerging is a distinction tied to the providers themselves. This is a battle of the brands for now, one that we’re framing from the lens of expertise, or conviction, if you will. At either end of the spectrum, it’s the battle between big-box shops vs. boutique firms. As @Pomp put it on Spaces last week, we’re witnessing a race between the “Big Dog ETF” vs. “Crypto Native” vs. “Hybrid Provider” vs. “Dark Horse” – the one no one saw coming in the alt coin space. It may very well be that the spot bitcoin ETF segment has many “winners” as each of these categories crown their own leader.
But it’s going to be interesting to see how investors respond to the opportunity set. Longer-term, we all know initial brand choice will give way to results – things like how well these ETFs trade, how liquid they are, how well they handle counterparty/concentration risk, how much alpha they capture (if any) – all of these things are going to be more apparent as these funds build a live track record, and they will matter in the due diligence effort both in the advisor and institutional channels.
Due Diligence Partners
The market’s capacity for these ETFs remains to be seen. Ongoing assessment will be key in understanding their place in the market. Either way, as you embark on your due diligence journey in bitcoin as an asset, and in the ETF space in search of the right bitcoin ETF for you and your clients, we at the ETF Think Tank remain committed to your research efforts. We are all diving into this new segment together and the learning curve is steep. If we can help talk through and explore this asset class with you, just holler.
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