The Race is On: 11 Bitcoin ETFs Launch

Swan Bitcoin Market Update #47

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After nearly 10 years of denials, eleven spot Bitcoin ETFs were approved and began trading this week, marking a pivotal moment in Bitcoin’s history.

The news broke on Wednesday afternoon. It was fitting that these ETF products were approved 15 years from the day when early Bitcoin user Hal Finney posted this legendary tweet:

When he posted this, Bitcoin didn’t even have a dollar price yet. It’s incredible to see how far this digital money has come since Hal received the very first transaction from Satoshi Nakamoto all those years ago.

Due to the SEC’s debacle on Tuesday, when the SEC’s official X account was hacked and a fake ETF approval announcement was posted, causing massive price swings and over $300 million in liquidations, the SEC chose to instead post the approval document on its website.

It’s important to step back and recognize why the SEC had denied so many applications prior to this week’s developments. Their main justification for denying them for all those years revolved around suspected fraud and manipulation in the spot Bitcoin market. However, when the SEC went ahead and approved the Bitcoin Futures ETFs that track the underlying spot Bitcoin market, it raised eyebrows and ultimately led to a lawsuit with Grayscale. In the end, the court ruled that the SEC’s decision to deny Grayscale from converting its Bitcoin trust into a spot Bitcoin ETF and approving Bitcoin Futures ETFs was “arbitrary and capricious” and ordered them to re-evaluate it. This was one of the main driving forces behind the SEC finally approving these products.

In the approval document, the SEC agreed with the analysis provided to them by multiple issuers they denied over the past several years. Apparently, the SEC just needed to perform its own “robust correlation analysis” to come to the same conclusion, that Bitcoin futures prices were closely correlated to spot prices. This was the same argument at the heart of Grayscale’s argument in court, against which the SEC fought, wasting millions of dollars in taxpayer money in the process.

This is the key passage in the approval document where the SEC capitulated:

It’s difficult not to condemn the SEC for now coming to the same conclusion after years of preventing investors from accessing a better investment vehicle to gain exposure to Bitcoin compared to more expensive, riskier alternatives.

SEC Commissioner Hester Peirce, who has long advocated for a spot Bitcoin ETF approval and was one of the three commissioners who voted to approve them this week, wrote an incredible letter that touched on what she believes was the main reason the SEC denied spot Bitcoin ETFs: prejudice. 

I recommend reading the letter in full, but here is an important excerpt.👇

Commissioner Peirce then goes on to list some of the harms done by the SEC in preventing a spot Bitcoin ETF from coming to market including:

• Damaging the SEC’s reputation and credibility long term  

• Wasting millions of dollars in taxpayer money toward blocking these applications

• Alienating a generation of investors due to their unreasonable approach 

The messaging from SEC Chairman Gary Gensler does hint that the SEC was forced to approve these from the courts rather than making the decision on their own accord. In his statement about the ETF approvals, Gensler came across as disgruntled and used the opportunity to spread misinformation about how Bitcoin is primarily used for illicit activity. Read the last two paragraphs of the statement below:

Regardless of the fact that the SEC had to be pulled towards these approvals kicking and screaming, the spot Bitcoin ETFs have finally hit the market.

It marks an inflection point in Bitcoin’s adoption. For the first time ever, millions of investors will now have access to Bitcoin in traditional brokerage accounts and large institutions like financial advisors, pension funds, and endowments will now be able to gain exposure to the asset.

This is the part where I remind you that an ETF is not real Bitcoin. There are tradeoffs that investors make when choosing the convenience of a spot Bitcoin ETF. For starters, they are bringing on counterparty risk by trusting a third party to secure the bitcoin on their behalf. Additionally, an ETF has yearly annual sponsor fees. When you buy spot Bitcoin, you pay once, and then never have to pay a fee again. Lastly, Spot Bitcoin trades 24/7/365 and has tax benefits, like less prohibitive tax loss harvesting rules, compared to ETFs.

Having said that, spot Bitcoin ETFs will likely bring millions into Bitcoin as a new top-of-funnel driven by marketing campaigns from some of the largest, most trusted financial institutions in the world. These ETF issuers will viciously compete with one another for capital because, in the ETF world, liquidity is king.

Typically, the largest ETF in an asset class dominates once it gains a significant market share and gathers momentum. From there, they have the pricing power to set their fees as they see fit. Once an ETF wins, it’s very difficult for another to take its crown.

Spot Bitcoin ETFs represent a unique moment in ETF history because never before have eleven ETFs launched for a brand new asset class simultaneously. The competition will be both entertaining and brutal to watch unfold.

We have already seen multiple strategies from these ETF issuers to attract capital through marketing campaigns, dropping their fees (or waiving them entirely), and trying to win favor with the Bitcoin community in other ways.

Here is an updated table of all of the ETFs and their fee structures:

Fees aren’t the only way these issuers are trying to differentiate themselves. Both VanEck and Bitwise have pledged to donate a percentage of their profits to Bitcoin core development.

VanEck: 

Bitwise:

Franklin Templeton even changed its profile picture on its official X account to include laser eyes in an attempt to gain favor with the Bitcoin community.

All of this led up to the first day of trading when we finally got to observe which issuers would be rewarded for their efforts.

On the first day of trading, the combined ETFs saw over $4.5 billion in trading volume.

But trading volumes provide an incomplete picture because it doesn’t delineate between the dollar amount of inflows compared to outflows.

When looking at inflows, we find that a total of $625 million flowed into these Spot Bitcoin ETFs, an impressive showing for one trading day.

From the first day’s trading, we can see that the big winners were 1.) Bitwise, 2.) Fidelity, 3.) BlackRock, and 4.) Ark 21 Shares.

Despite the significant inflows, many investors were puzzled by the fact that Bitcoin’s price was actually down on the week.

This can be explained for a number of reasons. First is the substantial outflows out of GBTC. We saw outflows of $95 million on the first day of trading. This results in Grayscale selling the bitcoin in the trust. It is reasonable to believe that many of these outflows were investors leaving the high fee of GBTC (1.5% annually) and re-investing into cheaper ETF products. However, it will take a few days for these investors to reinvest these funds due to the slow settlement times in the traditional financial system.

Much of the flows observed today could be interpreted as reshuffling between products and don’t necessarily mean a significant amount of new inflows are occurring. We did see evidence of this when looking at Bitcoin proxies like MicroStrategy and Bitcoin mining stocks that saw substantial sell-offs as the ETFs launched. It is reasonable to assume that some of these outflows were flowing into these spot Bitcoin ETFs that better track Bitcoin’s performance.

Another reason for Bitcoin’s price remaining relatively flat on the week is there could also have been profit-taking from hedge funds and other institutional investors that were simply viewing the launch of spot Bitcoin ETFs as a trade. These investors likely took a profit as the price spiked up towards $49,000 which may have contributed to the sell-off.

In the short term, we expect volatility as the market digest this news and these ETF issuers look to purchase bitcoin for their funds. These ETFs come at a time when market depth in the Bitcoin spot market remains low. Ever since the FTX collapse, liquidity in the spot Bitcoin market has been cut in half.

Today, Bitcoin’s 1% market depth sits at around $230 million. This means that an order worth $230 million would move the price of Bitcoin by approximately 1%.

These ETF issuers will look to source their bitcoin in various ways such as from OTC desks, directly from miners, and through crypto exchanges. Today, crypto exchanges make up roughly 45% of Bitcoin market depth. Given that spot liquidity remains low and a new wave of demand is coming from these ETF launches, we should expect volatility in the coming months.

Over the long term, these ETFs will likely improve liquidity in the asset because they enlarge the investor base and there will likely be increased trading volumes as institutions execute arbitrage trades when there is a price discrepancy between the ETF and the underlying bitcoin. Because of this, in the long term, these ETFs will potentially reduce volatility and they boost liquidity conditions in the underlying spot Bitcoin market.

Some additional reasons why Bitcoin’s price might not immediately explode to the upside in the wake of these ETFs is it takes time for the various broker-dealers to implement new products and for institutional investors like financial advisors and pension fund managers to learn about Bitcoin and invest in it on behalf of their clients.

We already saw some examples of this when Vanguard, the second-largest asset manager in the world, refused to offer spot Bitcoin ETFs on its platform. This kickstarted a movement on X of Bitcoin investors transferring their assets away from the platform and into firms that support Bitcoin. Vanguard began trending for all the wrong reasons.

This pretty much summarizes Vanguard’s day yesterday:

Vanguard eventually made a public statement likely in response to the noise created by the Bitcoin community stating “While we continuously evaluate our brokerage offer and evaluate new product entries to the market, spot Bitcoin ETFs will not be available for purchase on the Vanguard platform…Our perspective is that these products do not align with our offer focused on asset classes such as equities, bonds, and cash, which Vanguard views as the building blocks of a well-balanced, long-term investment portfolio.”

Vanguard has the right to decide which assets it lists on its platform, but its reasoning behind restricting access to Bitcoin products flies in the face of data. Bitcoin is the best-performing asset class 7 out of the last 10 years and was the third-best-performing asset class in risk-adjusted returns last year. Due to Bitcoin’s uncorrelated nature, historically, by adding Bitcoin to a well-diversified portfolio it has reduced overall risk while enhancing returns.

Ironically, Vanguard’s decision highlighted one of Bitcoin’s value propositions. Investors generally don’t like to be told what they can and cannot do with their hard-earned savings. Vanguard’s decision to restrict access to Bitcoin ETFs only served as an advertisement for Bitcoin’s permissionlessness and censorship resistance.

In the future, I expect Vanguard to capitulate and list spot Bitcoin ETFs as its risk-adjusted returns become too impressive to ignore. In the meantime, all of the broker-dealers that choose to embrace Bitcoin will reap the benefits. The institutions that support Bitcoin will not only attract more assets to their platforms, but if they include Bitcoin in their various funds, these funds will likely outperform the competition. The forms that embrace Bitcoin will have a significant advantage over the firms that choose to prevent their clients from accessing it. The game theory of Bitcoin is now playing out at the Wall Street level, and it’s beautiful to witness.

In the short term, expect the volatility to continue and the marketing campaigns from these ETF issuers to hit a fever pitch. Prepare to see the word “Bitcoin” plastered on billboards and Bitcoin commercials from the likes of BlackRock and Fidelity become commonplace on your television. These ETFs will act as a top-of-funnel and will become an initial touchpoint for many future Bitcoiners. Not only do they have the potential to drive Bitcoin’s price long-term, but they will also drive the public’s understanding of this brand-new technology. 2024 has started off with a bang and when we look back at this time, it will likely be viewed as the beginning of a new era when Bitcoin went mainstream.

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