April 13, 2024
Crypto

Bitcoin ETFs Are Finally Here. Crypto Investing Will Never Be The Same.


When regulators finally opened the starting gates for spot bitcoin ETFs to trade, existing funds that converted to the new model surged, new funds racked up trading volume and bitcoin prices bolted higher. Then, by the end of the first trading Thursday, most of the funds lost ground.




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An anticlimactic start? In some ways, maybe. But make no mistake; the new bitcoin ETFs mark a clear step forward for the still young digital currencies.

The Securities and Exchange Commission officially approved 11 spot bitcoin ETFs for trading late Wednesday. Trading kicked off early Thursday on the NYSE, Nasdaq and Chicago Board Options Exchange. The funds, all spot bitcoin ETFs, directly purchase and hold bitcoin assets.

In contrast, ProShares Bitcoin Strategy (BITO), the first U.S. bitcoin-linked ETF, which launched in 2021, invests in bitcoin futures contracts.

The new spot bitcoin funds are expected to increase direct demand for bitcoin and lure institutions and other new investor classes into cryptocurrencies and other digital assets.

“We are at the beginning of the first-ever institutional bull market in crypto — and spot ETF momentum is a key part of the momentum,” said Diogo Monica, president and co-founder of Anchorage Digital. Anchorage helps institutions buy, store and manage digital assets.

Crypto enthusiasts like Monica tout spot bitcoin ETFs as a major tailwind for digital assets in 2024. That seems to be the consensus, but investors will be anxiously watching to see how bitcoin prices play out.

Analysts say bitcoin may have been overbought ahead of the ETF launch, predicting regulatory approval could become a “sell-the-news” type event, at least in the short run.

Bitcoin spiked to 20-month highs above $45,000 to start 2024 and briefly reached $49,000 on Thursday. That was its highest level since December 2021. It then quickly erased its ETF-fueled gains.

Marathon Digital (MARA), CoinDesk (COIN), Riot Platforms (RIOT) and other crypto-related stocks have skyrocketed in recent months. But they pulled away from highs since the start of January and continued retreating as bitcoin eased.

SEC Finally Approves Bitcoin ETFs

The SEC’s approval list on Wednesday included ETFs from ARK Invest (ARKK), BlackRock (BLK), VanEck, WisdomTree, Fidelity, Invesco, Franklin Templeton, Bitwise and Valkyrie.

Grayscale Investments received approval to convert its $28 billion bitcoin trust into the Grayscale Bitcoin (GBTC) spot ETF. Meanwhile, Hashdex, in coordination with Tidal Investments, was approved to convert its Hashdex Bitcoin Futures ETF (DEFI) into a spot bitcoin fund.

Grayscale traded down 6% to near 38 and Hashdex was more than 12% lower, just above 52, at midday Friday.

Issuers ARK Invest and collaborator 21Shares, Fidelity, Franklin Templeton, VanEck, WisdomTree, and Invesco with partner Galaxy Digital listed their six bitcoin ETFs on the Chicago Board Options Exchange. BlackRock iShares Bitcoin Trust and Valkyrie’s Valkyrie Bitcoin Fund will trade on the Nasdaq. Bitwise joined Hashdex and Grayscale Investments on the NYSE Arca.

The issuers disclosed their planned fees for the ETFs in their updated regulatory filings on Jan. 9 and 10. The fees range from 0.2% to 1.5%, excluding waivers.

Charles Schwab (SCHW) announced early Thursday that ETFs were available on its platform, a public-relations rep told IBD. But some brokers, including Vanguard and Merrill Lynch, have so far opted against offering bitcoin ETFs, the Wall Street Journal reported.

Proposed Bitcoin ETF fees as of Jan. 10 (Source: Bloomberg)
NameTickerIssuerFee (after waiver)Waiver detailsExchange
ARK 21Shares Bitcoin ETFARKBARK Invest & 21Shares0% (0.21%)6 months or $1 billionCBOE
Bitwise Bitcoin ETP TrustBITBBitwise0% (0.20%)6 months or $1 billionNYSE
Fidelity Wise Origin Bitcoin TrustFBTCFidelity0% (0.25%)Until July 31, 2024CBOE
Franklin Bitcoin ETFEZBCFranklin0.29%n/aCBOE
Grayscale Bitcoin Trust (conversion)GBTCGrayscale1.50%n/aNYSE
Hashdex Bitcoin ETFDEFIHashdex0.90%n/aNYSE
Invesco Galaxy Bitcoin ETFBTCOInvesco & Galaxy0% (0.39%)6 months or $5 billionCBOE
iShares Bitcoin TrustIBITBlackRock0.12% (0.25%)12 months or $5 billionNasdaq
Valkyrie Bitcoin FundBRRRValkyrie0% (0.49%)3 monthsNasdaq
VanEck Bitcoin TrustHODLVanEck0.25%n/aCBOE
WisdomTree Bitcoin TrustBTCWWisdomTree0% (0.3%)6 months or $1 billionCBOE

Launch Day Action

Trading volume across all the bitcoin ETFs topped $4.6 billion Thursday, led by GBTC, IBIT and FBTC, Reuters reported. Still, the bulk of the ETFs lost ground Thursday, with losses accelerating Friday. Meanwhile, bitcoin reversed after spiking to $49,000 Thursday morning during the ETF launch — its highest price since December 2021. Bitcoin dropped below $44,600 by midday Friday, erasing its pre-SEC announcement gains.

But experts don’t see the initial price action as a red flag. Andy Baehr, managing director at CoinDesk Indices, believes the early Thursday rally was more indicative of overall sentiment. He suggests investors “zoom out” before worrying about bitcoin price trends.

“The approval was successful, the launches have been successful, the fee wars have got very active in the last couple of days. And investors have a really wide variety of options when it comes to picking up bitcoin in ETF form,” Baehr told IBD Thursday. “I would chalk up any market activity that’s happening today to the machinery of ETF production doing its thing, and making sure that these billions of dollars of new ETFs are properly hedged and traded.”

Thursday’s official launch followed a false announcement Tuesday, when the SEC’s social media account on X, formerly Twitter, was compromised. That resulted in a fake post announcing that the ETFs were approved. SEC Chair Gary Gensler quickly dispelled the news via his own account.

Many of the potential ETF issuers amassed seed funding ahead of their respective launches. Bitwise in late December announced a planned $200 million seed investment. That compares with the $10 million investment announced by BlackRock. VanEck lined up $72.5 million for its spot bitcoin ETF.

How Bitcoin ETFs Will Drive Institutional Demand

“A spot bitcoin ETF would streamline exposure for traditional players who have been slower to enter the ecosystem, allowing trillions in institutional capital to come off the sidelines,” Anchorage Digital’s Monica said. “We expect to see major institutions — including hedge funds, sovereign wealth funds and registered investment advisors — drive ETF inflows.”

Anchorage Digital operates a crypto platform for institutions and is valued at over $3 billion. It boasts backing from heavyweight investors like KKR & Co. and Goldman Sachs (GS). Clients span venture capital firms, registered investment advisors, asset managers and crypto protocols, including Apollo Protocol and Visa (V).

Data indicates the demand increase has already started, according to derivatives exchange Deribit. Chief Commercial Officer Luuk Strijers told The Block, a crypto news site, that there’s been a “noticeable uptick in institutional activity” since late October. A 2022 Nasdaq survey of 500 financial advisors found 72% of firms would be more likely to invest client assets in crypto if spot ETF products were offered in the U.S.

ETF Impact On Bitcoin Price

Despite the institutional potential, analysts are divided on the impact ETF approvals will have on bitcoin’s price.

“An SEC-regulated spot ETF for bitcoin would be a first of its kind for the digital asset ecosystem, so the industry will be watching price action closely,” Monica said before the SEC’s approval . “The amount and rate of ETF inflows will likely be a key factor affecting the price of bitcoin in the short term and long term.”

VanEck estimated the bitcoin spot market will generate $310 million of inflows in the first few days of a spot bitcoin ETF approval. It forecast spot bitcoin ETF inflows of $750 million within a quarter and $40.4 billion over the first two years as bitcoin takes “significant market share” from gold. That’s according to Matthew Sigel, head of digital asset research, in VanEck’s 15 Crypto Predictions for 2024 report.

Such inflows into newly approved spot bitcoin ETFs would seem certain to prop up bitcoin’s price.

“Notwithstanding the possibility of significant volatility, the price of bitcoin is unlikely to fall below $30k in Q1 2024,” Sigel wrote.

It’s worth noting that $30,000 is a 3o% drop from where the cryptocurrency traded Friday. Meanwhile, Grayscale Investments CEO Michael Sonnenshein expects a spot bitcoin ETF could unlock around $30 trillion worth of advised wealth once finally approved, according to a Dec. 18 interview with CNBC.

Sell The News Of Bitcoin ETFs?

The recent bitcoin reversal was unsurprising for Cathie Wood, who predicted the first wave of approvals could see the bitcoin price drop as investors take profits.

“There has been a big anticipatory move,” Wood told Yahoo Finance. “Those who have been moving in and enjoying some nice profits will probably sell on the news.”

But that is just in the short term. Wood thinks institutions have been hesitant to participate in crypto before the SEC approves a spot bitcoin ETF. “All we need is for the trillions of dollars in institutional assets out there to allocate maybe 0.1% or 0.2% to an ETF,” Wood said. “And that will move the price significantly.”

Still ‘A Lot Of Noncompliance’

JPMorgan also sees a high chance of a sell-the-news event, and is more cautious than many firms about crypto in 2024.

“Excessive optimism by crypto investors arising from an impending approval of spot bitcoin ETFs by the SEC has shifted bitcoin to the overbought levels seen during 2021,” a team of analysts led by Nikolaos Panigirtzoglou wrote in a December report. They expect that existing capital will shift within the crypto ecosystem, rather than new capital rushing in.

On the regulatory front, SEC Chair Gary Gensler says he’s still concerned about noncompliance and illicit activity in crypto, despite voting to approve the ETFs in a divided 3-2 vote.

“There’s been far too much fraud and bad actors in the crypto field,” Gensler told CNBC on Dec. 14. “There’s a lot of noncompliance, not only with the securities laws, but other laws around anti-money laundering and protecting the public against bad actors there.”

“(The approval) should in no way signal the Commission’s willingness to approve listing standards for crypto asset securities. Nor does the approval signal anything about the Commission’s views as to the status of other crypto assets,” Gensler wrote in a statement after the approval. “Bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion and terrorist financing.”

Bitcoin Mining Economics

Arthur Hayes, co-founder of crypto derivatives platform BitMex, says institutional participation could be detrimental to the bitcoin network.

“If ETFs managed by TradFi (traditional finance) asset managers are too successful, they will completely destroy bitcoin,” Hayes wrote in a Dec. 23 blog post. He noted that bitcoin block rewards will fall to zero sometime around 2140, at which point miners will only receive transaction fees for validating transactions.

“But if there was never another bitcoin transaction between two entities, miners would be unable to afford the energy it costs to secure the network,” Hayes wrote. “As a result, they would shut off their machines. Without the miners, the network dies and bitcoin vanishes.”

The Death Of Bitcoin?

Hayes argued that asset managers like BlackRock are in the “asset accumulation game.”

“They vacuum up assets, store them in a metaphorical vault, issue a tradable security and charge a management fee,” he wrote. “They don’t use the things they hold on behalf of their clients, which presents a problem for bitcoin if we take an extreme view of a possible future.”

Still, even if bitcoin “dies because it isn’t being used,” that creates a space for another crypto network to take its place, Hayes wrote.

But Monica and Anchorage Digital disagree that traditional finance firms will harm the cryptocurrency.

“Rising institutional participation will continue to advance a promising long-term outlook for bitcoin and the asset class as a whole,” Monica said. “A spot ETF would unlock a world where bitcoin can be in every retail and institutional portfolio. That possibility represents a major market opportunity.”

Bitcoin Halving: The Next Milestone

Spot bitcoin ETF approval isn’t the only driving factor for bitcoin in 2024. The next halving event is expected around April. Halving events help control the finite supply of 21 million bitcoins by cutting in half the amount of crypto rewards doled out to miners.

The last bitcoin halving event occurred in May 2020, when mining rewards fell to 6.25 bitcoin per block mined from 12.5 bitcoin per block. Some refer to the events as “halvenings,” a blend of “halving” and “happening.”

Halving events occur after every 210,000 bitcoins are mined, which takes roughly four years. The price of bitcoin has historically risen in the months after halving events as the creation of new bitcoins slows.

“It’s essentially a kind of supply shock on the market where the total amount of supply that’s coming on is cut in half,” Will Clemente, Reflexivity Research founder and crypto bull, previously told IBD. “Just from a raw supply-demand standpoint, you have less supply coming onto the market. Even if demand stays the same, price starts to drift upwards.”

Impact On Bitcoin Miners

Grayscale also expects a positive impact on valuations from the limit to new token supply growth combined with new potential investors.

But JPMorgan analysts argue that the next halving event is “largely priced in.”

The halving/price increase argument “seems unconvincing as the bitcoin halving event and its effect are predictable and in our opinion are well factored into the current bitcoin price,” Panigirtzoglou wrote.

And research from publicly traded exchange Coinbase notes that even though halving events improve supply-demand technicals, they may not be the direct catalyst for crypto bull runs.

“In our view, the halving’s underlying significance lies in its ability to raise media attention around what makes bitcoin unique: a fixed, disinflationary supply schedule,” a team lead by David Duong, head of institutional research, wrote in the Coinbase Institutional 2024 Crypto Market Outlook.

Power Needed To Mine Bitcoin Climbs

Moreover, the hash rate, or computational power to mine bitcoin, continues to increase. That makes it more costly and difficult to mine new bitcoin. Therefore, the reduction in mining rewards, combined with higher processing power requirements, could lead to consolidation among bitcoin miners as profit margins narrow, Duong says.

Sigel of VanEck agrees that the next halving event will create winners and losers. “Unprofitable miners will disconnect, ceding shares to those with low-cost power,” he wrote. Sigel doubts it will stress the public markets thanks to improved balance sheets of listed bitcoin miners such as Marathon Digital and Riot Platforms. They control about 25% of the global hash rate.

In addition, Sigel predicts miners overall will underperform bitcoin’s price before the halving, although low-cost miners such as CleanSpark (CLSK) and Riot should outperform the field. He expects bitcoin to rise above $48,000 post-halving, after consolidating for several days or weeks as the market digests selling pressure from unprofitable miners.

“After the halving, we expect at least one publicly traded miner to be 10x by the end of the year,” Sigel wrote.


How To Time The Stock Market Using ETFs


Bitcoin Price Outlook

Despite concerns of short-term dips, the consensus is that the spot bitcoin ETF approval and bitcoin halving will be positive catalysts in 2024.

VanEck forecasts bitcoin will reach an all-time high in November this year, three years after its previous record of $69,000 in November 2021.

Duong’s team at Coinbase expects bitcoin to be the main driver for crypto in 2024. “Although there will be a temptation to see bitcoin profits rolled into tokens further out the risk curve, we think bitcoin will continue to be the anchor for the digital asset class in 2024,” the analysts wrote.

Bitcoin fell below $43,600 Friday from its ETF launch day peak, but remains far above its $27,000 level at the end of September, reflecting its surge as ETF anticipation grew. The world’s largest cryptocurrency rebounded 158% in 2023.

Bitcoin Stocks’ 2023 Performance

Bitcoin’s 2023 price surge spilled over into crypto-related stocks.

Cryptocurrency exchange Coinbase vaulted 64% from a November cup-base breakout to a late-December high. For all of 2023, COIN stock skyrocketed 423%.

Coinbase has the potential to become “one of the few network winners in an industry we expect to grow exponentially from here,” according to JPM Securities, which has an overweight rating and 200 price target on COIN stock.

Grayscale Bitcoin Trust rallied 69% from a mid-October breakout. GBTC spiked 337% in 2023.

And bitcoin miner Marathon Digital rocketed 96% in December and catapulted more than 800% in 2023.

You can follow Harrison Miller for more stock news and updates on X/Twitter @IBD_Harrison

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