New Spot Bitcoin ETFs

On Wednesday, January 10, the SEC approved spot Bitcoin ETFs for trading in the United States, and on Thursday, January 11th, 11 of these new ETFs (including the Grayscale Bitcoin Trust, which is a conversion) backed by a mix of TradFi giants and crypto-native firms, began trading on U.S. exchanges.

Here’s what to know about spot Bitcoin ETFs, what they are, and how they will impact investors and the Bitcoin market in both the short and long term.

What is an ETF?

Before delving into the specifics of these ETFs, let’s briefly touch on what an ETF is for those who may be unfamiliar with the term. ETFs are exchange-traded funds.

These investment funds can hold assets such as stocks, bonds, or commodities. ETFs typically track the performance of a specific index, sector, commodity, or asset class. They are traded on stock exchanges, like individual stocks, and their prices can change throughout the trading day as they are bought and sold, unlike mutual funds, which are priced once a day.

ETFs have surged in popularity over the years, and U.S.-based ETFs collectively hold over $7 trillion in assets under management. The growth in popularity of ETFs is illustrated by the fact that they accumulated $598 billion in inflows in 2023, according to Morningstar. Additionally, over 500 new ETFs were launched in 2023. ETFs are widely held, with more than 12% of U.S. households, or 16 million, reporting that they own ETFs, according to the Investment Company Institute.

The increasing size and scale of the ETF market make it clear that Bitcoin ETFs will put Bitcoin in front of many new investors for the first time.

What is a Spot Bitcoin ETF?

There are already several Bitcoin futures ETFs trading on U.S. exchanges. These ETFs invest in Bitcoin futures contracts as their underlying asset. However, spot Bitcoin ETFs differ in that they invest directly in Bitcoin itself. The providers of spot Bitcoin ETFs issue shares based on their own Bitcoin holdings.

Futures ETFs can deviate from the price of Bitcoin (or whichever underlying asset they invest in) based on various factors. Because a spot Bitcoin ETF would directly hold Bitcoin, its price should correlate more closely with the cost of Bitcoin. Furthermore, futures ETFs can often be expensive and add more complexity to the equation.

It’s also important to note that there are key differences between buying a Bitcoin ETF and buying Bitcoin directly.

Investors buying the spot Bitcoin ETFs do not own the underlying Bitcoin that the funds hold. In contrast, investors buying Bitcoin on-chain or through a crypto exchange and holding this Bitcoin in their own wallet do have ownership of their own Bitcoin. Additionally, while investors buying Bitcoin themselves typically pay a transaction fee, there is no ongoing management fee as there is with Bitcoin ETFs.

Here are the 11 Approved Bitcoin ETFs

Below is a table of the 11 new Bitcoin ETFs that have now started trading in the U.S.

Here’s what’s happening so far…

On Thursday, January 11 the 11 newly approved Bitcoin ETFs combined to generate $4.6 billion of trading volume on their first market day.

While some of this volume was from funds moving out of the Grayscale Bitcoin Trust (GBTC) into newer products with lower fees, there was plenty of reason for excitement.

Bloomberg senior ETF analyst Eric Balchnuas posits that even if all buy/sell orders across all funds were equal, the debuts were a success because of the volume, writing, “Volume is crucial in attracting big fish; it precedes flows.” Balchnuas writes that overall, day one was a success “By all metrics: volume, number of trades, flows, media coverage, it was [a] smashing success, historical.”

While Grayscale has seen outflows, BlackRock’s IBIT can be viewed as one of the big winners, with over $1 billion in volume on the first day of trading. IBTC features a relatively low expense ratio of 0.25% (with an expense ratio of 0.12% for the first six months, or first $1B in AUM). This day one volume made IBIT one of the top 25 day-one ETF performers of all time.

While subject to change, Bloomberg Intelligence data shows that Bitwise was a major day-one winner with $238 million of new capital flowing into the fund on Thursday, followed by Fidelity, which saw $227 million of inflows, and BlackRock, which gained $112 million in inflows.

These numbers are all the more impressive when accounting for the fact that the funds aren’t available on all brokerage platforms yet, a process that can take several weeks or even longer. Ultimately, day one was a major success story in many ways, but it’s important to step back and look at the bigger, multi-year long-term picture, which continues to look compelling.

The Long-Term Impact

The longer-term outlook for Bitcoin itself and for the Bitcoin ETFs continues to look bright as the ETFs could help to “unlock the floodgates” of the $30 trillion wealth management industry.

Many qualified and institutional investors have been interested in Bitcoin but have been locked out of participating in the market because they were waiting for a regulated way to participate. As regulated investment products, new Bitcoin ETFs remove this hurdle.

According to Bitwise CEO Matt Hougan (whose firm launched the Bitwise Bitcoin ETF), financial advisors are “increasingly carving out” allocations of 1–5% for Bitcoin, making this a “many trillion dollar market” down the road, with qualified investors, including financial advisors, family offices, RIAs (registered investment advisors) and “eventually, wirehouses” all part of the target market for these funds.

Many of the first investment funds that will get involved in the Bitcoin ETFs will likely be tech- and growth-oriented funds. Eventually, Bitcoin ETFs could hold an even broader appeal to commodity-focused and macro investors, some of whom view Bitcoin as a form of digital gold.

And institutional investors aren’t the only ones that the funds will impact.

The availability and convenience of these Bitcoin ETFs enable individual retail investors to gain direct exposure to Bitcoin through their brokerage or retirement accounts for the first time. This has the potential to unlock a massive market for Bitcoin. Americans collectively hold over $35 trillion in retirement accounts (between employer-sponsored 401ks and individual IRAs), and Bitcoin can now theoretically capture some of this market.

The ease of buying Bitcoin ETFs will make the process of investing in Bitcoin feel the same as buying any stock or ETF, an appealing selling point to retail investors who are not crypto natives. Many of these investors may believe in Bitcoin’s long-term potential but don’t necessarily feel comfortable buying and managing their own Bitcoin on-chain. The availability of these Bitcoin ETFs from names like the TradFi giants that everyday investors know and trust will also help to burnish the reputation of Bitcoin and make it more appealing to some investors who have been on the fence to this point.

Interest in Bitcoin and these spot Bitcoin ETFs will also be a positive catalyst for the firms that provide the ETFs, as interest in Bitcoin can help them bring in new inflows of investor capital in an always-competitive business.

The launch of spot Bitcoin ETFs in the United States is a major victory for Bitcoin and the digital asset space. They will make Bitcoin a more viable and convenient option for both institutional and individual investors alike. But it’s also important to take a step back and remember that 1 BTC is still 1 BTC, just like it was before ETFs entered the conversation, and just like it is now after the ETFs debuted. This is just one step in a bigger journey as Bitcoin continues to cement its place as the world’s hardiest currency, accessible to all.