How are digital tokens transforming the ETF world?

How are digital tokens transforming the ETF world?

Since the approval of spot Bitcoin ETFs by the US Securities and Exchange Commission (SEC) in January, there has been unprecedented interest in this new type of ETFs with a resultant impact on the wider cryptocurrency industry. At EXANTE we are also seeing a dramatic change in interest. Our clients are jumping in wholeheartedly, investing more into these new ETFs, as a percentage, than the market average. An example of this is on Monday, 11 March when Bitcoin hit a new high, our clients' AuM was +11.18 % day-over-day compared to the Total market AuM which was actually -0.97%.

They are also switching their interest in Bitcoin from the previously existing bitcoin funds and Bitcoin CFDs to the new ETFs.

The impetus behind the growth in EXANTE’s clients interest has much to do with how the overall crypto market has been revitalised since these ETFs came into being. And the overwhelming success of the ETFs to date seems to be creating an almost virtuous circle for Bitcoin and other digital tokens.

What’s behind the Bitcoin push?

Bitcoin is continuing to reach new heights, as a record $2.7 billion flowed into crypto assets last week, bringing the total to $10.3 bn year to date according to a report from CoinShares international Ltd. The bulk of this is going to Bitcoin, with year-to-date bitcoin inflows now accounting for 14% of bitcoin assets under management.

The surge in Bitcoin is being driven largely by the enormous success of Spot Bitcoin ETFs, including those from BlackRock and Fidelity Investments, which now control around 69% of the market and have already drawn net inflows of about $10 billion. As noted by Bloomberg news, trading volumes for the 10 Spot Bitcoin ETFs launched on 11 January began to pick up considerably in late February, in line with Bitcoin’s surge. On 5 March alone, $10.4 billion out of a total $61 billion in Spot Bitcoin trading volumes went to ETF products.

The first month of Spot Bitcoin exchange-traded funds (ETFs) saw daily net inflows of about $125 million per day even though Grayscale's Bitcoin Trust (GBTC) saw heavy outflows as it switched into an ETF. Although prices for Bitcoin initially retreated, the companies behind each ETF continued to buy the dip in Bitcoin, substantially increasing their holdings. The total value invested in Bitcoin surpassed $1 trillion on 14 February for the first time since November 2021. On 12 March, net bitcoin ETF inflows hit over $1 billion, according to data from BitMEX Research. And, as noted by The Block, Spot Bitcoin ETFs now hold a total of 802,000 bitcoin. These holdings represent 4% of the circulating supply of bitcoin and are likely higher if you exclude lost or inaccessible coins.

Where to now? 

The key questions for many investors are what is the driving force behind the massive jump in Bitcoin and is it sustainable? 

While the European markets have been offering crypto exchange-traded products (ETPs) since 2019, the US Securities and Exchange Commission’s (SEC) approval of Bitcoin ETFs on 10 January 2024 was a watershed moment for the crypto market and a milestone for the ETF industry. This was because it was the first time that US investors could access the Spot price of Bitcoin in a brokerage account via a less risky ETF structure. The listed Spot Bitcoin ETFs saw a trading volume of $4.6 billion on their first day of trading. However, in the first few weeks after the SEC ruling, Bitcoin was actually dropping. It didn’t truly begin to reach the highs anticipated until 12 February 2024, when it finally hit the $50,000 mark for the first time since December 2021. According to The Block, Spot Bitcoin ETFs now hold nearly 90% of the daily trading volume market share, while bitcoin futures ETFs, introduced in 2021, account for around 10%. What is becoming clearer is that ETFs appear to be improving liquidity for Spot Bitcoin traders, with better crypto market depth, ie., the market is better able to absorb relatively large orders without major price shifts.

Bitcoin continues to rise to new levels as there appears to be increasing acceptance of Spot Bitcoin ETFs and other digitally asset backed securities by global regulators. On Monday. 11 March, the UK’s Financial Conduct Authority (FCA) said it would accept requests from Recognised Investment Exchanges (RIEs) to list crypto asset-backed Exchange Traded Notes (cETNs). The products would be available for professional investors, such as investment firms and credit institutions authorised or regulated to operate in financial markets. The London Stock Exchange started accepting applications for Bitcoin and Ethereum exchange-traded notes On the same day Thailand’s Securities and Exchange Commission said it would allow institutional investors and very high-net-worth individuals to invest in crypto exchange-traded funds (ETFs).

In the derivatives sector, outstanding contracts — or open interest — at the Chicago Mercantile Exchange (CME) Bitcoin futures market reached a fresh peak. The number breached 30,000 for the first time on Monday, data compiled by Bloomberg show. As noted by Yahoo Finance, the CME now holds the largest share of Bitcoin futures, surpassing traditional crypto exchanges. However, this dominance wasn't present during the November 2021 peak, which was followed by a rapid 31.5% price decline. In terms of Bitcoin open interest specifically, the current figure is 27% lower than its October 2022 peak. All of this points to the fact that there is increasing US institutional demand for crypto-related exposure and hedging.

In short, given the level of institutional as well as retail interest in these new ETFs, with the consequent impact on Bitcoin itself, there are suggestions that Bitcoin, and other digital tokens that may follow with ETFs or ETNs, will continue to reach new highs. The creation of these instruments is fostering a more robust and diversified investment landscape for digital assets. However, just because there is an improvement in the levels of liquidity and more support for those inevitable dips, does not mean that risks should be ignored.

While every effort has been made to verify the accuracy of this information, EXT Ltd. (hereafter known as “EXANTE”) cannot accept any responsibility or liability for reliance by any person on this publication or any of the information, opinions, or conclusions contained in this publication. The findings and views expressed in this publication do not necessarily reflect the views of EXANTE. Any action taken upon the information contained in this publication is strictly at your own risk. EXANTE will not be liable for any loss or damage in connection with this publication.

This article is provided to you for informational purposes only and should not be regarded as an offer or solicitation of an offer to buy or sell any investments or related services that may be referenced here.

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