It was the moment the entire cryptoverse had been waiting for, bringing completion to a decade of patient (and not so patient) application, appeal, protest, lawsuits and, ultimately, approval. Of course, I’m referring to the spot Bitcoin ETFs, and it should be no surprise to anyone reading this that 11 spot Bitcoin ETFs were approved on January 10, 2024. This was a watershed moment in the markets and is expected to drive bitcoin – and other crypto assets – to new heights. Now, in the wake of this, we’ve had an incredibly interesting – and incredibly volatile month. Let’s look at how all of this played out, where we are and, importantly, what this means for our markets going forward.
Inflows & Outflows
There are now 11 public vehicles available to purchase bitcoin. The oldest and most venerable is the Greyscale Bitcoin Trust, which was a closed-end trust that converted to an ETF. Joining GBTC are the new industry leaders iShares (BlackRock) and Fidelity, some notable crypto focused enterprises such as Bitwise and ARKK, and an additional six others major players.
Many were expecting a “God Candle”, an immediate run up to new heights. That didn’t happen (but here’s a little foreshadowing: we’ll get there, and in the not-too-distant future.) Others expected a complete collapse of the price of bitcoin. That didn’t happen either.
What did happen was that we saw a huge run up the first trading day followed by a massive pullback, with bitcoin going as high as +12% and as low as -8%, representing a 20% swing over the course of the month, with most of its time in negative territory.
This may seem a little paradoxical given that inflows to these ETFs were record breaking, with $871M of capital deploying into these new ETFS in the first 3 days and, as of this writing, a total of roughly $5B of capital inflows. That’s a record for any ETF launch… ever. To expand on this, the ETFs have had $10B in trading volumes over the first three days. By way of comparison, the total trading volume of all 500 ETFs launched in 2023 was approximately $450 million. Forget about not even being in the same ballpark… we’re not even in the same galaxy!
So then, why the price pullback? Well, to understand that we need to follow how the money flowed. There were really three main events that caused price depression, and these events counteracted the big inflow.
The first is that international traders – primarily on Binance – took advantage of the run up to “sell the news” and sold bitcoin. In fact, it was noted that 85% of all immediate sales upon the ETFs going live were internationally based – which is fascinating. As these ETFs are trading a global product, we have a whole new set of dynamics that will impact price, and we saw that right after approval.
That’s interesting, but it’s the sideshow. The biggest factor was not a general sell-off event, it was huge outflows from that aforementioned GBTC. Specifically, we saw approximately $4.4B exit GBTC as the trust-turned-ETF has maintained the highest fees in the industry, at 1.5% fee structure. Now, the capital that exited is expected to flow into new more favorable ETFs with lower fee structures, however there is a catch. Now that these are regulated entities, the exited capital may be subject to the “wash rule”, requiring a 30-day period of waiting before re-investing in a like asset. I expect some investors will be paying attention to this and waiting. If this is the case, we should see a lot of that capital being deployed into other ETFs in February.
Another big factor in the GBTC selloff was the FTX bankruptcy. FTX alone was responsible for over 20% of the GBTC outflow with a massive sell-off of approximately $1B to recoup capital. Yowza. For those of you who want to see this visually the chart below graphs the actual bitcoin held by the ETFs as impacted by inflows and outflows.
As of this writing, BTC is hovering around where it started the year and, with this initial consolidation phase out of the way, we now have the foundation set for significant inflows expected over the coming months and years which should drive growth.
Anchors Away!
But all of this talk about price is, honestly, irrelevant. Really. Raoul Pal warned just a few days before the ETFs were approved “If you care whether the BTC ETF is priced in or not, your time horizon is too short. It is all noise in the grand scheme of what lies ahead.” His point: this is a long-term game, not a game of days but of years. The ETFs now set the stage. They are a launching pad if you will, and the opportunity for institutional capital to safely flow in. But that’s not the important part in my opinion.
The MOST important thing about the ETF approvals, from my view, is that the US has now joined the world stage in accepting this asset and these markets. Sure, Gensler didn’t want to do this – in fact he basically said, “The judicial branch made me do it.” I’m totally OK with that – that’s checks and balances working. Gensler has almost single handedly killed this industry in the US while the rest of the world has embraced it. That is bad for our country. Of course we want consumer protection. Of course we want proper regulation. But we also want innovation and not a one-man war that seems to be stemmed from lack of understanding, personal bias, or a who-knows-what-else agenda.
The point being that, up until now, the United States has been a veritable boat anchor, holding this industry back. While bitcoin and crypto innovation is flourishing throughout other parts of the world, we’ve left many wondering if we would support the effort and – given the influence the US has – this has been a global concern. Now, the anchor has been lifted and we have shown the world that we are ready to participate in this innovation. The importance of this cannot be overstated because, failing to do this I fear the US would have been left far behind and, moreover, would have continued to hold the world back. Now, that concern is principally behind us.
Bitcoin is Boring
But let’s get the attention off bitcoin because, strangely, bitcoin is now kind of a yawn fest. The noble asset modeled after gold, which began 14 years ago as a controversial instrument and was even strongly rejected many as little as three years ago, is now the most boring kid on the block. It’s here. It’s accepted by the big guys. It’s institutionalized. It’s not going anywhere. *yawn*.
Consider then, that bitcoin is the least interesting part of the blockchain and cryptoverse. It’s becoming commercialized and adoption will spread. What’s still in front of us is this entire wave of innovation, the rest of the blockchain space. I discussed this in the last blog so I won’t rehash, but I will point out from an investment standpoint that bitcoin’s rate of growth is slowing and the days of 100,000% gains are far behind us. Consider that bitcoin at $50,000 (which isn’t far off) only needs to grow by 20x to hit a million dollars (and a few things still must go right for that to happen.)
Anthony Pompliano did his own analysis and noted that he expects bitcoin’s volatility to drastically reduce over the next 3 years, while it’s compound annual growth rate would fall to 20% within about 5 years. Don’t get me wrong – 20% annual growth is still amazing, but it’s a far cry from what’s possible via other assets in this still-young asset class.
On the adoption curve while bitcoin is maturing the rest of the blockchain and crypto world is still in its infancy. In front of us loom what I am going to call the innovation wars, where we expect platforms and protocols, DeFi, Metaverse and other classes of crypto assets to vie for their places. These assets have massive growth potential, some akin to what bitcoin once had. Most of these assets are still very young and, importantly, they don’t compete with bitcoin because they are not trying to be money. They are technologies that serve a purpose: building apps, tracking data, sharing resources, providing validation and uniqueness… and oh so many other uses. As they become more and more widely accepted and more and more widely used, we’ll see growth in the price of their tokens (Greater demand + limited supply yields increased cost per unit).
Smart participation in this innovation sector is where the next big money is going to be made. For those that want a little more color, here’s a great article from the end of last year noting that the ETFs offer tailwinds for the rest of the markets. So, whether you’ve been a die-hard in this space or are just turning the corner, if you’re looking at it from an investment perspective, consider that the best is still yet to come… it’s just going to be predominantly from the rest of this universe.
In Closing
OK, with all that I admit it. I’m sick of talking (and hearing) about the ETFs, so this is the last blog where they will be the main topic. Sure, we’ll have some new players — the Ethereum ETF is on the horizon, and we expect others to follow — and this will promote adoption of the whole industry. But the value of these institutional mechanisms is not price. The value is that each of these instruments bring acceptance to technologies that actually do something. Bitcoin is money. Ethereum and Solana allow us to build decentralized applications. Render allows us to share computing power. The list goes on and on.
Of course, from an investment perspective there’s huge opportunity, but when looking at these markets I encourage you to think less and less of what the price of a crypto is, and instead consider what is the real-world value of any asset. We all know that companies that provide value grow in value. So, wouldn’t it make sense that technologies that provide value grow in value as well? This is how to elevate from the hype and noise and position to participate in the next wave of innovation.
That’s it for now. We’ll see you next month and, until then be well, stay safe, and I’ll keep Decrypting Crypto for you!