Market update Q1 2024
The previous update we issued in January came just after the historic SEC approval of the spot Bitcoin ETF. The final word from the SEC arrived on January 10. After more than 10 years of attempts to secure approval for a Bitcoin spot ETF, history was made on January 10, 2024, when the SEC green-lit all nine ETF applications simultaneously.
Initially, the market perceived the approval of the ETFs as a typical ‘sell-the-news’ event. On the night of the approval, Bitcoin experienced a sharp increase, soaring from $46,000 to briefly touching $49,500. However, in the two weeks that followed, Bitcoin’s value dropped back down to $38,500 - a roughly 22% correction. The reasons for this sharp correction were twofold:
1. There had been a significant buildup in speculative long positions betting on the approval of the Bitcoin ETF, with investors taking profits on their trades post-approval, resulting in selling pressure.
2. The market’s expectations for the initial months of ETF inflows were quite pessimistic.
A major factor contributing to this pessimism was the Grayscale Bitcoin Trust (GBTC). For more on GBTC, please refer to our quarterly update from Q3 2023. In a nutshell, GBTC was the first institutional Bitcoin product, launched in 2013 as the initial means for institutions to gain Bitcoin exposure. However, the product had one major flaw: it did not allow for redemptions. Over the following 10 years, it accumulated over 625,000 BTC (valued at over $40 billion at current prices), which could not be withdrawn from the product and had investors stuck for many years subject to a 2% management fee on the AUM. The approval of the spot Bitcoin ETFs in January 2024 finally allowed for capital to exit the Grayscale Bitcoin Trust, which created significant fear in the market that this released Bitcoin supply would exert substantial downward pressure on prices.
Image 1. The daily outflow from the Grayscale Bitcoin Trust since the ETF approval.
These market fears turned out to be fully justified, as from the first day of trading, there was a continuous drain from the Bitcoin AUM of the Grayscale Bitcoin Trust. Several well-known parties were forced to exit as part of the liquidation of their bankruptcy estates; for instance, the FTX estate sold $1 billion worth, and Genesis is estimated to have sold $4 billion worth. Additionally, many holders of GBTC sought cheaper alternatives upon ETF approval, as the reduced 1.5% management fee on the Grayscale ETF was still significantly higher than the 0.2% typically offered by competitors like Blackrock and Fidelity. In the first three months of ETF trading in 2024, almost half of the 625,000 BTC exited the Grayscale Bitcoin Trust. Some of these funds moved to other ETFs, some shifted their exposure to spot Bitcoin, and some were sold for dollars. This could have had a catastrophic impact on the Bitcoin price, if not for the other nine approved Bitcoin ETFs that exceeded all expectations and propelled the Bitcoin ETF launches into the top five most successful ETF launches in US history.
Despite the massive exodus from the Grayscale product depicted in the image above, the net demand for the nine approved spot Bitcoin ETFs surpassed all expectations. Particularly, firms like BlackRock and Fidelity showed massive preparation going into the approval, and their relentless marketing and wealth management departments raked in huge dollar inflows into their Bitcoin ETFs. In just the first month, the Bitcoin ETFs, excluding GBTC, accumulated over $11 billion worth of Bitcoin, with three of the ETFs— BlackRock’s $IBIT, Fidelity’s $FBTC, and Ark 21’s $ARKB—topping the $1 billion mark in assets under management. BlackRock’s fund has even made it into the top five of all ETFs (including non-crypto) based on 2024 inflows, putting it on similar levels with industry-leading indexing giants like the iShares Core S&P 500 ETF and the Vanguard S&P 500 ETF. Additionally, the trading volumes of the new Bitcoin products exceeded all expectations. In March alone, spot Bitcoin ETFs combined for $111 billion worth of trading volume, triple the volume
of January and February, according to Bloomberg senior ETF analyst Eric Balchunas. In March, the BlackRock Bitcoin ETF reached $10 billion in assets faster than any ETF in history. It currently holds $17 billion in AUM, second only to the $23 billion in the Grayscale Bitcoin Trust (GBTC). Although the ETFs are already highly successful, it is estimated that only around 20% of potential buyers now have access to purchasing these ETFs. Once more asset & wealth managers are approved for offering the products, inflows are likely to increase further. Bitcoin ended the quarter breaking all-time highs, trading at $71,250.
Image 2. The netflow picture of all the 9 Bitcoin ETFs.
In addition to the robust inflows into Bitcoin ETFs, the first quarter also witnessed significant advancements across other areas of the cryptocurrency sector. On March 20th, BlackRock announced its entry into the asset tokenization field by launching a $100 million money market fund on the Ethereum blockchain. This fund will utilize Circle’s stablecoin USDC for settlements and employ Securitize as the transfer agent and tokenization platform. This initiative is part of a larger digital asset strategy by BlackRock, which includes direct investments in its partners Circle (in 2022) and Securitize (this quarter).
In a January interview with CNBC, BlackRock CEO Larry Fink described the introduction of their spot Bitcoin ETF and the application for a spot Ethereum ETF as initial steps toward a broader goal of tokenization. This vision is becoming a reality with BlackRock’s recent launch of a money market fund on the Ethereum blockchain, marking a significant move in the tokenization space. Tokenization, which involves converting traditional assets into digital tokens on public blockchains, aims to achieve quicker settlements and enhance operational efficiency. BlackRock joins other major financial institutions like Citi, Franklin Templeton, and JPMorgan, which have already explored or launched on-chain funds. The practice of creating blockchain-based tokens of traditional investments such as bonds and funds, known as the tokenization of real-world assets (RWA), is rapidly expanding. For instance, tokenized U.S. Treasuries have grown to $730 million from just $100 million in early 2023. The enthusiasm around BlackRock’s recent activities is shared by major financial players like Citigroup, which forecasts the tokenization market to grow to $5 trillion by 2030.
Image 3. The upcoming halving further reduces the yearly emissions of Bitcoin.
The second quarter of 2024 will bring several key events poised to influence the market. A pivotal moment to watch is the “Bitcoin halving” event scheduled for April 20th. This event, which occurs every four years, halves the daily emission of Bitcoin, and this time it will reduce the inflation rate of Bitcoin from 900 BTC per day ($58.5 million) to 450 BTC per day ($29.25 million). This predetermined reduction in the rate of new Bitcoin entering the market aims to mitigate inflationary pressures, which enhances Bitcoin’s appeal as a long-term investment compared to holding cash by giving it the characteristics of a hard asset. The anticipated supply shift is likely to distort current supply and demand dynamics and has historically resulted in upward price pressure as the daily supply of BTC is reduced by 50%. While this scenario is likely to unfold favorably in the long term, the event may also introduce some volatility, leading to short-term price fluctuations. Historically, Bitcoin halvings have reduced the profitability of Bitcoin miners, prompting some of the least efficient mining participants to sell their Bitcoin reserves to cover losses, which could suppress the Bitcoin price in the short term following the halving event.
Additionally, the market is closely watching the SEC’s pending decision on the introduction of spot Ethereum ETFs. High-profile applicants, such as BlackRock, Fidelity, and VanEck, who have successfully launched Bitcoin ETFs, applied for their Ethereum ETFs at the end of 2023. Initial optimism for approval as early as May 2024 has been tempered in the past month. In the weeks leading up to the approval of the Bitcoin ETFs, there was significant public communication between the ETF filers and the SEC to improve their Bitcoin ETF proposals. Currently, this level of communication between the SEC and the Ethereum ETF filers is virtually non-existent, making it more realistic to expect that the Ethereum ETF approval will come in November rather than May. The approval of Ethereum ETFs would mark a significant milestone and further legitimize the industry to traditional market participants.