Bitcoin ETF a Big Success

Within a day of the Bitcoin ETF's IPO, more than $4 billion flowed into the fund, breaking the record held by any previous ETF. Weeks and months later, many individual funds continued to break records.

There have been 5,535 ETFs launched over the past 30 years, but none have been as impressive as those launched by the likes of Blackrock and Fidelity. In one month of trading, Fidelity's FBTC gathered nearly $3.5 billion in AUM, while BlackRock's IBIT attracted more than $4 billion.

By comparison, the first gold ETF amassed $1.2 billion in its first month. The previous ETF to hold the fastest inflow record was BlackRock's Climate Consciousness Fund, launched in August 2023, which raised $2.2bn in its first month.

Pre-ratification Challenges

Although the Bitcoin ETF was not first approved until 10 January 2024, it has been in the works for over a decade.

In July 2013, Cameron Winklevoss and Tyler Winklevoss, founders of cryptocurrency exchange Gemini, submitted the first application for a spot Bitcoin ETF. That same year, Grayscale Investments launched the Bitcoin Investment Trust, which was later listed as a public security in 2020 under the ticker symbol "GBTC," making it the first publicly traded bitcoin fund in the United States.

From 2013 to 2018, the Winklevoss twins were repeatedly denied various ETF applications by the U.S. Securities and Exchange Commission (SEC). Each time, the SEC claimed that the cryptocurrency market did not have sufficient regulatory controls to safely launch such products.

In 2021, the first Canadian spot bitcoin ETF was launched. Also that year, current SEC Chairman Gary Gensler took office.

In October 2021, the first Bitcoin futures ETF was launched; ProShares Bitcoin Trust was listed on the Chicago Mercantile Exchange (CME), with SEC approval based on the fact that the CME had adequate market surveillance measures in place to prevent manipulation. At this time, Grayscale also filed a second application with the SEC to convert GBTC to a spot ETF.

In 2022, the SEC rejected multiple spot Bitcoin ETF applications, including Grayscale's, leading Grayscale Investments to file a lawsuit against the regulator.

In 2023, BlackRock and ARK Investments both filed applications with the SEC for spot bitcoin ETFs, and other issuers such as Invesco and Fidelity followed suit.

Eventually, on 10 January 2024, the SEC approved 11 applications for spot bitcoin ETFs.

How Spot Bitcoin ETFs Work

Since Bitcoin is a new asset class, it can be argued that Bitcoin ETFs are a new type of exchange-traded product.

Whereas a typical ETF provides exposure to a basket of securities, these ETFs are backed by a commodity, spot bitcoin. So the closest analogy we have in finance is the gold ETF. gold ETFs also offer a security that investors can purchase to gain access to a desirable commodity in their portfolios.

Owning gold presents some complications. Storing or moving gold can be risky or expensive. For some investors, holding ETFs in a brokerage account may be preferable. Similarly, buying and holding Bitcoin may be cumbersome for less technical investors, so they may choose to buy shares of an ETF.

Spot ETFs have the ability to create or redeem fund shares based on changing market conditions. This provides exposure to the price of bitcoin without the need to hold the asset.The ETF issuer buys bitcoin, which is then held in a secure wallet by a trusted custodian. Most, if not all, of the funds are held in what's called cold storage, meaning they're stored offline where hackers can't access them. Afterwards, the ETF issues shares of stock corresponding to those coins. The pricing of the shares reflects the current spot price of Bitcoin.

Sometimes, the spot ETF's price may differ from the current value of the underlying asset. When this happens, the fund must rebalance its outstanding shares based on its holdings. To do this, Authorised Participants (APs) can create or redeem large blocks of shares to bring the fund's share price in line with the value of the underlying assets. Authorised Participants are usually large banks that take advantage of arbitrage opportunities presented by ETF prices that are either above or below the value of the underlying assets.

The Road Ahead

While the future is always difficult to predict, the trend for spot bitcoin ETFs seems to be on the rise. Ric Edelman, founder of the Digital Asset Council for Financial Professionals, is the most vocal about his belief that $150 billion could flow into ETFs over the next few years.There is also speculation that sovereign wealth funds or central banks could begin buying or mining bitcoin, which would lead to a significant increase in demand.

The success of spot bitcoin ETFs marks a historic achievement for the financial markets. Despite regulatory hurdles, these ETFs have broken records for inflows and performance, with funds such as Fidelity's FBTC and BlackRock's IBIT leading the way.

The process from initial rejection to approval highlights the evolution of regulation in the cryptocurrency market. the ETF structure ensures consistency between the share price and the value of the underlying asset. As a result, spot Bitcoin ETFs have become a popular new investment vehicle, demonstrating Bitcoin's mainstream acceptance.

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