The New Market in Bitcoin Exchange-Traded Funds (ETFs)

In January 2024 the U.S. Securities & Exchange Commission (SEC) approved trading in spot Bitcoin ETFs (Exchange-Traded Funds). This means that rather than directly hold Bitcoins themselves, investors can buy shares in funds that own Bitcoins. The share values then move in line with the value of Bitcoin, with the investors enjoying better protection and greater ease of trading. This blog looks at the impact of the SEC ruling on Bitcoin ETF trading, its contribution to the 40% increase in Bitcoin value from January to September 2024, and identifies the largest players.

What is a spot Bitcoin ETF (Exchange-Traded Fund)?

A spot Bitcoin ETF is a financial product that allows investors to gain exposure to Bitcoin without directly buying or holding the cryptocurrency. Essentially, it’s a fund that tracks the price of Bitcoin and trades on traditional stock exchanges, similar to how stocks of companies are traded. The alternative, futures-based Bitcoin ETFs, don’t hold actual Bitcoin but instead invest in Bitcoin futures contracts. These funds are subject to the rules and risks of the futures market. The blog is primarily about spot Bitcoin ETFs, though we’re not going to keep using ‘spot’.

Their major advantages are that they operate within traditional financial markets, therefore providing a regulated environment that offers investor protections that are not always available in the cryptocurrency space. This also means investors don’t need to set up digital wallets or deal with crypto exchanges, which simplifies the process of diversifying an investment portfolio by gaining exposure to Bitcoin.

Bitcoin ETFs thus make Bitcoin more accessible for traditional investors through familiar investment platforms, such as brokerage accounts, without needing to navigate cryptocurrency exchanges or wallets. Unlike direct investments in Bitcoin, there is no risk of losing private keys or dealing with unregulated exchanges.

Given that ETFs trade on stock exchanges, they can be bought or sold throughout the trading day at market prices, offering greater liquidity and flexibility than directly buying Bitcoin.

Outcomes of the SEC’s ruling

As of late August 2024, around just eight months after their debut, 11 new SEC-approved Bitcoin ETF funds had collectively bought over $52 billion of Bitcoin, reported the Reuters news agency. This is close to the annual GDP of countries such as Bulgaria, Tanzania or Serbia. Why have they captured the imagination of so many investors – both institutional and retail?

Before January 2024, several US Bitcoin ETFs already existed, though they were focused on Bitcoin futures rather than directly holding Bitcoin. The SEC ruling gave them the opportunity to pivot, which, as an example, was taken by the Grayscale Bitcoin Trust that had been operating since 2013.

ETFs in Canada had already been allowed to directly hold Bitcoin, and four had launched in early 2021: Purpose Bitcoin ETF (BTCC), CI Galaxy Bitcoin ETF (BTCX), 3iQ CoinShares Bitcoin ETF (BTCQ), and Evolve Bitcoin ETF (EBIT).

The U.S. SEC’s ruling was therefore highly significant, and attracted major new players to the sector. Blackrock is the world’s largest asset management firm, and it launched an iShares Bitcoin Trust (IBIT) which by May 2024 was on track to become the world’s largest Bitcoin fund. In May ’24 alone it purchased over $380 million worth of Bitcoin, according to blockchain analytics platform Arkham Intelligence. These purchases meant it held $19.1 billion of Bitcoin at the time, coming closer to the $19.4bn of Bitcoin held at that time by Grayscale Bitcoin ETF.

By September 1st 2024, further purchases meant Blackrock’s IBIT had become the world’s largest owner of Bitcoin.

Spot Bitcoin ETF Assets Under Management

At the end of August 2024, the three largest spot Bitcoin ETFs (Blackrock’s iShares Bitcoin Trust, Grayscale Bitcoin Trust and Fidelity Wise Origin Bitcoin Fund) owned over 83% of the total Bitcoins owned by this entire new sector. The other eight Bitcoin ETFs are named in the next chart, and at the close of August 2024 their individual market shares ranged from 4.9%, held by ARK 21 Shares Bitcoin, down to under 0.02% at Hashdex Bitcoin ETF.

U.S. Spot Bitcoin ETFs Ranked by Bitcoins Owned

The source of this data is HODL15Capital, a well-followed investor on X/Twitter whose charts and graphs are often used by industry analysts and experts.

High demand from these spot ETFs has contributed to the Bitcoin value rising from $42,280 on 1 January 2024 to $58,970 on 1 September, a rise of almost 40%.

Bitcoin’s Value in the Past 12 Months

Source: CoinMarketCap

The Attraction of Bitcoin ETFs to Pension Funds

Bitcoin ETF shares can now potentially be held in pension plans, subject to local regulations by country or state. The potential returns are considered too large to ignore, and major pension providers are looking in to how they will use Bitcoin ETFs to add to the diversity of their investments.

IBIT’s investors include the State of Wisconsin’s Investment Board, which had purchased nearly $100 million worth of shares in the first quarter of 2024.

Japan’s massive Government Pension Investment Fund (GPIF) announced in March 2024 that it would start exploring a new diversification strategy that possibly includes Bitcoin. It is the largest pool of retirement savings in the world, and worth around $1.75 trillion.

At the close of 2023 the total global assets under pension fund management were estimated to have a value of $55.7 trillion. The United States accounts for nearly $35.6 trillion of that amount. Some experts predict that by 2025, cryptocurrency ETFs could form 5% of pension and hedge fund portfolios. On a global basis, and at their current value, this represents around 4.65 million Bitcoins. By the end of August 2024 the Bitcoin ETFs had acquired under one million.

The Future of Bitcoin ETFs

Nobody knows what the future of Bitcoin ETFs, which are volatile securities, will be. Since their inception, Bitcoin value has soared to more than $60,000 per coin. At other times, they have dropped back below $19,000.

However, the time scale for a pension fund to consider a new asset and create a policy on how to invest can typically take 6 to 9 months. This means a lot of players could soon enter the market for Bitcoin ETF shares following the SEC’s ruling in January 2024. How high could the value of Bitcoin rise if there is significant investment in Bitcoin ETFs by pension funds?

At a retail investor level, each individual can only decide for themselves whether cryptocurrencies, and Bitcoin in particular, will make good long-term investments. As when choosing any investment opportunity, potential Bitcoin ETF investors should take account of their personal financial goals, investing timeline and risk profile. The following factors are also important to consider when evaluating any particular Bitcoin ETF: assets under management, fees, trading volume, and each fund’s investment strategy.

You should maybe consider consulting a financial advisor before making investment decisions, and none of our content is intended to be taken as financial advice.