BTC ETFs finish first month on a high, but is the euphoria warranted?

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U.S.-approved BTC spot-based exchange-traded funds (ETFs) finished their first month of trading on a high note, but the picture may not be as rosy as advocates are painting.

Last week was the first week the nine U.S.-approved BTC spot-based ETFs enjoyed an overall net positive inflow since their launch on January 11. On February 9, the ETFs enjoyed net inflows of $541.5 million, their best day since January 17. The ETFs have now welcomed over 200,000 BTC tokens, roughly 1% of BTC’s total 21 million supply.

The positive inflow was partly due to the slowing of the rush to the exits by holders of GBTC, the former BTC trust operated by Digital Currency Group’s (DCG) Grayscale Investments division. GBTC converted to an ETF last month, finally allowing its holders to sell their shares after years of restrictions. And selling was what holders were dying to do, given that GBTC charges by far the highest management fee (1.5%) of any of the BTC ETFs.

GBTC’s castoffs aren’t being shared on an equal basis. BlackRock’s iShares BTC Trust has attracted the most BTC (worth nearly $4.2 billion), easily eclipsing runner-up Fidelity Wise Origin BTC Fund (nearly $3.5 billion) and dwarfing third-place finisher Cathie Wood’s ARK 21Shares BTC ETF, despite the latter’s Friday announcement that its assets under management had topped $1 billion.

The outlook is far grimmer at the remaining six issuers, and reality is beginning to dawn on some of these ETF cellar dwellers. Some observers now expect to see one or two ETF issuers shutter their underperforming operations before the year is through rather than continue to pay the costs of running these funds.

The second-lowest ranked Franklin Templeton ETF had gone all-in on BTC, even adding the tired ‘laser eyes’ meme to their X/Twitter profile. The eyes disappeared sometime last week, presumably after someone at Franklin Templeton pointed out that advertising this failure to launch—their EZBC fund has less than $100 million currently under management—wasn’t the win Franklin’s BTC cheerleaders thought it was.

February 9 also saw the first day that an ETF other than GBTC reported a net outflow. Invesco’s BTCO saw $17.4 million leave its hands on Friday, ironically the same inflow figure on its first day of trading. Full circle?

Grayscale’s other shoe hasn’t dropped

There is still $21 billion in value tied up in GBTC, possibly because of capital gains tax implications that may have convinced some GBTC holders to swallow the high fees rather than take an even greater hit from cashing out.

Grayscale is attempting to fend off further outflows by furiously promoting its claim that the BTC ‘halving’ event this April isn’t like all the previous halving events that were supposed to usher in a permanent upward trajectory for BTC. In the past, halvings did indeed produce temporary spikes in BTC’s value, only to surrender those gains (and sometimes more) when the euphoric haze ascended. But GBTC says this time is “actually different” because, uh, well, they really need it to be.

Meanwhile, another DCG division, Genesis, recently asked a bankruptcy court for
permission to unload around $1.4 billion worth of its GBTC shares (plus another $200 million worth of Grayscale’s Ethereum-based trust). Will the other ETFs continue to absorb these outflows? Time will tell.

Unwilling contributors

GBTC isn’t the only one making unwilling contributions to the new ETFs since January 11. ETFs in jurisdictions that authorized such products long ago, including Canada and Europe, saw nearly $540 million flow out in the first three weeks following the U.S. ETF launches. These ETF customers were likely drawn by the cutthroat U.S. fee war that resulted from the SEC’s decision to launch all U.S. BTC ETFs simultaneously to avoid any first-mover advantage.

Other markets, including the Chicago Mercantile Exchange, have also seen outflows since the ETF launch as customers ditched the CME’s futures market for the more direct option. And then there are ETF managers like BlackRock transferring hundreds of millions of dollars already invested in private BTC trusts under their management into the new ETF.

The amount of BTC held by ETFs has now surpassed the 190,000 tokens held by
MicroStrategy (NASDAQ: MSTR), which, under founder Michael Saylor, has become an ersatz BTC ETF. MicroStrategy is trying hard to deter its shareholders from seeking a more pure BTC play without the need to support MicroStrategy’s increasingly irrelevant data analytics operations.

Last December, Saylor insisted that his company was a better option than ETFs, saying the latter “are unlevered and they charge a fee.” MicroStrategy expounded on this theme in its recent Q4/FY23 earnings report, in which it described itself as “the world’s first bitcoin development company.”

The report claimed MicroStrategy was a better option than ETFs due to its abilities to “innovate to create incremental value,” “generate cash from operations,” and “leverage capital markets.” MicroStrategy’s company structure was also touted as more favorable, in part due to its active control over capital structure.

Not everyone is convinced that these qualities are all that unique, or even accurate. After all, Saylor’s ability to personally steer MicroStrategy’s direction is a double-edged sword. On February 7, Saylor announced that he’d sold 5,000 of his shares in the company. Since that sale, MicroStrategy’s share price has risen by nearly 30%. D’oh!

The road ahead

While the BTC ETFs have performed better than many of their early critics suggested, the performance also hasn’t been the mammoth steroid injection that BTC backers predicted. There are conflicting signs that each camp is pointing to as bolstering their view of what lies down the road.

Earlier this month, Bloomberg reported that many traditional financial platforms weren’t rushing in to BTC ETFs because new products require due diligence before they can be pitched to the public as sound investments. This vetting process could take months, suggesting the ETFs could get a significant awareness shot in the arm later this year.

Or not. A recent JPMorgan (NASDAQ: JPM) survey of over 4,000 institutional traders found that 78% of them “have no plans to trade crypto/digital coin’ in the future. A mere 12% expect to do so at some point, leaving just 9% of institutional traders currently swimming in this soup. That’s only a single point higher than the 8% of traders who admitted trading in 2023. Meanwhile, the number of traders who chose the ‘no plans’ option rose six points from last year. Bullish, as the kids say.

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