Bitcoin ETF Hype Threatens Another Fizzle of News Selling

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(Bloomberg) – The best argument for approving new bitcoin exchange-traded funds is that they already exist, tracking futures. Unfortunately for the crypto crowd, this is also the best argument for why no one needs a new one.

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Proponents say the arrival of a U.S. cash ETF would open the floodgates to a new wave of investors, potentially ushering in more than $50 billion in demand. A new batch of applications led by asset management titan BlackRock Inc. has rekindled optimism that the Securities and Exchange Commission may finally give its blessing after more than a decade of denials, fueling a 20-year rally. % of Bitcoin since mid-June.

On the other side, naysayers are skeptical that a U.S. spot fund would really be a game-changer. After all, anyone who has wanted access to exchange-traded bitcoin products that do pretty much anything a spot tracker will do has been able to get it, albeit somewhat imperfectly for over two years. And for the most part, they didn’t care.

The launch of the first US ETFs backed by bitcoin futures happened in October 2021 in an eye-catching way. The ProShares Bitcoin Strategy ETF (ticker BITO) recorded around $1 billion in revenue from the start. This acted as a catalyst for Bitcoin to hit an all-time high of nearly $69,000 a few weeks later.

Yet the initial momentum did not materialize, the fund never saw the same amount of flow as it did then.

Look what we saw on the futures front, it was a lot of money that was spent on day one, but then for all intents and purposes it stopped, said Jillian DelSignore, managing director and head of strategic growth and solutions at FLX Networks, in an interview. . I think it is certain that several billion dollars will arrive. I really think it will be very early momentum-driven asset growth, and then the question mark for me is what happens from there. Is it calming down?

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JPMorgan has joined the debate in recent days, arguing that any approval of the spot Bitcoin ETF in the United States will not be transformational for the sector, as such products have existed in Canada and Europe for years without having seen. huge influxes. There has been little investor interest, says strategist Nikolaos Panigirtzoglou, and existing funds have not benefited from outflows from gold ETFs.

Bloomberg Intelligence draws a different conclusion when it comes to Canada and Europe. Demand in the United States, where the ETF market is larger and vehicles are much more widely used, could end up being stronger.

Exchange-traded crypto products make up about 1% of all Canadian ETF assets; Bringing that same logic to the United States would equate to about $54 billion in potential assets, BI analysts Athanasios Psarofagis and James Seyffart said. For context, about $137 billion is in all of the US commodity ETFs.

It’s hard to overstate the amount of hype that surrounds the still hypothetical cash fund. Many crypto fans claim that an approval would not only make it easier to invest in Bitcoin, but also highlight the crypto industry’s move into the mainstream. BlackRock CEO Larry Fink, a former crypto-skeptic, recently added his voice to those who see Bitcoin as an agent of diversification.

It has differentiating value from other asset classes, but more importantly, because it’s so international it will transcend any currency, Fink said Friday in an interview with CNBC.

Many reasons are given as to why a cash fund might turn out to attract more attention than futures funds ever did. This would allow financial advisers to have easier access; it could potentially be cheaper than futures ETFs; and there would be no associated costs or limitations on the contracts that are built into the futures product.

In all my years covering ETFs, I have never seen a potential product with more hype. There’s a reason for that, and I’m confident the pre-launch hype will meet record demand, said Nate Geraci, president of The ETF Store, an advisory firm. Although Bitcoin futures-based ETFs have done an admirable job of tracking the spot price of Bitcoin, they have not been perfect, he added. BITO, for example, is down 60% since inception on a price basis and 54% in terms of total return, compared to a 51% drop in Bitcoin.

Investors want the real deal. They don’t want to bother with a potentially large tracking error, Geraci said.

Still, the backlash from the 2022 crypto market crash and series of industry meltdowns, some of which are still ongoing, have chilled some of its investor base in the space. Collectively, retail investors have lost billions to scams and fraud, trading volumes have plummeted, and market liquidity has dried up.

In other words, the number of people potentially interested in investing in Bitcoin has dropped significantly from the highs.

I don’t know if there’s a ton of hype around Bitcoin where a regular investor who may not be as committed to the market wants to buy Bitcoin right now, said Alex Coffey, senior trading strategist at TD Americatrade. Several years ago it was booming, it was the talk of the town, so there was a lot more interest.

(Updated prices.)

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