Bitcoin ETF approval

A bitcoin ETF hasn't been approved yet but all signs point to an announcement on Wednesday and trading as soon as Thursday.

This will lead to something of a frenzy on CNBC with advertisers of the 11 prospective ETFs vying for supremacy in what will surely be a winner-take-all market.

How much money flows into those ETFs will determine what happens next to bitcoin. Here are eight things to consider:

1) Beware the smokescreen effect

The long history of ETFs shows it's a winner take all market. Ultimately there will be one bitcoin ETF to rule them all as money gravitates to liquidity when identical products are offered. Right now, there's a battle for flows with fees running from 0.49% to 0.2% and a handful offering fee waivers completely for six months or until AUM threshold are hit.

Those low fees illustrate how competitive it will be. It will certainly be in any funds interest to try to goose its AUM and volumes early. There is talk that Blackrock has $5 billion ready to go, which would crush the competition on Day 1. However I would be hesitant to draw any conclusions on those early numbers as they're manipulated to win the ETF war rather than a true reflection of investor demand.

2) GBTC has a big role to play

The first bitcoin ETF was from Grayscale and it's had a checkered history while charging a 2% MER. For much of its history it has traded at a discount near 50% from its bitcoin holdings, reflecting its closed-end structure, offshore banking and overall lack of trust. The discount has narrowed to 7% as they prepare to convert to a spot ETF.

Credit to them for fighting the SEC and winning, setting of the entire scramble for ETFs but they're planning a 1.5% MER which sounds like a plan for a slow death while continuing to collect that juicy MER for as long as possible.

Ultimately, the whopping $30B that's parked in GBTC should be some of the first money to move out, but there's the case of that chunky discount to NAV, which the owners of the fund are surely hopes close before they sell and move to a better ETF. Tax considerations could also slow changes though it's early in the year so maybe it's better to bite the bullet now.

3) What does Canada tell us?

The Purpose Bitcoin ETF was the world's first spot ETF and it got considerable hype when it launched in Feb 2021. Note that Canada is roughly one-tenth the size of the US, which is a good guide.

That ETF attracted $421m in its first two days of trading but didn't make it to $1 billion until April (and only barely) before finishing the year below.

Canada bitcoin ETF AUM
Canada bitcoin ETF AUM

Notice the dip lately, which highlights some sellers who may have sold for tax reasons or (more likely) are planning on switching into US products. That is 'money on the sidelines' but it's not truly fresh money going into crypto. Given the 1% fee in the Canadian ETF, I'd expect it to be cleaned out much like GBTC.

Another thing to note is that volumes in the Canadian ETF peaked on Day 1 and then trended lower for the next four days before flatlining for months.

BTCC ETF volumes

Now for the estimates.

If you take the Canadian one after two days and 10x it, you could put $4B on it and that's that. Of course that would be a huge disappointment with many people talking in the $100B range. I think that hi-jinx alone easily exceed that but keep in mind:

  • Bearish: The Canadian one got considerable hype in the US, so it certainly exceeded what Canadian population alone would bring
  • Bullish: The US market isn't just the US and Americans. Yes, perhaps 401Ks and tax-sheltered accounts are the biggest use case but the whole world runs on US dollars so it won't just be Americans buying. A 0.2% ETF with liquidity and safety is a compelling option.

Ultimately, I'd be shocked if the AUM isn't at least a few times bigger than the Canadian one, adjusted for population.

4) Informed estimates

Bloomberg ETF reporter Eric Balchunas is putting himself on the record saying this:

Standard Chartered predicting $100b of flows into bitcoin ETFs by end of this year. Too high in our opinion, esp for flows as they wouldn't incl GBTC's $30b. Our over/under in flows by end of year is more like $15b and ballpark $50b for AUM.

Now 'year end' is a big qualifier there and basically untradeable because it's so far away.

The Canadian ETF is instructive here in two ways:

  1. The early AUM was indicative of where it ended up. Like at the box office, the opening 'weekend' gives you a pretty good idea of where it ends up. The $426 billion AUM for the Canadian product at the end of Day 2 led to about double that in about six weeks. In that time period, bitcoin went to $48K from $40K so it had a tailwind. However from April, it was a bear market in bitcoin and it ended the year at $16B and AUM around $900m. So there's a obviously a chicken-egg thing here with the AUM dependent on the price and vice versa.
  2. Estimates for the AUM in the Canadian ETF were optimistic. What's notable from Balchunas is that he's being characterized as conservative, however his track record is the opposite. He predicted Canada's BTCC would hit $1B AUM 'by the end of next week'. Again, it took six weeks to get there. And I think he was referring to a USD-equivalent $1 billion and in that case it didn't get there until 10 months later.

5) Longer term AUM

BTCC isn't the only ETF in Canada and if you add them up, the AUM in USD is just under $3 billion. If you take that and 10x and you get $30 billion, which is what's already in Grayscale. Obviously, there's more to come and there's also $1.7 billion in BITO which is the futures ETF.

6) GBTC arb

This is another important chart to keep in mind. The AUM of GBTC has risen to $30B from $15B since October. The vast majority of that is the 60% rise in the price of bitcoin but there are certainly some arbs here (that arb was a trade that me and many others are kicking themselves over). However the next move in the arb will be selling it and that money might be an arb flow rather than a bitcoin one so it might ultimately leave the bitcoin space altogether which is a negative for BTC in general.


7) BITO lessons

Bitcoin peaked 3 days after the Canadian ETF launch and three days after the futures-based BITO launch (though with BITO it made a marginal new high a month later before falling more than 50%).

For BITO, there was a great deal of hype as well (look familiar?).

BITO launch bitcoin chart

For BITO, the AUM only recently eclipsed the peak from just after the October 18, 2021 launch.


8) That institutional money

The hope is that institutional money is going to be able to flow into bitcoin for the first time because of an ETF but that's not what I'm hearing. Institutions aren't just able to buy bitcoin because of an ETF; they have mandates and rules that prevent them from investing in bitcoin and crypto (and things like gambling or porn). Those can change and could help the AUM over the year but that won't help this week.

Adding it all up

Digging through these numbers adds to my conviction that the trade is to sell-the-fact -- probably on Day 2 or 3 but it might be sooner. Perhaps some CNBC hype and AUM games can extend it to Monday but I don't see a real basis for any real flows to move the needle. Bitcoin has rallied 50% in anticipation of the ETF. I expect we'll see a big sell-the-fact trade.... it might have already come.

Bitcoin 5 mins chart sell the fact
Bitcoin 5 mins chart