Bitcoin fell below $40,000 after reaching just under $50,000 ahead of the Bitcoin ETF spot launch. Many investors expected this to be the start of a price rally that would last later this year until reduce by half event and brings us to prices seen in 2021. With enthusiasm well below expected levels, Bitcoin continues to be a divisive topic. But here’s why it shouldn’t be.
Bitcoin divides because many do not understand it
When Bitcoin was created in 2009, it was launched after the financial crisis as an alternative to traditional finance. Combining this asset with a traditional financial instrument like an ETF was a challenge. For example, the SEC was reluctant to approve it. Then, the CEO of JPMorgan recently posted negative comments about cryptocurrency. Finally, Vanguard refused to let spot Bitcoin ETFs trade on its platform.
Perhaps one of the biggest obstacles is that traditional financial analysts, accustomed to analyzing stocks and bonds, don’t understand cryptocurrency. Its prices and volumes are more difficult to predict, but arguably stocks can and do carry the same risks. Although earnings and EBITDA are based on a certain level of facts, multiples are an art and stock prices are only an estimate. Bitcoin has also been associated with bad actors, but the stock market has not been immune to this problem (e.g. Theranos, Enron, etc.). Yet it has gained a bad reputation while many of the same problems exist for other disruptive technologies.
Its prices are more rational, which also means that they are less attractive
A few years ago, we wanted the Bitcoin ecosystem to mature and prices to behave rationally. It was known for its volatility, and that is why it was considered unsuitable for many investors. Now that they are exhibiting rational behavior, it seems the hype has died down. And many are no longer interested. After months of anticipation, starting with Grayscale’s court victory, the launch of ether futures, and the SEC X hack, most of the excitement over the Bitcoin ETF launch was already integrated. I think this explains the lack of price movement. Additionally, investors who were waiting for a price rally may have sold their Bitcoin holdings during the brief rally preceding the ETF’s launch. Finally, many investors are leaving Grayscale ($4.0 billion in capital outflows – discussed in more detail below), which added to this pricing pressure (another rational event).
Despite the fall in Bitcoin prices, the launch remains important for both cryptocurrencies and ETFs.
Despite the lack of price movement, spot Bitcoin ETFs remain an important milestone in the crypto industry. This helped legitimize it and bring it to the mainstream. This is also a milestone in the ETF industry, setting a precedent similar to the launch of gold ETFs.
THE iShares Bitcoin Trust (I BITE) recorded inflows of $1.9 billion, while the Fidelity Wise Origin Bitcoin Fund (FBTC) earned nearly $1.6 billion. There is a significant gap between these products and Bitwise Bitcoin ETF (BITB) and the ARK 21Shares Bitcoin ETF (ARKB), which generate approximately $500 million in revenue. A fee war saw fees drop to 0.0% before launch. In turn, investors have turned to big names that can provide the liquidity needed by institutional investors and the notoriety needed by new retail investors who are hesitant to invest in an emerging asset class. Combined, the nine new spot Bitcoin ETFs saw net inflows of $5.0 billion this month. Meanwhile, Grayscale saw $4.0 billion in net outflows ($2.8 billion last week).
It seems that Grayscale has somewhat of a first-mover advantage in terms of assets and experience. But its fees stand out greatly from its peers with its 1.5% expense ratio. We have to give Grayscale credit. Without Grayscale’s court victory against the SEC, Bitcoin spot ETFs likely would not have been approved yet, or perhaps never. Even though they have been a key player in this fight, investors could logically turn to cheaper products. Many large institutional investors also left Grayscale, including ARK, in December. ARK then invested these assets in its own spot Bitcoin ETFs and FTX holdings.
Spot Bitcoin ETFs have played an important role in making crypto a more legitimate asset class. Ex-GBTC flows show that investors are interested in these products. But I think not everyone will be a fan of Bitcoin. And that’s okay.
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Editor’s Note: The summary bullet points for this article were chosen by the Seeking Alpha editors.