The rise of the Bitcoin ETF
In January this year, the US Securities & Exchange Commission (SEC) approved the listing of 11 spot Bitcoin exchange traded funds (ETFs), following years of unsuccessful attempts by managers to launch products tracking the cryptocurrency's price. In April, three issuers launched spot Bitcoin and Ether ETFs on the Hong Kong Stock Exchange.
Flows have been strong, the big guys are winning
In the US, market participants have been enthusiastically investing in spot Bitcoin ETFs since they launched at the start of the year. According to Morningstar, at the end pf April investors had invested a net $12.1 billion into them, of which over 80% has gone to either BlackRock's iShares (IBIT) or Fidelity Investments (FBTC). Both are large asset managers and are highly credible, making them the chosen vehicles of investing in the crypto currency. Meanwhile, the Grayscale Bitcoin Trust, now ETF - the favoured crypto-tracking ETF for investors before the advent of spot bitcoin funds - has seen massive outflows from the fund.
While Grayscale lowered its ETF's fees from 2.0% to 1.5%, it is still six to seven times higher than the other spot ETFs whose expense ratios range from 0.19% to 0.25%. Additionally, the major funds temporarily cut or even eliminated fees during the early launch period. IBIT cut its expense ratio to a discounted rate of 0.12%, while others, including FBTC, cut theirs to zero for differing introductory periods.
The three Hong Kong-based ETFs attracted funds totalling close to $300 million in the first couple days of trade - although a much larger response was expected. In the case of Hong Kong, investors have favoured size over fee structures with ChinaAMC receiving the bulk of flows despite a close to 1% management fee.
Who is driving Bitcoin ETF flows?
Major banks have been investing small amounts in the newly-launched Bitcoin ETFs. On 10 May, regulatory disclosures showed that JP Morgan purchased $731 246 of spot Bitcoin ETF investments and Wells Fargo reported a $141 817 investment in the first quarter. Earlier disclosures revealed that both BNP Paribas and BNY Mellon have also invested amounts into the Bitcoin ETFs.
Additionally, asset managers have been backing their own product. BlackRock, the largest asset manager in the world, disclosed a $6.6 million investment in its own IBIT fund, while Ark Invest holds $206.4 million of its ARKB fund, and Van Eck holds $98 000 of its HODL fund.
This would indicate that more than half of net flows may have been driven by institutional money thus far. This is not to say that the Bitcoin ETFs have not been popular among retail investors, individuals are still the largest owners of crypto assets globally and some may prefer holding their exposures directly rather than via an ETF.
Why an ETF?
For most investors, buying an ETF on a registered exchange is far simpler than buying and holding crypto directly. To invest in crypto currency directly, you need to create a wallet, find an exchange to use, connect it with your bank account, and use the crypto exchange to buy and sell cryptocurrency. The second major consideration is security - buying cryptocurrency through an ETF does not require investors to safeguard passwords, keys or be conscribed to other additional security requirements. One is also less susceptible to the impact that hacking has had on some crypto exchanges as an example.
The US ETFs are all Bitcoin trackers, while in Hong Kong the approved crypto ETFs track either Bitcoin or Ether. We see scope for a potential listing of ETFs tracking certain other larger and more well-established crypto assets medium term, but it is unlikely that we will see the approval of alternative coin ETFs by regulators any time soon.
The investment case for Bitcoin
The very significant risks
How does it fit into a portfolio?
Including crypto assets, such as Bitcoin, in a portfolio can provide diversification benefits due to their low correlation with traditional asset classes like stocks and bonds. This can help reduce overall portfolio volatility and potentially enhance risk-adjusted returns. While past performance is not indicative of future results, the significant price appreciation seen in Bitcoin has attracted investors seeking outsized returns.
Investor practitioners generally do not advocate for a larger than 5% portfolio allocation to crypto currencies - a small allocation can have a large impact on absolute and risk adjusted returns and large potential drawdowns could severely limit or eliminate the contribution of these instruments at certain times and indeed drastically reduce returns.
Investing in Bitcoin ETFs
While we have not had a crypto ETF launch on the JSE yet, it is possible that the SEC decision has made it easier for our regulator to allow such a product to be traded on the local exchange soon. For now, investors who want exposure to crypto assets via an ETF will be limited to Bitcoin and Ether trackers listed on global exchanges via a platform like FNB's Global Trader.
The largest, cheapest, and most reputable Bitcoin ETFs available include:
The very significant risks
The rise of the Bitcoin ETF
In January this year, the US Securities & Exchange Commission (SEC) approved the listing of 11 spot Bitcoin exchange traded funds (ETFs), following years of unsuccessful attempts by managers to launch products tracking the cryptocurrency's price. In April, three issuers launched spot Bitcoin and Ether ETFs on the Hong Kong Stock Exchange.
Flows have been strong, the big guys are winning
In the US, market participants have been enthusiastically investing in spot Bitcoin ETFs since they launched at the start of the year. According to Morningstar, at the end pf April investors had invested a net $12.1 billion into them, of which over 80% has gone to either BlackRock's iShares (IBIT) or Fidelity Investments (FBTC). Both are large asset managers and are highly credible, making them the chosen vehicles of investing in the crypto currency. Meanwhile, the Grayscale Bitcoin Trust, now ETF - the favoured crypto-tracking ETF for investors before the advent of spot bitcoin funds - has seen massive outflows from the fund.
While Grayscale lowered its ETF's fees from 2.0% to 1.5%, it is still six to seven times higher than the other spot ETFs whose expense ratios range from 0.19% to 0.25%. Additionally, the major funds temporarily cut or even eliminated fees during the early launch period. IBIT cut its expense ratio to a discounted rate of 0.12%, while others, including FBTC, cut theirs to zero for differing introductory periods.
The three Hong Kong-based ETFs attracted funds totalling close to $300 million in the first couple days of trade - although a much larger response was expected. In the case of Hong Kong, investors have favoured size over fee structures with ChinaAMC receiving the bulk of flows despite a close to 1% management fee.
Who is driving Bitcoin ETF flows?
Major banks have been investing small amounts in the newly-launched Bitcoin ETFs. On 10 May, regulatory disclosures showed that JP Morgan purchased $731 246 of spot Bitcoin ETF investments and Wells Fargo reported a $141 817 investment in the first quarter. Earlier disclosures revealed that both BNP Paribas and BNY Mellon have also invested amounts into the Bitcoin ETFs.
Additionally, asset managers have been backing their own product. BlackRock, the largest asset manager in the world, disclosed a $6.6 million investment in its own IBIT fund, while Ark Invest holds $206.4 million of its ARKB fund, and Van Eck holds $98 000 of its HODL fund.
This would indicate that more than half of net flows may have been driven by institutional money thus far. This is not to say that the Bitcoin ETFs have not been popular among retail investors, individuals are still the largest owners of crypto assets globally and some may prefer holding their exposures directly rather than via an ETF.
Why an ETF?
For most investors, buying an ETF on a registered exchange is far simpler than buying and holding crypto directly. To invest in crypto currency directly, you need to create a wallet, find an exchange to use, connect it with your bank account, and use the crypto exchange to buy and sell cryptocurrency. The second major consideration is security - buying cryptocurrency through an ETF does not require investors to safeguard passwords, keys or be conscribed to other additional security requirements. One is also less susceptible to the impact that hacking has had on some crypto exchanges as an example.
The US ETFs are all Bitcoin trackers, while in Hong Kong the approved crypto ETFs track either Bitcoin or Ether. We see scope for a potential listing of ETFs tracking certain other larger and more well-established crypto assets medium term, but it is unlikely that we will see the approval of alternative coin ETFs by regulators any time soon.
The investment case for Bitcoin
The very significant risks
How does it fit into a portfolio?
Including crypto assets, such as Bitcoin, in a portfolio can provide diversification benefits due to their low correlation with traditional asset classes like stocks and bonds. This can help reduce overall portfolio volatility and potentially enhance risk-adjusted returns. While past performance is not indicative of future results, the significant price appreciation seen in Bitcoin has attracted investors seeking outsized returns.
Investor practitioners generally do not advocate for a larger than 5% portfolio allocation to crypto currencies - a small allocation can have a large impact on absolute and risk adjusted returns and large potential drawdowns could severely limit or eliminate the contribution of these instruments at certain times and indeed drastically reduce returns.
Investing in Bitcoin ETFs
While we have not had a crypto ETF launch on the JSE yet, it is possible that the SEC decision has made it easier for our regulator to allow such a product to be traded on the local exchange soon. For now, investors who want exposure to crypto assets via an ETF will be limited to Bitcoin and Ether trackers listed on global exchanges via a platform like FNB's Global Trader.
The largest, cheapest, and most reputable Bitcoin ETFs available include:
The very significant risks
