The toll of ETFS on miners
The launch of spot Bitcoin exchange-traded funds (ETFs) in the United States has been catalogued as a rampant success despite the unfavourable price action. The cohort has generated record volumes for ETFs in general, though much of this has been due to investors reshuffling asset allocations from legacy products and equities. Net inflows still amount to USD1.2bn as of now. Further consolidation of Bitcoin prices cannot be ruled out due to the steepness of the recent rally, but fundamentals remain sound.
The approval of spot Bitcoin exchange-traded funds (ETFs) in the United States has been a success in many ways, though prices have not followed suit. The truth is that the cohort of wraps managed to generate record volumes in the first few days. However, to a large degree, investors have been switching from legacy funds to newer ones. The reason for this switch has mainly been due to the very low expense ratios the spot ETFs have been offering, and the fact that the derivatives-based solutions were more expensive in the long run due to the costs of carry. This resulted in systemic underperformance versus the spot Bitcoin prices. As of now, the net inflow towards open-ended and physically-backed Bitcoin ETFs has approached USD1.2bn.
Simultaneously, some of the volume has originated from non-US products, demonstrating investors’ clear preference for US capital markets structures. In order to prevent further outflows, most asset managers in the rest of the world have reacted swiftly by lowering their products’ management fees. On another note, the biggest laggards have been cryptocurrency mining companies and publicly traded companies strongly associated to cryptocurrencies, which on a year-to-date basis have endured double-digit price declines.
Though there is a strong elasticity component related to Bitcoin’s price action, the broader explanation stems from the fact that investors were holding these assets only as a Bitcoin proxy. Now, as the actual asset, Bitcoin, has become available, they have started to switch so as not to be exposed to general equity risk or specific company risk. In fact, a similar development occurred around 20 years ago when the first physically-backed gold ETFs were launched in the United States, putting a lasting valuation discount on gold mining companies, which were held as a proxy before.
Looking past the ETF saga, Bitcoin’s fundamentals remain sound, as evidenced by long-term holder accumulation, rising on-chain activity, and the upcoming block-reward halving, paired with a growing conviction that the fastest and steepest US monetary tightening cycle has ended. Further consolidation cannot be ruled out following the steepness of the last year’s rally.
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