Author: nsights4vc Source: substack Translation: Shanooba, Gold Finance
On September 3, 2024, the Federal Bureau of Investigation (FBI) issued a warning, cautioning that North Korean hackers are actively attacking the U.S. cryptocurrency exchange-traded funds (ETFs) and the broader cryptocurrency industry, including decentralized finance (DeFi) and related businesses. Hackers are using sophisticated social engineering techniques to disrupt security and deploy malicious software, aiming to steal digital assets from companies involved in these financial products. The alert emphasizes the ongoing threat posed by North Korean state-sponsored cyber actors, who are employing complex and tailored methods to attack organizations associated with cryptocurrencies.
In the subsequent part of this article, we will outline Bitcoin and Ethereum ETFs, focusing on spot ETFs. We will emphasize key indicators and insights to gain a comprehensive understanding of these investment products.
Overview of Spot Bitcoin ETF
Spot Bitcoin ETF is a financial product that allows investors to access Bitcoin by holding actual cryptocurrencies. Each share of a spot Bitcoin ETF represents a portion of the fund's Bitcoin holdings, enabling investors to benefit from changes in the price of Bitcoin without needing to directly purchase, store, or manage Bitcoin. Unlike Bitcoin futures ETFs based on futures contracts, spot Bitcoin ETFs are backed by actual Bitcoins, providing a simpler and less volatile investment option.
From 2018 to 2023, the SEC rejected many spot Bitcoin ETF proposals due to concerns about market manipulation and investor protection. However, in 2024, the SEC approved a spot Ethereum ETF, signaling an increasing acceptance of cryptocurrency ETFs. This marks an important step towards mainstream adoption, indicating regulatory agencies' openness to direct investment tools associated with digital assets.
The approval of spot Bitcoin ETFs such as ProShares Bitcoin Strategy ETF (BITO) and Valkyrie Bitcoin and Ethereum Strategy ETF (BTF) marks a milestone in Bitcoin investment regulation and accessibility. Since their launch, these ETFs have seen strong demand, with inflows exceeding the net inflow of the first gold ETF in 2005 (adjusted for inflation), highlighting the growing interest and confidence in digital assets.
Key Differences between Bitcoin and Bitcoin ETFs
Ownership: Investors in the Bitcoin ETF for spot Bitcoin have shares in a fund that holds Bitcoin, which is different from direct ownership of Bitcoin, where investors hold and manage Bitcoin in a digital wallet.
Trading: Bitcoin can be traded on various exchanges 24/7, reflecting the continuous nature of the cryptocurrency market. In contrast, Bitcoin ETFs are traded on traditional exchanges and operate during normal business hours, closing on weekends and holidays.
Fees: Bitcoin ETFs charge management fees, similar to other ETFs. Direct Bitcoin holders primarily incur fees during blockchain transactions, such as trading or transferring.
Differences between Bitcoin ETFs for spot Bitcoin and Bitcoin futures ETFs
Spot Bitcoin ETFs and Bitcoin futures ETFs offer different investment approaches. Spot ETFs directly hold Bitcoin, providing real-time exposure to prices and are managed by custodians in regulated markets, thereby reducing risks such as hacking or loss.
In contrast, Bitcoin futures ETFs track futures contracts, which are agreements to buy or sell Bitcoin at a future date and price. This introduces some complexity, such as potential price differentials due to speculation and market dynamics. While spot ETFs reflect the current market price of Bitcoin, the volatility of futures ETFs may be higher due to the rolling nature of futures contracts and external factors.
Hashdex Bitcoin Spot ETF
Hashdex Bitcoin ETF, traded under the code 'DEFI', provides investors with direct exposure to Bitcoin by holding spot Bitcoin. This ETF is managed by Hashdex and trades on the NYSE Arca exchange. The fund invests at least 95% of its assets in spot Bitcoin, up to 5% in Bitcoin futures contracts traded on the CME, as well as cash and cash equivalents. The performance of this ETF is benchmarked against the Nasdaq Bitcoin Reference Price - Settlement, which tracks the average price of spot Bitcoin using data from selected public sources.
Grayscale Bitcoin Mini Trust
Grayscale Bitcoin Mini Trust (stock code: BTC) is a spot Bitcoin exchange traded product (ETP) that began trading on July 31st at the New York Stock Exchange Arca. It provides investors with the opportunity to invest in Bitcoin by directly holding cryptocurrencies. The trust charges a 0.15% annual management fee, which is one of the lowest fees currently available for Bitcoin ETFs.
The trust was created by transferring 10% of the Bitcoin held in Grayscale's main Bitcoin Trust (GBTC) to the Mini Trust, using a unique initial seeding process designed to make it easier for investors to access the product.
Some of the largest Bitcoin ETFs outside the United States include:
Purpose Bitcoin ETF (BTCC) - listed on the Toronto Stock Exchange, this is the world's first Bitcoin ETF launched in Canada. It holds physical Bitcoins and allows direct investment in Bitcoin prices. According to the latest data, it manages approximately 1.64 billion Canadian dollars in assets, making it one of the largest Bitcoin ETFs globally.
3iQ CoinShares Bitcoin ETF (BTCQ) - This ETF is also listed on the Toronto Stock Exchange and is managed in collaboration between 3iQ and CoinShares. It directly invests in Bitcoin and provides another popular choice for investors seeking direct exposure to Bitcoin.
CI Galaxy Bitcoin ETF (BTCX) - This ETF is managed by CI Global Asset Management and traded on the Toronto Stock Exchange. It directly holds Bitcoin and aims to reflect the daily price movements of Bitcoin. It is primarily targeted towards institutional investors but is also open to retail investors.
WisdomTree Bitcoin ETP (BTCW) - This ETP is listed in Europe and provides Bitcoin exposure, available for purchase on the Swiss Stock Exchange, Börse Xetra, and other European exchanges. It is backed by physically settled Bitcoins held in cold storage.
The investment portfolio of the three major spot bitcoin and ethereum ETF issuers (calculated by asset management scale)
Overview of Ethereum ETF
The launch of spot ethereum exchange-traded funds (ETFs) has been difficult and the market has been volatile. The outflow of funds in the first month of trading reached $0.476 billion. These funds were launched on July 23, 2023, and they failed to capture the momentum of the cryptocurrency market. It contradicted optimistic forecasts of a potential rebound.
Although the start has been difficult, market analysts like Eric Balchunas of Bloomberg industry research believe that the outlook is more optimistic and this trend may soon reverse. The significant outflow of funds is mainly attributed to the unlocking of assets of Grayscale's Ethereum Trust (ETHE), which has been converted into an ETF. This conversion unlocked previously unavailable assets, resulting in a significant reduction in ETHE's assets from $10 billion to $4.37 billion. Some of the funds flowed into other funds, such as the Grayscale Ethereum Mini Trust, which currently holds $0.90487 billion.
Currently, the competition pattern of Ethereum ETF is dominated by Grayscale, with its two largest funds leading the market. Blackrock's ETHA closely follows, with assets under management of $0.822 billion, while Fidelity's ETHA lags behind with assets under management of $0.3155 billion. According to the report by CoinShares on September 2, this forms a sharp contrast to the performance of spot bitcoin ETF, which initially experienced outflows but quickly saw strong inflows with a total of nearly $21 billion.
The lack of significant inflow of funds into Ethereum ETF reflects the broader market sentiment and the hesitation of traditional investors regarding the current valuation of Ether. Since the ETF launch, the price of Ether has dropped by over 31% and is trading at $2,387, which exacerbates the challenges faced by these investment tools. However, Balchunas and other industry observers believe that the current outflow of funds is temporary and the interest of institutional investors is expected to increase, thanks to the widespread appeal of Ethereum's tokenization capabilities. Influential figures such as Blackrock CEO Larry Fink have also emphasized this.
The structure of spot Ethereum ETF involves authorized participants, mainly large institutional investors, who create and redeem shares. They deposit Ether with the ETF issuer in exchange for shares, thus maintaining the price of the ETF in line with the underlying value of Ether. This mechanism enables continuous trading throughout the day, providing investors with liquidity and convenient access without directly participating in cryptocurrency exchanges.
Although the concept of staking Ethereum through ETFs is theoretically attractive, it is still impractical within the current framework. Staking requires active participation in proof-of-stake networks, which goes beyond the passive investment nature of existing ETFs. Therefore, Ethereum ETFs currently do not participate in staking activities but focus on providing direct and tradable exposure to Ethereum.
Hong Kong spot ETF
Hong Kong recently launched its first spot bitcoin and ethereum ETFs, marking a significant milestone in the region's efforts to position itself as a major center for crypto investment. The Securities and Futures Commission (SFC) of Hong Kong approved these ETFs on April 15, 2024, with trading set to commence on April 30, 2024. Key participants in this issuance include ChinaAMC, Bosera Funds, and HashKey Capital. These ETFs provide investors with a regulated way to invest in bitcoin and ethereum directly without the need to hold the assets themselves.
ChinaAMC has launched spot bitcoin and spot ethereum ETFs that offer spot and physical subscription and redemption services, a feature the U.S. spot bitcoin ETF does not have. These funds support multiple currencies, including Hong Kong dollars, U.S. dollars, and Renminbi, and support listed and unlisted stocks
Conclusion
As shown in the graph above, in recent days, the net flow of bitcoin ETFs has been negative. ETFs other than IBIT, BTC, and BTCW are selling their holdings of bitcoin. On Tuesday, September 3, we found that the withdrawal amount of listed ETFs was 0.2878 billion U.S. dollars, the highest since May 1. Currently, the total bitcoin money supply is 19,749,775 BTC, accounting for 94.05% of the total supply, leaving only 5.95%.
We also note that the trading volume of Hong Kong spot ETF was low in the past few days, with its Asset Under Management (AUM) similar to its level at the start of operations in mid-April. The appeal of the ethereum ETF is relatively low; apart from inflows into Fidelity on Tuesday, only Grayscale has shown activity, with its main ETF ETHE consistently experiencing outflows, while the Grayscale Mini Trust has seen inflows.
