12th January, 2024
Market Overview:
Digital assets experienced a historic week in both market performance and adoption, as the long-awaited spot Bitcoin ETF was finally approved by US regulators.
- Bitcoin experienced several major swings this week, all related to news surrounding spot ETF approvals
- Bitcoin trended upwards throughout the week, growing from a Monday low of $43,320 before the first major fluctuation on Tuesday after the SEC’s official Twitter account was hacked; the price quickly climbed to around $48,000, before pulling back below $45,500
- When ETFs actually opened for trading on Thursday following a Wednesday confirmation, Bitcoin prices peaked at $49,020—the highest levels in over two years, since late December 2021
- Despite the boon to Bitcoin, Ether actually outperformed the leading digital asset; whilst spot Bitcoin ETF approval was somewhat “priced in”, the confirmation raised hopes for similar spot Ether products currently awaiting SEC rulings
- Ether grew from a Monday low of $2,180 to a Thursday high of $2,683
- Overall digital asset market capitalisation grew to $1.77tn, peaking above $1.82tn during the initial ETF buying surge
- According to industry monitoring site DeFi Llama, total value locked in DeFi grew over $5bn to $57.7bn, driven largely by Ether appreciation
Digital assets experienced one of the most eventful news cycles in their history this week, as—more than a decade after the first attempt—a spot Bitcoin ETF was finally approved (but not without some late drama from the market regulators). This understandably dominated reporting and “superseded expectations”, but there were still several major developments elsewhere, including IPO plans for stablecoin issuers Circle, a new tokenisation platform backed by finance heavyweights, and news on VC data from 2023.
What happened: Spot Bitcoin ETFs approved in “watershed moment”, trade with record volume
How is this significant?
- On Wednesday, the SEC finally approved spot Bitcoin ETFs for trading in the US, in a landmark move that the FT described as a “boost to crypto advocates”
- Trading went live the next day, experiencing heavy investor interest as the presence of ETFs broadened Bitcoin accessibility and exposure to a whole class of traditional investors without the experience or inclination to self-custody
- As anticipated the SEC approved the first filing from this round, by ARK Invest, before accelerating the approvals on a further ten filings, making for 11 simultaneous approvals
- This includes TradFi titans like BlackRock, Fidelity, Franklin Templeton, Invesco, and WisdomTree, alongside DeFi natives Grayscale, Galaxy Digital, and Hashdex
- Expectations of final approval were high in the leadup to announcements; over the weekend FOX Business cited a BlackRock source confident of Wednesday approvals
- Approval was a long time coming since spot Bitcoin ETFs were first conceptualised, more than a decade ago with a filing by the Winklevoss twins
- The buildup to the event also saw something that investors likely endorsed; issuers undercutting each other on fees, vying for the largest slice of the pie
- Upon launch, the fees were lowest for BlackRock (0.2%), ARK (0.21%), and Fidelity (0.25%), whilst Grayscale charged by far the highest fee at 1.5%
- Almost all issuers are temporarily waiving some or all of their fee—the discrepancy with Grayscale relates to its conversion from the existing GBTC fund with $29bn of Bitcoin, which Bloomberg ETF analyst Eric Balchunas described as “bringing a (volume) gun to a knife fight”
- Indeed, Grayscale should perhaps be singled out for special praise; their legal victory over the SEC opened the door for spot ETF approvals after their GBTC conversion rejection was ruled “arbitrary and capricious”, and enthusiasm around Bitcoin and their fund’s NAV discount closed to zero for the first time since February 2021—a remarkable recovery from the 48% discount presented in February 2023
- Grayscale CEO Michael Sonnenschein told CNBC that their industry experience justified the higher fee; “We’re a crypto specialist. We’ve weathered all different types of speed bumps and advancements within the crypto ecosystem. For a lot of these asset managers and issuers, this is the first time they’re going to be dealing with the complexities that go into running these types of products”
- When the trading floors opened less than 24 hours after approvals, the Wall Street Journal described investor enthusiasm as “a monster start” and a “roaring debut”
- Bloomberg meanwhile declared “Bitcoin ETFs take Wall Street by Storm with Historic Debut”, noting that several trading records “delivered validation” for “Bitcoin brethren”
- $2.3bn of Grayscale Bitcoin Trust changed hands; “the largest-ever first-day turnover for an ETF”
- However, it should be noted that as Grayscale’s conversion allowed it to open with $29bn of Bitcoin in the fund, it’s speculated that the bulk of their volume was selling
- BlackRock’s IBIT fund breached $1bn in trading volume, the 5th-largest launch on record, Fidelity racked up $685m of trades, and over $4.6bn of Bitcoin ETFs changed hands on the first day of trading—trouncing the $1bn debut of Bitcoin futures ETF trading
- Following the launches, UBS revealed it would offer Bitcoin ETFs to wealth management clients, and Citigroup will provide access to institutional clients, whilst Charles Schwab, and trading platform Robinhood extend the capability to a broader client base
- Vanguard actively declined to allow trading due to conflicts with investment and portfolio management philosophy, and BoA’s Merrill Edge is currently considering the matter
- Franklin Templeton’s head of digital assets, Sandy Kaul, believes this was merely the first of several dominoes to fall, anticipating more crypto ETF approvals in the future on other projects such as Ether—and Grayscale proved her right, filing for a covered call ETF the same day that spot ETF trading began
- Balchunas commented on trading activity, stating “It’s like two years worth of fee wars have been condensed into a couple days… Easily the biggest splash in ETF history for a first day. No matter where you look, it’s superseded expectations”
What happened: SEC experiences security failure before ETF approvals
How is this significant?
- The day before the SEC announced approvals for spot Bitcoin ETFs, the SEC announced approvals for spot Bitcoin ETFs… that isn’t a copy-paste error you’re reading, but rather the consequence of a basic security error by the agency
- On Tuesday, the SEC’s official X (formerly Twitter) account confirmed approvals for all Bitcoin ETFs—before commission chair Gary Gensler tweeted a few minutes later that the account had been compromised
- This whiplash of messaging of course caused market whiplash as well, leading several politicians to demand “transparency” and “accountability” from the SEC for making such a “market-moving mistake”
- FOX Business presenter Charles Gasparino claimed that from a legal standpoint, the SEC is now required to investigate itself for market manipulation
- The “compromise” of the official SEC account was identified by X as a failure of basic security practice by the agency; “the account did not have two-factor authentication enabled at the time the account was compromised”
- This was particularly ironic as both the SEC and Gensler had previously warned about irresponsible behaviour in the digital asset market, and lectured on cyber-security best practices—evidently they didn’t practice what they preached
- The FBI is currently investigating the alleged hack
What happened: Stablecoin issuer Circle files for IPO
How is this significant?
- USDC issuers Circle are looking to follow digital asset exchange Coinbase in becoming one of the few US-based crypto companies to go public
- Although relatively common in crypto-adjacent fields like mining, IPOs remain a rarity with that level of direct exposure
- Nonetheless, following an earlier failed SPAC attempt, Circle this week confirmed it had submitted a draft registration statement to the SEC, “with the number of shares to be offered and a price range to be determined at a later date”
- Existing investors in Circle include Goldman Sachs, General Catalyst Partners, BlackRock, Fidelity, and Research LLC and Marshall Wace LLP
- Oppenheimer & Co. analyst Owen Lau told Bloomberg “The spot Bitcoin ETF just got approved. The sentiment has improved. It’s not a bad timing to capture this sentiment”
What happened: Spot Bitcoin ETF reactions
How is this significant?
- An event as keenly anticipated as the long-awaited spot ETF launches led to widespread commentary, from both supporters and detractors of digital assets
- Bloomberg called spot ETF launches “a landmark decision”, and noted the significance of approvals in the face of a regulator deemed a “bad faith” actor by industry advocates; “The approvals mark a rare capitulation by the SEC following opposition that lasted for more than a decade”
- Republican SEC commissioner Hester Peirce, a known digital asset advocate, declared herself “delighted” after questioning previous rejections by the agency; “There are still pieces of it to go, but this is a big milestone”
- Charles Schwab’s head of trading services James Kostulias noted a maturing of the industry; “There’s a validating step to the actual underlying instrument, to all of the regulation and all of the rigour that goes around becoming an ETF”
- Grayscale CEO Michael Sonnenschein was effusive in a TechCrunch interview, saying “We always knew the investor sentiment would get there, regulators would get there and the financial adviser community would get there”, and telling Bloomberg the event was “It is definitely a historic day, the culmination of ten years of work… such a milestone”
- The Financial Times also noted enthusiasm, quoting EU Bitcoin ETF issuer Melanion Capital’s CEO Jad Comair as saying "It's a huge milestone, it's recognition of Bitcoin being a large-scale traditional investment. We're opening the doors to Wall Street"
- ARK Invest CEO Cathie Wood told the FT that the firm were happy to trade with zero fees for the first six months as she believes Bitcoin is a public good; “We want to make sure we provide access and make it as accessible as possible. We are not looking to maximise profits on this”
- Speaking to CNBC, Kevin de Patoul, CEO of crypto liquidity provider Keyrock believed a key outcome was reputational, rather than financial “This ETF has… increased credibility of crypto as an ‘asset class’ (a very high impact). There is now a US Bitcoin spot ETF, and bitcoin is no longer considered shady or infamous. This significantly changes the perception for the mainstream public”
- Meanwhile, in his statement announcing ETFs (described by Bloomberg’s Matt Levine as “hilariously grudging”), Gary Gensler still took the time to criticise the asset class, and suggested the agency had to approve the products due to legal defeats against Grayscale last year; “Based on these circumstances and those discussed more fully in the approval order, I feel the most sustainable path forward is to approve the listing and trading of these spot Bitcoin ETP shares”
- Despite being legally obliged to approve the listings, he apparently felt obliged to undermine digital assets as well, writing “Though we’re merit-neutral, I’d note that the underlying assets in metals ETPs have consumer and industrial uses, while in contrast Bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing”
- Other significant entities unimpressed by approvals included anti-crypto senator Elizabeth Warren, and asset managers Vanguard; which banned users on its platform from buying any of the listed Bitcoin ETFs, and only allowed selling of the GBTC fund, echoing the previous distaste for digital assets voiced by founder Jack Bogle before his passing
- However, ARK Invest CEO Cathie Wood was unimpressed with Gensler’s patently “merit-partisan” approach, telling Bloomberg “He just denigrated the whole crypto space. I couldn’t believe it. This is par for the course in disruptive innovation. It’s the old DNA basically bashing the new DNA”
- Bloomberg Opinion columnist Matt Levine—who famously authored the single story “Crypto Issue” of Businessweek just prior to FTX’s collapse—took a philosophical approach; “Taking a step back here, there is something really cool about what Bitcoin has accomplished… people—lots of people, crypto evangelists but also regular retail investors and quite traditional investment strategists at big institutional investment firms—view it as a store of value”
- Reactions in terms of forecasts have been varied; JP Morgan expects “$36bn of inflows from existing instruments”, whilst ETF issuer Valkyrie expected $10bn of inflows by the end of the year, including $2bn to $3bn in the first week—a figure likely exceeded on the first day alone
What happened: Digital asset VC funding drops by two-thirds
How is this significant?
- Amidst the relative euphoria of ETF news, data revealed that there are still some challenges facing the digital asset industry, particularly in terms of startups and venture capital
- VC funding declined more than two-thirds last year, according to Pitchbook data
- Overall levels of VC funding dropped by 68% year-on-year, to $10.7bn
- The overall number of deals also decreased significantly, by 32%
- Michael Anderson, co-founder of Framework Ventures says that 2021’s hype brought in many traditional VCs without any experience, leading to inflated valuations that carried on until FTX’s collapse in November 2022, which left “many tourist VCs in retreat and their weaker portfolio investments bleeding out”.
- Pitchbook agreed, partly attributing the drop to inflated valuations from 2021 and 2022 skewing CEO perceptions, and urging more realistic goals; “You’re not gonna be able to raise a seed round at a $20 million valuation—that doesn't exist anymore”
- Despite these large pullbacks in VC allocations, it is still worth noting that 2023 remained the third-best year on record of venture capital investment; albeit far below the levels of record year 2022 and 2021
- If the market continues its recovery, VC confidence could be restored, leading to greater allocations going forward—potentially even starting Q1—as the broader market has experienced enough prolonged recovery to bring VCs back out of the woodwork
- Kate Laurence, CEO of venture fund Bloccelerate VC agrees, telling Bloomberg that just as FTX’s collapse kicked off crypto winter, so his conviction seems to signal crypto spring; “It was like somebody turned on a switch and things changed after that”
What happened: Tokenised treasuries grow more than eight-fold
How is this significant?
- Tokenisation experienced rapid growth in 2023, with new data indicating that tokenisation of US treasuries alone grew 8.5x last year
- Real world assets monitor rwa.xyz revealed that the market for tokenised treasuries grew from $100m to $850m, led by Franklin Templeton
- Philippe Kieffer, business development head at Makor Securities’ digital asset arm Enigma, said demand was only growing thanks to macroeconomic conditions; “As interest rates have steadily risen, we have seen a huge amount of demand from our institutional clients for a product that would allow them to take advantage of these high risk-adjusted returns… we anticipate driving hundreds of millions of dollars worth of volumes based on this huge amount of client demand”
- In other tokenisation news, Nomura, Brevan Howard, and private markets firm Hamilton Lane joined forces in backing Libre, a web3 tokenisation platform focused on alternative asset managers
- Libre CEO Avtar Sehra told industry publication Coindesk “This decentralised infrastructure needs to have compliance built into it,... It has to have a lot more nuance to match the right user to the right instrument and a lot of factors come into play: what instrument are you actually issuing, and who can actually hold that? How can it be marketed and to what type of investors in which jurisdictions?”
- Sehra added that Libre would feature assets familiar to its backers, such as hedge funds and private credit fixed income type products
- Natalie Smith, head of strategy and client partnerships at Brevan Howard, added “The tokenisation of funds allows us to offer investors a new way to access our strategies, providing them with optionality and further developing our platform to serve client needs. It is for this reason that we have been deeply involved in Libre”
- Brevan Howard have good reason to be bullish on digital assets; its crypto division delivered 44% returns last year, versus a 2% decline in its master fund
What happened: Hong Kong sources disclose interest from ten firms in listing crypto ETFs
How is this significant?
- Hong Kong, positioning itself as a global crypto hub, appears determined to follow America’s lead and launch spot crypto ETFs of its own, according to the CEO of locally-licenced digital asset exchange HashKey
- In an interview with a local finance publication, Livio Weng said “about ten fund companies” were currently exploring the issuance of spot ETFs, after the local regulators published circulars detailing their requirements
- Hong Kong lawmaker Johnny Ng wants them to move from exploration to execution, urging the city to “take the lead”, and prioritise “crypto education”
- He warns against falling behind now that the United States SEC has finally approved such products; “I hope that Hong Kong, amidst rapid development and intense competition in the virtual asset sector, can swiftly secure a position globally, particularly by taking the lead in implementing relevant policies and products in Asia. This presents an opportunity to solidify Hong Kong’s position as a global hub for virtual assets”