Spot Bitcoin ETFs Arrive in the U.S.

After a very successful year in 2023, the ETF industry has already exhibited a notable start to the year. The long-awaited approval of spot Bitcoin ETFs finally came to the U.S. on January 10, 2024. Although the approval was expected, it is still considered a historic moment for both U.S. ETFs and crypto assets given the impact and the attention behind it.

The First Days of the U.S. Spot Bitcoin ETFs

Crypto assets had a strong start in 2024 with the Bitcoin price climbing to over U$47K. The key driver of this price surge was the expectation that the SEC would approve spot Bitcoin ETFs for trading on the U.S. market. The very next day after SEC's approval, a total of eleven Bitcoin ETFs rushed to the market to jump into the Bitcoin asset-gathering race. The U.S. spot Bitcoin ETF market quickly became six times the size of the existing Canadian spot Bitcoin ETF market. However, this was not because of massive inflows on their first trading days — these were somewhat underwhelming — but because of the existing Grayscale Bitcoin Trust converting to an ETF.

Nevertheless, even if the outflows from the Grayscale Bitcoin Trust were to be excluded, the total inflows over the first two days would have still been moderate at U$1.4B. Although U.S. spot Bitcoin ETFs saw over U$831M in inflows over the first two days of trading, this number is arguably underwhelming considering the overall size of the U.S. ETF market and the hype preceding this launch.

The Impact of the Canadian Crypto ETF Market

Before the U.S. spot Bitcoin ETF could walk, the Canadian Spot Bitcoin ETF had to learn how to walk and run. The smooth launch of Bitcoin ETFs in Canada established a successful model for the U.S. ETF market. Although not intentional, the approval of only one spot Bitcoin ETF on the first day by the OSC in Canada gave a significant advantage to that fund. The OSC learned from this experience, and in the case of spot Ether ETFs, approved three Canadian ETFs all at once.

The SEC also seems to have taken note from the OSC's experience and chose to approve eleven ETFs all at once in hopes of not favouring a single issuer based on when they first filed. The Canadian experience was also first to prove that the ETF wrapper was suitable for crypto and gave investors easy access to crypto assets in a regulated environment. With the SEC's nod, investors could become more confident about pumping money into crypto ETFs and crypto assets.

While the approval of spot Bitcoin ETFs in the U.S. might benefit the crypto industry, the implications for Canadian crypto ETFs may be muted. Given the size of the American market, investors — especially international investors — may switch to U.S. ETFs for crypto investment. Canadian crypto ETFs may see a mix of inflows and outflows, especially as global asset manager giants enter the market.

Fees – An Early Differentiator

Canada experienced a spot Bitcoin ETF fee war immediately after the first ETFs were launched. The U.S. took a page from this playbook and amped it up. With all eleven spot Bitcoin ETFs launching on the same day, almost all holding the same asset and using similar indices, the easiest way to stand out was to cut fees or waive them. As a result, issuers started a fee war even before the ETFs launched. Many issuers chose to also waive or discount their fees for the first few months or until reaching a certain AUM. Others permanently launched with very low fees.

Future Innovation and a Word of Caution

The SEC's go-ahead stamp could give further legitimacy to the crypto industry. Most notably, it will allow many U.S. retail investors to tap into the crypto market through the over U$7.5TN ETF market in the U.S. However, important to note, this approval came with a cautionary statement from SEC Chair Gensler highlighting that the ruling of the U.S. Court of Appeals for the District of Columbia against the SEC was one of the main reasons for the SEC to approve Bitcoin ETFs.

Chair Gensler's statement also reiterated that "While the SEC approved the listing and trading of certain spot Bitcoin ETP shares, the SEC did not approve or endorse Bitcoin. Investors should remain cautious about the myriad risks associated with Bitcoin and products whose value is tied to crypto."