Spot Bitcoin and ether ETFs: US, Hong Kong, Australia (Updated on May 27)
US spot Bitcoin ETFs have driven wild crypto rallies as a vast, untapped source of new money. With Hong Kong launching its Bitcoin and ether-linked products, other jurisdictions may follow suit. Here is a deep dive into the state of the crypto ETF market in 2024.
Performance of spot Bitcoin ETFs
After more than a decade of resistance, the SEC gave in, greenlighting eleven spot Bitcoin ETFs on January 11, 2024. Following their breakthrough approval, the funds have accumulated over $76B. They spurred crypto’s penetration into the mainstream — and Bitcoin’s new ATH of $73,738 on March 14.
Hailed as a superior crypto investment vehicle, the ETFs fuel hopes for new rallies. Backed by actual bitcoins, they provide indirect exposure to the asset. With access via traditional brokerage accounts, investors may allocate to BTC even if their mandate prohibits holding crypto directly.
Like other ETFs, spot Bitcoin ETFs facilitate passive investment with enhanced transparency, liquidity, and low expense ratios compared to actively managed mutual funds.
The total AUM stands at $48.52B as of May 2, 2024. Over $17.3B is managed by GBTC (Grayscale Bitcoin Trust), followed by $16.2B in IBIT (BlackRock’s iShares Bitcoin Trust) and $8.86B in FBTC (Fidelity Wise Origin Bitcoin Fund). The other funds are:
- Bitwise Bitcoin ETF (BITB)
- ARK 21Shares Bitcoin ETF (ARKB)
- Invesco Galaxy Bitcoin ETF (BTCO)
- VanEck Bitcoin Trust (HODL)
- Valkyrie Bitcoin Fund (BRRR)
- Franklin Bitcoin ETF (EZBC)
- WisdomTree Bitcoin Fund (BTCW)
- Hashdex Bitcoin ETF (DEFI)
IBIT seems poised to overtake GBTC. Based on CoinDesk’s analysis, some of its assets come from Grayscale substitutions, outflows from international products in the EU and Canada, and recycled Bitcoin futures ETFs. It also attracts BTC holders who switch to brokerage accounts to avoid custody and tax reporting complexities.
Dissecting Bitcoin ETF outflows
On May 3, GBTC returned to positive territory after a four-month streak of outflows. Some of the withdrawals were due to repayments by bankrupt crypto firms, including FTX.
The outflow volume across spot Bitcoin ETFs peaked on May 1 at over $563M. As of May 8, GBTC, converted from a trust, boasts the biggest market cap and AUM of over $18B.
Outflows occur for different reasons, including profit-taking, portfolio rebalancing, and reactions to market shifts. The inflow uptick may suggest improving investor interest after profit realization, which may bolster the BTC price.
The fading of euphoria was expected as fresh money periodically dries out for any ETFs. It is necessary to look at the bigger picture. As Bloomberg Intelligence’s James Seyffart noted, on April 15, 2024, when IBIT was the only spot crypto ETF with inflows, over 2,900 of all 3,500 ETFs in the US had zero flows.
Spot Bitcoin ETFs and Bitcoin price
Fluctuations in ETF flows have impacted short-term Bitcoin dynamics. In January, withdrawals from GBTC, driven by the $1B FTX bankruptcy estate liquidation, triggered a massive Bitcoin sell-off and slump.
Yet ETFs do not define Bitcoin. They merely contribute to the larger picture, with other valuables and macro drivers affecting overarching trends. In April, JPMorgan noted the correlation between ETF inflows and prices — and consequently the BTC price — had weakened to 0.60 from January’s 0.84.
New market participants: Will pension funds embrace crypto ETFs?
Pension funds, endowments, and sovereign wealth funds may allocate to BTC through ETFs in the coming months. BlackRock has been educating institutions about spot crypto products, and diligence and research conversations are underway.
As of May 2024, some registered investment advisors (RIAs) offer BlackRock’s IBIT on an unsolicited basis. In the future, clients of large wealth advisory players like Morgan Stanley may be offered Bitcoin ETFs without restrictions.
Debut of Bitcoin and ether ETFs in Hong Kong
Aiming to restore its reputation as a global financial hub, Hong Kong greenlit six spot crypto ETFs, which started trading on April 30. The first-day collective trading volume reached $11M or $12M by different estimates — which pales compared to the $4.6B during the US debut.
Reactions were mixed, but zooming out, $11M is quite impressive when adjusted for market size. Yet the Bitcoin price reflected displeasure with an 8% drop, and QCP Capital described the numbers as “terribly disappointing.”
That pessimism was misguided. Bloomberg Intelligence ETF analyst Eric Balchunas wrote, “If you localise numbers, this was big.” Although other analysts expect Hong Kong to amass just $1B over two years, the international reach of its financial offerings casts doubt on such modest projections.
The six spot crypto ETFs are the first products of this kind in Asia. Hong Kong had previously launched crypto future ETFs, which have accumulated $175M in total assets — a fraction of the $2.5B managed by Proshares Bitcoin Strategy ETF (BITO), the first US bitcoin-linked ETF.
China’s special administrative region has three futures products: CSOP Bitcoin Futures, CSOP Ether Futures, and Samsung Bitcoin Futures. It also hosts three major providers of crypto-related ETF services:
- Harvest Global Investments Ltd.
- Local unit of China Asset Management
- Partnership between HashKey Capital Ltd. and Bosera Asset Management (International) Co.
Performance of Hong Kong ETFs: Success is relative
The local ETF market has generally outperformed US spot Bitcoin ETF flows despite crypto turbulence. Both Bitcoin and ether ETFs had recorded combined weekly inflows worth $300M by May 3, 2024. Over the same week, a staggering $860M left spot Bitcoin ETFs in the US.
Those outflows seemed to stem from the Fed’s decision to leave its interest rates unchanged. When it was announced on May 1, the ETFs set a negative record of $563.7M. The following day, flows into IBIT, FBTC, and BITB fell to zero.
Thus, unfavorable macro news from North America helps Asia lead the way, boasting the most impressive inflows. The Huaxia Bitcoin ETF, Harvest International Bitcoin ETF, and Boshi Bitcoin ETF led the gains, with their collective holdings reaching 4,218 BTC mere three days after launch.
As of Wednesday, May 8, the three Bitcoin ETFs have accumulated under 4,400 BTC, equal to around $276M in AUM, according to CoinDesk. The debut week alone brought $258M, reflecting strong investor confidence.
Enhanced liquidity of Hong Kong crypto ETFs
Wintermute Trading Ltd., a London-based algorithmic trading firm and market maker, will provide liquidity for the Hong Kong products in cooperation with OSL Digital Securities and HashKey HK Exchange. Both are sub-custodians of virtual asset trading platforms that facilitate ETF operations.
Commenting on the partnership, CEO Evgeni Gaevoy has said, “Hong Kong has established itself as a leading advocate for crypto in the APAC region, and we are hopeful that other countries will follow their lead in the near future.”
Diverse redemption mechanisms
In contrast to cash redemption prevalent in the US, Hong Kong’s offerings employ in-kind subscriptions and redemptions. Hence, local investors have the flexibility to exchange underlying assets for fund units and vice versa.
This approach enhances the attractiveness of ETFs and substantiates forecasts of impressive adoption rates. Han Tongli, CEO of Harvest Global, told Bloomberg the take-up could be three times bigger than in the US.
Moreover, in-kind products facilitate convenient access, especially during Asian trading hours. The model is particularly attractive to crypto enthusiasts, market makers, and digital asset exchanges for its efficiency enhancement and arbitrage opportunities, as highlighted by Gaevoy.
Spot ether ETFs in US: Rollercoaster ride
Experts note that promoting spot ether ETFs will be more challenging. The first problem is education due to the complexity of the Ethereum network. Furthermore, investors who have already improved their portfolio Sharpe ratio (return adjusted for risk) via spot Bitcoin ETFs may not see the point of additional exposure.
Another concern is that ether would eventually be classified as a security, unlike Bitcoin, which is a commodity under the US Commodity Futures Trading Commission. MicroStrategy executive chair Michael Saylor has predicted the same outcome for other tokens, including BNB, SOL, XRP, and ADA. He said,
“None of [these tokens] will ever be wrapped by a spot ETF, none of them will be accepted by Wall Street, none of them will be accepted by mainstream institutional investors as crypto assets.”
According to Standard Chartered Bank, the market factored in the expected failure, with the ETH sinking in April and early May.
May 27 Update: SEC greenlights spot ether ETF trading
The SEC was due to decide on the first two applications in late May. The issuers and industry experts were pessimistic, citing discouraging meetings with the agency. The regulator had already extended the original deadline once.
Nine firms, including Ark Investment Management and VanEck, have filed for spot ether products. Their communications with the SEC were described as one-sided, in stark contrast to the discussions before the launch of spot Bitcoin ETFs.
SEC’s surprising change of heart
For months, the chances of ether ETF approvals hovered at 10–15% on Polymarket. On May 20 — three days before the first SEC deadline, Bloomberg analysts revised them upward to 75%, citing rumors about a pivot.
That day, SEC officials asked the applicants to promptly adjust their filings, sending them scrambling to do weeks of work in days. The news came shortly after Donald Trump had told supporters the Democrats wanted to “kill” crypto.
On May 23, the SEC took a 180-degree turn, approving the trading of eight products on three US exchanges: the Nasdaq, the NYSE, and Cboe. This surprising decision may have been politically motivated, but it is not the final green light for the funds.
What’s next?
Issuers must now secure the SEC’s approval of their individual ETF registration statements (S-1) with investor disclosures. According to industry insiders, the duration of that process is unclear: the SEC corporate finance division may request updates in the coming days and weeks.
According to the document detailing discussions of the exchanges’ proposals, the SEC’s priority is preventing fraud and manipulation. The commenters voiced concerns about three main points:
- Surveillance data sharing. All three exchanges maintain contracts with the Chicago Mercantile Exchange (CME) aimed at counteracting fraud and manipulation. However, the CME does not currently monitor spot ether markets. The exchanges must also share their data with other regulated markets under similar agreements.
- Investor protection and market integrity. The requirements concerning pricing data availability and portfolio transparency resemble those for spot Bitcoin ETFs.
- Volatility and risk. While the SEC considered the potential risks and benefits of merging crypto and TradFi, it did not address the volatility issue directly. One commenter noted the possible divergence between the ETF and ether prices, which may “cause stress for institutions heavily exposed to” the products or reliant on them.
The last point, linked to risks for “retail investors and the broader financial system,” is similar to the criticism of spot Bitcoin ETFs. Stating that volatility and risk “remain largely unexamined and unaddressed,” Forbes contributor Alexandra Andhov warns that ignoring them may result in a “repeated 2007–2008 on a much larger scale.”
Finally, the ETF trading approval does not automatically entail ether’s treatment as a commodity. The use of the S-1 form only means the funds do not include assets with over 40% of their portfolio in securities.
Staking for ether ETFs: US vs. Hong Kong
The SEC was adamant about denying spot Bitcoin ETFs for years until Grayscale’s historic victory in August 2023. A three-judge panel ruled that rejecting its proposal to convert GBTC to an ETF had been an “arbitrary and capricious” move.
With Ethereum, the biggest bone of contention is staking — the opportunity to lock up ether as collateral to earn rewards. In 2023, the SEC clamped down on the practice, forcing the Kraken CEX to pay a $30M fine and shut down its staking-as-a-service business.
US spot ETF issuers, including Ark Invest and Fidelioy, have abandoned plans to stake the coins they would purchase for the products. This diminishes their appeal compared to direct ETH buying but smoothens the path with the regulators.
Meanwhile, Hong Kong’s Securities and Futures Commission is discussing potential ether ETF staking with local issuers. According to industry insiders, the services may be rendered through licensed platforms, but a definite timeline for a decision has yet to be set.
Staking would boost the demand for the ETF products. It might give Hong Kong a head start on the US.
Australia: Next stop for spot ETF bandwagon?
Australia is expected to launch its own crypto ETFs by the close of 2024, with anticipated inflows stemming from self-managed pension assets. The Australian Securities Exchange (ASX), commanding 90% of the local equity market, is poised to grant approval.
According to Bloomberg reports, DigitalX Ltd., a local entity, and VanEck have submitted applications, with VanEck resubmitting in February. CEO and Managing Director Arian Neiron remarked,
“The demand for access to Bitcoin via a listed vehicle traded on ASX has been increasing, and many of our clients have told us that their clients are already positioned to have an allocation ready to invest.”
While ASX refrains from commenting on specific applications, it has acknowledged engagement with various issuers keen on introducing crypto-asset-based ETFs, as reported by CoinDesk.
In a separate development in April, Monochrome Asset Management, headquartered in Brisbane, filed for a spot Bitcoin ETF with Cboe Australia. Despite being a smaller competitor to ASX, Cboe Australia boasts expertise across Asia and broader investor access.
Cryptocurrency ETFs first debuted in Australia back in 2022. Among the pioneers is the BetaShares Crypto Innovators ETF (CRYP), which tracks an index tied to 30 stocks of crypto-related companies. Its assets under management (AUM) stand at approximately $43M.
Another contender, the Global X 21Shares Bitcoin ETF (EBTC), mirrors the BTC price in Australian dollars, offering shareholders exposure to BTC held in Coinbase’s cold storage. Its AUM of $5.78M is a fraction of EBTC’s total.
Examples of products trading on ASX and Cboe include feeder funds with modest AUM estimates: BT3Q at just $100K and ET3Q at $190K.
- The Global X 21Shares Ethereum ETF (EETH) tracks the ETH price in Australian dollars, akin to EBTC. It offers interest on coins in Coinbase’s custody but has less than $3M AUM.
- The 3iQ CoinShares Bitcoin Feeder ETF (BT3Q) is a feeder fund for a Canada-based ETF that monitors daily changes in the BTC price in USD.
- The 3iQ CoinShares Ether Feeder ETF (ET3Q) acts as another feeder fund for a Canada-based ETF, tracking daily changes in the ETH price in USD.
Wrapping up
Spot ETFs play a pivotal role in fostering genuine mainstream acceptance of cryptocurrencies. Following the triumph of US-based funds, Hong Kong has launched six local options, and Australia may jump on the bandwagon this year.
Outflows in the US reflect a return to the norm, while the SEC’s change of heart means that spot ether ETFs may launch this year. With the Hong Kong market also holding considerable promise despite its size, the reach and impact of crypto ETFs is set to grow globally.
