Bitwise CIO: Spot Bitcoin ETFs' Launch "Most Successful Ever"

Just over two months after the launch of the US’ first spot bitcoin ETFs, Matt Hougan, Michael Sonnenshein, Tony Ashraf, and Leon Marshall discussed the massive impact they have already had. In addition, they considered the likelihood of the US Securities and Exchange Commission (SEC) approving a spot Ethereum ETF in May and shared their thoughts on what approval could mean for the wider crypto and ETF industry.

The Most Successful ETF Launch Ever

Since their approval by the US Securities Exchange Commission (SEC) and subsequent inception in January, spot bitcoin ETFs have become “the most successful ETF launches ever in the US, by a large margin”, said Matt Hougan, Chief Investment Officer at Bitwise, speaking at the Blockworks Digital Asset Summit 2024 in London.

He pointed out that the funds have attracted over $10bn of net inflows during their first two months of trading.

“Before these, the fastest-growing ETF in one year was Invesco’s NASDAQ 100 ETF [QQQ], which pulled in about $5bn,” he said.

Leon Marshall, CEO of Galaxy Europe, said that the ETFs have exceeded expectations already. “The demand was there,” he said. “This is the early innings of that demand meeting potentially thousands of salespeople.

“I think we’ll come to realise that this is maybe the greatest orange pill event of all time” - Leon Marshall, CEO of Galaxy Europe

New Investor Segments

The spot bitcoin ETFs, such as the Bitwise Bitcoin ETF [BITB], have been a success in part because they have offered a new avenue for investors to put their money into bitcoin.

Crucially, however, the panel highlighted that the potential for these products to attract still more investor classes over time is key to their long-term viability.

For example, Hougan explained that, at present, some of the largest brokerages — such as Morgan Stanley and Wells Fargo — are currently not buying these products, even though they and their clients may want to, because they need to perform their own due diligence on them first.

While SEC approval was the first major hurdle for spot bitcoin ETFs to overcome, each of these individual approval processes represents another “hump”, said Hougan.

“We’re a few weeks away from the first of these” being cleared, he added.

Once the large brokerages start incorporating bitcoin ETFs into their offerings, it could unlock even more potential capital inflows for the products.

“You should think of the flows we’re seeing into these ETFs as if the spigot’s turned on 20%. There’s still another 80% to go,” said Hougan.

Radical changes

This could, over time, disrupt the historical cyclicality of the bitcoin market.

As Michael Sonnenshein, CEO of Grayscale, pointed out, spot bitcoin ETFs represent a use case for bitcoin that didn’t previously exist.

“There is an entirely new set of receptacles that hold bitcoin,” he said. “That doesn't necessarily make bitcoin any more useful, but it does make bitcoin more investable,” he said.

Tony Ashraf, Managing Director at BlackRock, said that new investors coming into bitcoin via the ETFs have “a different view about buying and holding, using the ETF structure in terms of long-term investment… I don’t think we should underestimate that demographic change,” he said.

Marshall underscored that the new investor types attracted by spot bitcoin ETFs are also less likely to sell aggressively when the price falls, given they are likely to view bitcoin as a long-term investment more than as a trading opportunity.

“A lot of people who invest through their IRAs are not going to at-market sell when the price falls 10%,” he said. “I think that might be, in itself, a structural change.”

SEC Weighs Ethereum ETF

The question on the lips of many crypto advocates is whether other cryptocurrencies could receive a similar nod from the SEC.

The most likely contender, at present, would be Ethereum. The SEC is reviewing eight applications for spot Ethereum ETFs, and has a deadline of 23 May by which to decide to approve or deny these.

Sonnenshein said that over the course of several denials of spot bitcoin ETFs, the SEC made numerous objections, related to problems with regulation of the underlying market and the potential for fraud and manipulation.

“In the case of spot Ethereum ETFs, we haven’t really seen a denial,” he said. “We remain optimistic about the prospects for a spot Ethereum product market.”

Hougan: I Hope It’s December

Should the SEC decide not to approve in May, it wouldn’t be the end of the road for spot Ethereum ETFs.

As in the case of bitcoin, issuers can re-apply for approval in the future; the US presidential election in November, with its potential for an administrative reshuffle, is just one upcoming milestone that could prompt a change of stance from the SEC.

“As I said around bitcoin, it’s a matter of ‘when’, not a matter of ‘if’,” said Sonnenshein.

However, Hougan expressed his controversial hope that the SEC will reject Ethereum ETFs in May.

“I want it to be later,” said Hougan. “I think it will gather more assets if it launches in December versus if it launches in May.

“As I said around bitcoin, it’s a matter of ‘when’, not a matter of ‘if’” - Michael Sonnenshein, CEO of Grayscale

“Wall Street traditional finance just started ingesting this giant thing called bitcoin, and they’re just getting their hands around it… I think we need another eight or nine months of digesting bitcoin before we’re ready.”

Further Diversification?

If and when it happens, the approval of a spot Ethereum ETF naturally opens the door to a further range of spot crypto products.

On the one hand, this could mean ETFs for other cryptocurrencies, such as Solana. However, Marshall feels that there could still be further diversification.

“I expect to see other permutations on the spot ETF,” he said. “It might be that in the future, we look to the SEC to enable redemptions in kind.”

The longer-term impacts of spot crypto ETFs are harder to predict because these products are fundamentally changing the relationship between traditional finance and crypto.

“There’s a catalyst effect happening,” said Ashraf. “You have a duality between traditional and crypto that’s starting to manifest itself in really different ways.”