Bitcoin Exhibits an Unprecedented Action, Potentially Forging Pathway to Substantial Profits
In 2021, the initial Bitcoin (BTC 2.99%) exchange-traded funds (ETFs) entered the American market. Post-launch, Morningstar analyst Ben Johnson bluntly told investors, "These aren't the Bitcoin ETFs you're seeking." The reason being, the initial Bitcoin ETFs buy and sell futures contracts instead of directly investing in Bitcoin itself.
The problem with this approach is that the price changes in futures contracts don't necessarily mirror the price changes in Bitcoin. Furthermore, to maintain an ongoing exposure, issuers must roll Bitcoin futures contracts every month, selling contracts as they approach expiration and purchasing new ones. However, this rolling of contracts involves costs, which are eventually passed onto shareholders.
Consequently, these initial Bitcoin ETFs provide indirect exposure to Bitcoin, resulting in a lack of tight tracking of its price. For instance, the futures-linked ProShares Bitcoin ETF declined by 37% since its market debut in October 2021, while Bitcoin rose by 60%. In other words, the first Bitcoin ETF in the US has underperformed Bitcoin by 97 percentage points since its inception.
Ben Johnson at Morningstar was right; those weren't the Bitcoin ETFs investors desired. Fortunately, spot Bitcoin ETFs, which actually own Bitcoin, debuted in January 2024. This development has allowed Bitcoin to experience an unprecedented phenomenon: strong adoption among institutional investors.
The significance of this lies in the fact that:
Spot Bitcoin ETFs simplify processes for institutional investors
The SEC approved 11 spot Bitcoin ETFs in January 2024. These funds enable investors to add Bitcoin exposure to their existing brokerage accounts, eliminating the inconvenience and high fees associated with cryptocurrency exchanges.
John Eade, president of Argus Research, summed up the situation as follows:
Not too long ago, the only way to gain exposure to Bitcoin was to invest in it directly. The procedure was laborious and required self-service in an unregulated market. However, investing in Bitcoin has significantly evolved thanks to the January introduction of spot Bitcoin ETFs. This new type of security provides investors with Bitcoin exposure without the need to purchase, store, or manage it.
Crucially, because spot Bitcoin ETFs own Bitcoin instead of future contracts, they closely track Bitcoin's price. For instance, the iShares Bitcoin Trust has returned 110% since its January 2024 launch, while Bitcoin itself has risen by 111%.
Due to this, the new spot Bitcoin ETFs have already attracted substantial demand from both retail and institutional investors. These ETFs have been so successful that several experts have labeled them the most successful ETF launches in history. In particular, the iShares Bitcoin Trust stands out. It amassed $10 billion in assets at a record-breaking speed, according to The Wall Street Journal.
Institutional investors have played a significant role in this trend. The number of institutions holding a spot Bitcoin ETF increased from 965 to 1,100 between the first and second quarters of 2024, such that they are "being adopted by institutions at the fastest rate of any ETF in history," according to Matt Hougan, chief investment officer at Bitwise.
This has significant implications for Bitcoin's future price trajectory. Institutional investors manage $120 trillion in assets, and allocating even a small fraction of this sum to Bitcoin could push its price significantly higher. Even Cathie Wood at Ark Invest believes that institutions will eventually allocate "a little more than 5% of their portfolios to Bitcoin," driving the price of a single Bitcoin up to $3.8 million.
Options trading on the iShares Bitcoin Trust could boost institutional adoption further
In November 2024, the Nasdaq Stock Exchange introduced options trading on the iShares Bitcoin Trust, another significant development that could further stimulate institutional adoption. Options contracts offer the holder the right (but not the obligation) to buy or sell securities at a predetermined date and price.
One potential application of options trading is the hedging of long positions. For instance, institutional money managers with positions in the iShares Bitcoin Trust could safeguard their portfolios against a potential Bitcoin crash by purchasing put options, which give the holder the right to sell a security at a specific price during a predetermined period.
The big picture
Spot Bitcoin ETFs have already enhanced institutional demand for Bitcoin, leading to a 111% surge in its price since the new funds entered the US market in January. Furthermore, demand for spot Bitcoin ETFs could further grow as institutions incorporate options into their trading strategies, potentially pushing Bitcoin's price even higher in the coming years.
Investors looking for a direct and more straightforward way to invest in Bitcoin were eagerly awaiting spot Bitcoin ETFs. These funds, approved by the SEC in January 2024, allow investors to buy shares, gaining exposure to Bitcoin without having to deal with the complexities of cryptocurrency exchanges.
Since their launch, spot Bitcoin ETFs, such as the iShares Bitcoin Trust, have closely tracked Bitcoin's price, demonstrating a tighter correlation compared to the futures-linked ETFs. For instance, the iShares Bitcoin Trust has returned 110%, almost identical to Bitcoin's 111% increase, proving that owning Bitcoin directly through ETFs can significantly simplify the investing process.
