Bitcoin ETFs take $50 billion baby steps toward big time

Last October, Matthew Hougan told an industry panel that he expected spot bitcoin exchange-traded funds (ETFs) to attract $55 billion of assets in their first five years.

As of late August this year, about eight months after their debut, the 10 new funds approved by US regulators collectively boasted more than $52 billion, according to data from TrackInsight.

“Clearly, I wasn’t being bullish enough,” Hougan, CEO of crypto firm Bitwise Investments, reflected wryly. “This is going to be an area that we measure in hundreds of billions of dollars.”

That remains to be seen. These products track the price of bitcoin, which has whipsawed repeatedly since its birth 16 years ago kicked off the crypto era. Some market players say bitcoin is inherently speculative, more akin to art or fine wine than gold and commodities, driving volatility and risk.

The path to wide acceptance as a mainstream asset may be slow and twisting. One milestone came in August. That’s when Morgan Stanley (MS.N) decided to allow its 15,000-strong network of financial advisers to actively recommend at least two of the new bitcoin ETFs – the iShares Bitcoin Trust (IBIT.O) and the Fidelity Wise Origin Bitcoin Fund (FBTC.Z) – to clients.

“It is now unacceptable not to do due diligence and the work of understanding these products,” said John Hoffman, head of distribution and partnerships at Grayscale Funds, whose firm’s Grayscale Bitcoin Trust (GBTC.P) wasn’t part of the first wave of products added to Morgan Stanley’s platform.

“The risk has kind of flipped for the wealth management channel to the risk of not moving forward.”

Retail investors have dominated flows into the new ETFs. Only a handful of large institutions, like the state of Wisconsin’s investment board and a number of hedge funds, have publicly disclosed positions in regulatory filings.

“The first 50 billion has come from people who understand bitcoin well,” said Sui Chung, CEO of CF Benchmarks, which has developed the bitcoin index underpinning several of the ETFs.

“Now we’re seeing the next stage: people on the risk committee at Morgan Stanley being dragged, kicking and screaming, to this decision when advisers can’t tell their clients ‘no’ any longer.”

But the fact that first movers like Morgan Stanley are getting so much attention points to how much ground crypto ETFs must cover to become part of the investment mainstream.

“They’re being hailed as cutting edge for doing this, and that reminds us that by being early movers they’re also being seen as being risky,” said Andrew Lom, an attorney at Norton Rose Fulbright whose practice includes fintech.

For Lom, the real test of whether the new ETFs will reach mainstream status will be not just their size but their liquidity. “We may already be there,” he said. “At some point, people start to think and talk about it as part of the normal investable universe, and then you’ll see the modern portfolio theory folks start considering what allocation to give it.”

That’s when the next test will arrive: whether model portfolios, one-stop investment products that financial advisers increasingly rely on when making asset allocation decisions, will add them to the mix. Even some of bitcoin’s staunchest adherents admit that lies at least six to 12 months ahead.

WHAT ABOUT ETHER ETFs?

If bitcoin ETFs are at least on their way to emerging as part of the investment mainstream, the future is murkier for spot ethereum ETFs.

A month after their July 23 launch, assets in the ether group totaled nearly $7 billion, according to TrackInsight. BlackRock’s iShares Ethereum Trust (ETHA.O) has hit $900 million in assets, outstripping ETF launches as a whole, yet suffering by comparison to BlackRock’s bitcoin product which reached $1 billion in its first four days of trading.

“A lot of people were excited until the launch, and then it became a kind of ‘sell the news’ event,” said Adrian Fritz, head of research at 21Shares, one of the firms to roll out a spot ether ETF in late July. “With more education and time, you’ll see more excitement around ether as well.”

Others remain more cautious, noting that ether isn’t just a smaller cryptocurrency but a very different one.

“If bitcoin is digital gold, then ether is digital oil,” said Chung of CF Benchmarks. “The reason ethereum might increase in value is that people might need it to move assets around the digital network, just as people use oil to make the real world work.”

That hybrid nature also requires both regulators and investors to undertake more research and due diligence, he and others say.

“The sales pitch will be longer and more complicated,” Chung said.