The spot ETF complex flips to net inflows this week as GBTC outflows level off but have yet to wind down.
The kinks in the ETF complex seem to be getting worked out according to one important metric.
Traders are showing a preference for trading spot ETFs over the underlying spot markets compared to the futures-based ETFs and underlying futures market.
Challenger Inflows Overwhelm Grayscale Outflows
The action in the ETF landscape continued again in the third week, bucking the trend of ETF launches settling down after the first few trading days. This week saw a flip in net flows for the total complex, from net outflows to net inflows. The redemptions of the Grayscale Bitcoin Trust (GBTC) have leveled off and are now being more than made up by inflows into the 9 new challenger funds. Net cumulative inflows into the spot ETF complex now stand at $1.5B, ahead of the $1.3B flows into BITO at the same point of its launch, but still below the $2.0B raised at a similar point for GLD.
GBTC Daily Outflows Have Leveled Off, But Have Yet to Cease
The market breathed a sigh of relief at the end of last week as the outflows from GBTC, which many had seen pressuring spot markets, began to slow. And while the data shows that outflows are well down from the daily peak $641M, money continues to flow out of GBTC to the tune of about $200M per day. This daily outflow has leveled off, but it has yet to see a complete wind down. While it helps spot price that inflows into challenger ETFs are now greater than GBTC’s outflows, it looks premature to call a complete cessation to the GBTC outflows. Since the conversion to an ETF, GBTC has seen redemptions for a cumulative total of $5.8B, about 20% of the $28.6B AUM it had at the onset.
BlackRock Surges Ahead of the Pack
Since the beginning of spot ETF trading, two players have been neck and neck in the race to catch Grayscale’s massive AUM lead: BlackRock’s iShares Bitcoin Trust and the Fidelity Wise Origin Fund (Satoshi Nakamoto roughly translates to “Wise Origin”). While BlackRock had consistently held a slight edge over Fidelity, on Thursday things changed when Fidelity’s inflows dropped from its $175M per day average to just $35M, while BlackRock saw another $164M of inflows. It’s too early to consider this slowdown for Fidelity a trend, but it certainly opens some “daylight” between the top two challenger funds. BlackRock’s AUM has now topped $3.0B while Fidelity sits at $2.6B. Ironically, even with the $1.5B of net inflows into the spot ETF complex, total AUM for the 10 funds including GBTC stands at $28.1B, which is below where just GBTC was before start of ETF trading.
ETF Kinks Being Worked Out
The peculiarities of the spot ETFs, notably the cash create/redeem mechanism for Authorized Participants (AP), which require a third-party Liquidity Provider (LP) for the bitcoin leg of trading, had a noticeable impact on the ETFs at the onset of trading. This friction, along with other operational and settlement complexities, caused the ETFs to trade at values that differed greatly from their net asset values (NAV). The ETFs which have only seen inflows, the 9 challenger ETFs (represented below by IBIT and FBTC), traded at significant premiums to NAV, while GBTC, which has seen only outflows, traded at a discount to NAV. However, those differences have narrowed over time, indicating that these initial kinks have been largely worked out.
Early Data Show Signs of Preference to Trade Spot ETFs vs Underlying, Whereas the Case is Reversed for Futures ETFs
Spot ETF volumes have traded a higher share of the underlying spot market compared to futures-based ETFs and the underlying futures market. This is a measure of success of the spot ETFs to us and indicates investor preference to trade the spot ETFs over the underlying spot markets whereas in the case of futures and the futures ETFs, the preference is reversed. Investors seem to prefer the underlying futures markets as opposed to the futures ETF. This data is still early, and the number of exchanges, while encompassing many of the major players (Binance, Bitfinex, Bitstamp, Coinbase, Crypto.com, Gemini, Huobi, itBit, Kraken and OKX), is not completely exhaustive. However, the share of ETF volumes to spot volumes would be even higher when considering just the onshore exchanges accessible to US investors.
Market Update
Bitcoin’s price rallied back this week as fears of over overwhelming GBTC outflows subsided. As our analysis above indicates, GBTC outflows haven’t ceased entirely, but seems to have plateaued to a level so that it is more than offset by flows into the challenger ETFs. Stocks had a mixed week, with the S&P 500 up 0.3% and Nasdaq Composite down 0.9%. Comments from Fed Chair Powell indicated a March rate cut expected by the market was not on the table, sending risk assets tumbling on Wednesday. However, the sell off was short lived as both the S&P 500 and Nasdaq Composite have recovered their FOMC-induced losses and then some. For bonds, while they were up on the week, they are now lower than levels before the FOMC meeting. Investment grade corporate bonds were up 1.7%, high yield bonds were up 0.3%, and long term US Treasuries were flat. Gold rallied 1.7% while oil prices fell 4.6%.
Of additional importance this week was the precipitous fall in the shares of New York Community Bancorp (NYCB), which was negatively impacted by rising loan loss provisions on its office and commercial real estate loan book. It was barely a year ago when the banking industry was gripped by the failures of Silvergate, Signature, Silicon Valley, and First Republic. Today, the issues facing NYCB (credit risk) seem to be very different than the ones confronted by the industry a year ago (interest rate risk), but this is certainly something to keep an eye on. As a reminder, bitcoin performed well against the backdrop of the regional banking crisis a year ago.
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