Dear Founders, Investors, and Friends,
On January 10, 2024, the SEC finally approved ten filings for a spot Bitcoin ETF. It was a decade-long endeavor that started in July 2013 when the Winklevoss twins first applied in July 2013. Back then, Bitcoin traded at $100. Now at over $40,000, this approval marks a critical juncture for Bitcoin, transitioning from a niche investment to a recognized asset in traditional finance.
The Significance of Spot Bitcoin ETFs
These ETFs help change the perception around Bitcoin and, by extension, other digital assets. They also represent a meaningful improvement in the accessibility of Bitcoin.
Now, those seeking exposure to Bitcoin can do so without the concerns of establishing personal infrastructure like a crypto wallet, or facing counterparty risks associated with centralized exchanges. Investors can now simply buy the ETF from their brokerage account which makes buying Bitcoin as easy as buying Apple stocks or gold.
The rigorous SEC approval process adds a layer of legitimacy, heralding Bitcoin as a viable alternative asset class.
As a result, these ETFs will lead to new, continuous capital inflows into Bitcoin and open the gates for billions of dollars sitting in pension and investment funds.
Initial Performance: A Promising Start
The early days of these Bitcoin spot ETFs have shown promising results, especially when we take a look at the two most important indicators: Volumes and flows.
- Volumes: After 14 days of trading, the entire class of spot Bitcoin ETFs has seen over $28 billion in trading volumes. Even after subtracting GBTC (more on that later), we are left with $14 billion. These numbers are not only impressive but also demonstrate a sufficient depth in market liquidity. This is further evidenced by the low discounts/premiums and the close trading around their respective NAVs.
- Flows: In the run-up to the launches, most discussions centered on how much new demand for Bitcoin these ETFs would unlock. Given Bitcoin's price action in the second half of 2023, expectations were running high. Now, after three weeks of trading, more than $1.4 billion has flowed into the funds.
So far, BlackRock and Fidelity have emerged as the clear leaders, with their Assets Under Management (AUM) amounting to $2.8 billion and $2.2 billion, respectively. Ark/21 Shares and Bitwise, while not as large, have also made a strong start in the market.
Overall, the net inflows could have been significantly higher if not for Grayscale, which experienced a $5.5 billion outflow, effectively offsetting much of the inflows into other funds. Since 2013, Grayscale has operated as a closed-ended fund, preventing investors from redeeming BTC in exchange for GBTC shares. Their only option was to sell their GBTC shares on the market.
This situation changed when Grayscale converted their $26 billion trust into an exchange-traded fund. There are two primary reasons why many investors are now moving away from GBTC:
- Higher Fees: GBTC charges fees of around 150 basis points, significantly higher than the average of approximately 30 basis points charged by other ETFs.
- End of Arbitrage Opportunities: In recent months, many traders capitalized on the substantial discount of GBTC compared to its Net Asset Value (NAV). Now, with GBTC trading closer to its NAV, these arbitrage opportunities have diminished, prompting some traders to exit their positions.
As of today, it appears that the initial substantial outflows have subsided. Recently, daily flows have reverted to positive, driven by a decrease in GBTC outflows and sustained demand for other products.
Outlook: What’s next?
In an interesting development, ETFs currently hold about 3.3% of the global Bitcoin supply, with a significant portion of this under GBTC. We anticipate this percentage to increase meaningfully in the coming years.
However, there's a notable critique regarding these ETFs: the potential for a few ETF managers to control a substantial portion of Bitcoin, raising concerns about centralization. While these concerns are not unfounded, they don't overly concern us. The inherent nature of Bitcoin ensures that possession of the asset doesn't equate to control over the network. Moreover, we believe these ETFs will act as catalysts, introducing more individuals to the benefits of blockchain technology and the concept of self-custody.
In terms of other cryptocurrencies, momentum is building for Ethereum, with spot ETF filings already in place. One notable submission is from BlackRock, and given Larry Fink's track record, the prospects for approval this year seem promising.
We also expect the introduction of various Bitcoin-related ETFs, such as covered call ETFs, which will enable market makers and professional investors to implement more sophisticated strategies. Grayscale, for instance, has already filed for such an ETF following the approval of the spot Bitcoin ETF.
As we move forward, the evolution of these developments promises to be intriguing. We're excited to be part of this dynamic journey.
Now, let's move on to other news and our recent investment activities last month.
Investments we made
We’re really excited to start this year with the announcement that we have invested in Zealy.
Zealy is a community-led growth marketing platform where companies execute marketing strategies tailored to their communities. Companies like LVMH, Renault, Alpine, ZkSync, and dYdX are already on board and Zealy’s platform boasts an impressive user base of 1.5 million monthly active users.
You can learn more about them in our latest article: From Customers to Advocates: The Art of Community-Led Growth.
Key Events from January
- Celsius restructuring
In the midst of its restructuring efforts, the bankrupt cryptocurrency lending firm Celsius has initiated the withdrawal of its ETH stake from the network, triggering an unprecedented surge in the validator withdrawal requests, with the queue surpassing 16,000. Presently, the firm's holdings include approximately 540,000 ETH (around $1.2 billion). (Source: The Block)
- New AML Regulation in the EU
Representatives of the European Council and the EU Parliament reached a preliminary agreement on parts of the EU's planned anti-money laundering package. Specifically, the new regulation extends official supervision to so-called crypto service providers (CASPs). These include, but are not limited to, crypto exchanges, custodians and trading platforms. (Source: European Council)
- Solana’s Token-Extension Upgrade
Solana carried out a significant upgrade of its SPL-Token-Standard by integrating 13 novel token extensions, thereby amplifying the tokens' programmability. This technical leap paves the way for developers to develop new products that are especially relevant for B2B applications, spanning from use cases like payment solutions to asset tokenization. (Source: Solana)
- Circle files for IPO
In a confidential move towards an initial public offering in the U.S., stablecoin issuer Circle is laying the groundwork to transition into a publicly-traded company. This follows its earlier assertion of a $9 billion valuation in a 2022 bid to go public via a special-purpose acquisition company (SPAC), a plan that was ultimately abandoned in December 2022. (Source: Reuters)
- Tether Q4 attestation
Tether, in its recent Q4 attestation, reported a substantial profit of $2.85 billion, thereby earning even more than Goldman Sachs ($2.01 billion). The company used $2.2 billion of this to bolster its excess reserves, which have reached a total of $5.4 billion. The remaining $640 million were invested in a variety of strategic initiatives spanning areas such as mining, AI infrastructure, and P2P telecommunications. (Source: Tether)
What we’ve been reading
In its latest annual developer report, Electric Capital delivers an in-depth examination of the evolving landscape of developer activity across all the major crypto ecosystems. In its latest annual developer report, Electric Capital delivers an in-depth examination of the evolving landscape of developer activity across all the major crypto ecosystems.
In his brand new book Chris Dixon analyzes how blockchain networks and Web3 can restore the original promise of the Internet as an open and democratic network.
Exploring topics from information markets to privacy infrastructure, this blog post by the venture capital firm Variant outlines a series of product ideas they hope to see brought to life by startups in 2024.
This post by Coinbase Ventures highlights the status quo of the cross-chain bridge landscape, explains on which criteria these protocols compete and provides an outlook on possible future developments within the vertical.
The venture capital firm Galaxy offers a comprehensive breakdown of how Real-World Assets are being integrated into non-RWA DeFi protocols, examining the risks involved and the likely impact on the DeFi landscape.
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