Graphing Digital Assets

Month in Review — January 2024

The Rise of BTC?

The SEC approved 11 applications for spot bitcoin exchange traded funds (ETFs) on January 10, after a decade of rejecting such applications. Ten of these began trading on the following day and, by month-end, saw impressive net flows of $1.46 billion ($7.10 billion excluding GBTC outflows).

Drawing parallels between bitcoin and gold, we previously commented on potential post-launch scenarios for U.S. spot bitcoin ETFs by looking at the net flows following the launch of GLD, the first U.S. spot gold ETF, and its effect on the price of gold. Taking a deeper dive, we looked at GLD's first year of trading (top graph) and found that, despite net flows of $1.13 billion within its first three days, the price of the underlying asset of gold wavered during the ETF's initial months. 

The price of gold significantly increased in the years following the launch of the ETF (bottom graph). However, the rise was not immediate, reflective of the delay of substantial institutional capital entering the space, as well as the time investors and advisors required to become educated on the mechanics of gold ETFs before eventually investing in the product. 

Institutional and other sources of capital may be similarly delayed in entering U.S. spot bitcoin ETFs. In a recent feature with AIMA, Robert Mitchnick, Head of Digital Assets at BlackRock, noted that retail investors have been driving most of the investment volumes thus far. He expects RIAs to come next once the product is approved across platforms, followed by wirehouses and private banks, with institutions last. 

Accessibility to the vehicles also affected gold’s price. In the years following the launch of GLD in the U.S., gold ETFs were launched in other countries, attracting significant inflows which further contributed to gold’s price increase. Similarly, on the heels of the approval of spot bitcoin ETFs in the U.S., Hong Kong Securities and Futures Commission received its first application for a spot bitcoin ETF, anticipating a launch this quarter. 

As the ETFs make bitcoin more accessible to global investors, we can expect ongoing growth. As with GLD two decades ago, the approval of spot bitcoin ETFs in the U.S. marks more than merely a "sell the news" event and will drive widespread adoption of bitcoin. 

Delving Into GBTC Outflows

In January, Grayscale's GBTC saw net flows of -$5.6 billion (top graph). While some perceived these outflows as a negative development for the launch of U.S. spot bitcoin ETFs, this was anticipated by investors following GBTC. 

The Grayscale Bitcoin Trust was launched in 2013 exclusively for accredited investors. In 2015, Grayscale made it available to retail investors through OTC trading. In 2016, Grayscale submitted its first application for a spot bitcoin ETF, initiating its battle with the SEC. These filings made it clear to Grayscale investors that the company’s intentions were to make the trust more widely available to retail investors on an exchange.

Now that GBTC was successfully converted to an ETF, there are several reasons why it experienced notable outflows:

GBTC's Historical Discount to Its NAV
GBTC traded at a discount to its NAV from February 2021 through its ETF conversion in January 2024, reaching as wide as 48.9% in December 2022. Anticipating the discount to narrow to zero once Grayscale's application was approved, arbitrage traders strategically bought shares. When the discount reached zero shortly after GBTC’s conversion, concurrently with the rising price of BTC, many of these traders unloaded shares to generate profits on their holdings. 

GBTC's High Fees
GBTC charges the highest management fees compared to the other U.S. spot bitcoin ETFs. Some investors have sold their shares to re-invest these funds into other spot bitcoin ETFs. JPMorgan analysts noted that an estimated $1.3 billion had shifted from GBTC to other spot bitcoin ETFs.

FTX's Bankruptcy Estate Sold a Large Position
FTX's bankruptcy estate allegedly offloaded 22 million shares of GBTC, valued at approximately $1 billion, as part of its plan to recoup investor assets.

Looking at GBTC flows (bottom graph), daily outflows have decreased since dropping to -$641 million on January 19th (trading day 7). JPMorgan analysts concluded that the majority of GBTC profit-taking has already happened and is behind us. As the GBTC discount trade unwinds and FTX liquidation materializes, we are no longer in overbought territory, and the next catalyst before the halving (anticipated in mid-April) would be the SEC acknowledging a proposed rule change enabling Nasdaq to list and trade options on BlackRock's bitcoin ETF by March.

Turning To Stablecoins

While U.S. spot bitcoin ETFs made headlines during the month, stablecoins saw noteworthy activity. Total stablecoin market capitalization increased by $4.85 billion (3%) in January, the fourth straight monthly increase following an 18-month decline spurred by the Terra-LUNA collapse in May 2022 (top graph). 

Stablecoins combine the benefits of blockchain with the stability of other assets. They are key in the digital asset ecosystem, enhancing market liquidity, access, and digital payments and are therefore taking center stage in the 2024 crypto regulatory and policy landscape. 

In the EU, the Markets in Crypto Assets (MiCA) regulation, proposed in September 2020, will take effect in December 2024, with regulations for stablecoin issuers taking effect six months earlier in July 2024. Similarly, the UK and Hong Kong both plan on pushing through significant legislative updates this year that include an initial phase focused on stablecoins. Regulators in the U.S. are actively working towards passing a stablecoin bill and U.S. Senator Cynthia Lummis commented that she is "optimistic that we will see stablecoin legislation this year and possibly even in the first half of the calendar year." 

Some digital asset experts are concerned about what this might mean for dominant stablecoins. USDT (Tether), the largest stablecoin and third largest digital asset after BTC and ETH, reached 71% in market share in January (top graph). Tether reported record-breaking Q4 2023 earnings of $2.85 billion, surpassing those of Goldman Sachs. 

Despite current signs of growth, some risk persists. USDT still faces criticism due to its lack of regulatory compliance and transparency. Other risks come when a stablecoin depegs from the asset that backs it, as TUSD (TrueUSD) struggled to maintain its peg in January. The stablecoin dropped as low as near $0.965 on January 26 (bottom graph). 

The transition towards proper regulation of stablecoins globally must be strategically executed to mitigate existing risks without incurring damage to the assets. Regulation of stablecoins will serve as a catalyst for further regulation of digital assets, and we anticipate significant regulatory strides to be made in 2024.

“Other” includes all other stablecoins in the top 150 stablecoins.