Coin Metrics: Market Structure for Spot Bitcoin ETFs

Since the creation of the Bitcoin genesis block in 2009, 15 years have passed, marking the birth of a revolutionary currency system. The introduction of Bitcoin laid the foundation for the emergence of a $1.6 trillion digital asset economy, becoming the first gateway for many to enter the world of blockchain and digital assets. Now, 15 years later, the industry is eagerly awaiting a crucial moment in Bitcoin’s history: the launch of a spot ETF. As we approach this milestone, we are entering a new phase for the largest cryptocurrency asset and network. In this issue of Coin Metrics, we delve into the structure of the digital asset market and explore the dynamics that are leading us into this exciting chapter.

The road to ETFs

The process of launching a Bitcoin spot exchange-traded fund (ETF) has been long and challenging, but it is unprecedented. 2023 marks the start of the “Cointucky Derby,” a period characterized by 11 spot ETF applications from leading asset managers and financial institutions including BlackRock, Fidelity, VanEck, and others. We are seeing complex conversations between issuers and the Securities and Exchange Commission (SEC) that delve into the operational and structural nuances of proposed ETFs. These discussions revealed key aspects such as the selection of an ETF custodian, the decision to adopt a cash creation model for the redemption mechanism, the fee structure, authorized participants to facilitate the cash creation and redemption process, and consideration of initial capital injections to facilitate inflows.

As the Securities and Exchange Commission’s (SEC) Jan. 10 deadline looms, final revisions to S-1 filings highlight a hotly contested fee structure battle: ARK has reduced its management fee from 0.8% to 0.25%, competing with Fidelity’s 0.39% and BlackRock’s 0.2%, while the lowest long-term fee comes from Bitwise at 0.24%. It is evident that the issuer prioritizes market share over short-term profits, indicating a potential surge in demand surrounding fund inflows. The industry’s anticipation for a physically-backed Bitcoin ETF is evident, with participants eagerly following every update, and issuers strategically positioning themselves to capture a significant share of Asset Under Management.

Source：Coin Metrics Reference Rates & Market Data Feed

This sentiment is reflected in the price of Bitcoin, which surged 156% in 2023. Trustworthy spot trading volumes rebounded in the first quarter but experienced a period of stagnation after the Silicon Valley Bank crisis in March. However, with the expectation of ETF support, trading volumes have started to rise again, currently averaging around $10 billion, although lower than the volumes before the FTX crash. The liquidity of Bitcoin will also be a key factor in enabling efficient trading of this asset, especially with the imminent launch of ETFs.

Spot and futures exchange updates

The share of Bitcoin spot trading volume across exchanges reveals an increasingly fragmented exchange picture. This is reflected in Binance’s dominance falling from over 75% in the first quarter to below 30% in January 2024. Other exchanges such as Coinbase and Bullish have also benefited, resulting in a more even distribution of trading volume on centralized exchanges.

Source: Coin Metrics Market Data

Several unanswered questions remain around the role of exchanges, especially given the cost-benefit structure that comes with the launch of spot ETFs. However, investors will now have another way to gain exposure to Bitcoin, which can help meet the risk tolerance of different groups of people. While some may seek a safe and affordable way to invest in Bitcoin, which makes the introduction of ETFs a huge benefit, others may prefer the ability to self-custody Bitcoin, and exchanges can serve as an important portal.

Source: Coin Metrics Market Data & Google Finance

The role of onshore exchanges will also be closely watched. However, with Coinbase taking on the role of custodian for the majority of applicants, the largest U.S. exchange may not only benefit from additional revenue streams from its diversified business model, but trading volumes may increase as more players join the fray. Increase. Following the recent rebound in digital asset markets, Coinbase’s average spot trading volume has climbed to over $2.5 billion and is likely to continue to grow as market activity continues.

Source: Coin Metrics Market Data

The derivatives landscape played a significant role in shaping the market structural dynamics that preceded ETFs. With CME futures open interest soaring to $5.4 billion, we’re seeing the digital asset market shift from being primarily retail-driven to a more active institutional playing field. This trend is likely to expand as a host of financial advisors, registered investment advisers (RIAs) and family offices with trillions of dollars in assets under management increasingly incorporate Bitcoin into their traditional investment portfolios.

While the week surrounding ETFs is likely to intensify short-term volatility, as witnessed by the significant reduction in open contracts due to the unusual reports that the U.S. Securities and Exchange Commission (SEC) may reject all ETF applications last week, the long-term outlook paints a different picture.

Volatility and Return Characteristics

The historical volatility of Bitcoin and other crypto-assets has often been the focus of criticism that views them as high-risk investments. While this is especially true in the early stages, over the longer term Bitcoin’s average realized volatility has trended downwards, suggesting it has evolved into a more mature asset. The chart below shows a similar trend for ETH and SOL, which entered the market at a later stage and exhibited greater volatility relative to BTC. In the world of crypto assets, it is clear that these assets exhibit varying degrees of volatility and maturity, impacting their overall market structure and role in investment portfolios.

Source: Coin Metrics Market Data

Over a 5-year period, comparing the risk and returns of digital assets to other assets in the investable universe can shed light on their role in a portfolio. Traditional assets like gold have the lowest risk and reward potential, giving them a safe-haven status that puts gold in a different universe than large-cap stocks like Apple, Microsoft and Amazon. These large-cap stocks all share similar characteristics. On the other hand, the digital assets shown in the chart show distinct characteristics. Bitcoin, the pioneering and largest digital asset, is less volatile than ETH and SOL but offers greater return potential than tech stocks, suggesting it is evolving into a mature yet growth-oriented asset. Additionally, its largely uncorrelated nature with traditional assets further highlights its value in a diversified portfolio and enhances its appeal to investors seeking uncorrelated returns.

Source: Coin Metrics Reference Rates & Google Finance

In summary, these characteristics solidify Bitcoin’s position as the premier, largest, and most liquid digital asset for potentially obtaining a spot ETF tool - demonstrating its market maturity. As Ethereum (ETH) exhibits similar features, it will become the next object of emulation.

Conclusion

Bitcoin’s journey from a novel digital currency to a mature, globally recognized network and asset class is almost upon us. The emergence of spot ETFs is an important step in this direction, marking a turning point and ending a decade-long exploration. It is also a crucial moment in the evolution of the market. As we enter a new stage of the largest crypto asset, Bitcoin will not only solidify its importance in the digital asset ecosystem but also on the global financial stage.

Disclaimer：

1. This article is reprinted from [techflowpost]. All copyrights belong to the original author [Will 阿望；Diane Cheung]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
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