The first bitcoin spot ETF was launched at the end of September last year by Jacobi Asset Management on the European Euronext exchange in Amsterdam. Since then, Europe has become the world leader in this type of investment fund, with as many as 83 already established, with Switzerland and the island of Jersey (a UK subsidiary territory) being the most common venues ex aequo, where 30 funds each have been established. Since then, the bitcoin exchange rate has risen by 72% and these instruments already have more than €4.4 billion under management. However, let us consider what long-term impact the existence of ETFs on cryptocurrencies might have.
Table of contents:
- The impact of ETFs on bitcoin and cryptocurrency exchanges so far
- How will bitcoin ETFs affect the financial world?
- What does the future hold for bitcoin and other cryptocurrencies?
The impact of ETFs on bitcoin and cryptocurrency exchanges so far
After bitcoin rose 72%, the downward trend in stablecoin volumes in the cryptocurrency market reversed for the first time in about 1.5 years since the first day of trading of the European ETF. The amount of stablecoin, or in other words the amount of money in the cryptocurrency market, has since increased by 7.9%.
Source: Btctools
This seems to have been the main factor that translated into a 305% increase in trading volume on cryptocurrency exchanges. Nevertheless, we are still 71.8% below the volume from the 2021 bull market here.
Source: THE BLOCK
However, the US, as the largest financial market, has still not approved the introduction of bitcoin ETFs. This is a particularly important market, where the most popular products on the OTC interdealer market from Grayscale, despite not effectively mirroring cryptocurrency quotes (as the company mentions in the release) and having relatively high management costs (at 2%), generated as much as 67.8% of all cryptocurrency trading in December, according to CCData data.
Source: CCData
According to an analysis by CCData, investment assets (AUM) in the United States grew by 13.49% in December, reaching $36.88 billion. As a result of this growth, this area continues to dominate the market in terms of AUM related to digital assets, holding a share of 75.2%. Canada came in second, reaching AUM of $3.82 billion and gaining a market share of 7.50%. Switzerland, through the introduction of 30 ETFs, increased its AUM by 24.07%, reaching USD 2.24 billion, while Germany saw an increase of 23.36%, reaching AUM of USD 1.45 billion, representing a market share of 2.96%. This confirms the potential for the introduction of ETFs in the US market.
How will bitcoin ETFs affect the financial world?
The whole bitcoin ETF story began at the end of August last year, when US digital asset manager Grayscale Investments won a lawsuit against the SEC after the regulator rejected a request to convert the Grayscale Bitcoin Trust into an ETF. This happened despite the SEC's previous approval of an ETF for bitcoin futures. The court found that the SEC had not adequately explained why it had approved the listing of the bitcoin futures ETF, but rejected Grayscale's proposed conversion. The SEC must now review Grayscale's application again, along with the other numerous applications for a spot bitcoin ETF currently awaiting approval.
This seems particularly important as ETC Group said last November that institutional investors were becoming increasingly interested in its physically-backed cryptocurrency ETF product. Bradley Duke, founder and chief strategist at ETC Group, highlighted that a significant surprise was the lack of institutional investor presence in Europe. In his view, the approval of a spot bitcoin ETF in the US, particularly by firms such as BlackRock, signals the market's readiness for institutional participation.
The introduction of bitcoin ETFs seems to have significantly democratised access to this market, going beyond traditional cryptocurrency exchanges and wallets. Currently, however, their size is still small compared to the overall financial and cryptocurrency market. For example, the global market capitalisation of the cryptocurrency market is US$1.78 trillion, meaning that existing investment funds in this sector account for only 2.9% of the total value of cryptocurrencies. Crypto markets are relatively small compared to other financial sectors. For example, according to data from Statista, the equity market capitalisation reaches around US$112 trillion, which translates into a share of all cryptocurrencies at 1.59%. For the current value of digital assets under management, this share is almost zero. Therefore, it is unlikely that cryptocurrencies will dominate global financial markets in the near future.
Source: Conotoxia MT5, BTCUSD, Daily
What does the future hold for bitcoin and other cryptocurrencies?
Although the European Economic Area appears to be more open to institutional investment in cryptocurrencies through the introduction of bitcoin ETFs, the introduction of such funds in Europe does not yet appear to be generating significant inflows from institutions. Currently, market expectations are mainly focused on the approval of such instruments in the US, which could potentially influence the long-term development of the cryptocurrency market. However, it is currently difficult to accurately gauge the scale of capital ready to invest in this market, where financial products account for only 2.9% of capitalisation.
Nonetheless, a rapid increase in the inflow of new funds from institutions and investors is noted, which may suggest the start of a new bull market. Moreover, given that bitcoin still accounts for as much as 53.7% of this market's capitalisation, the success of this cryptocurrency could have a significant impact on the rest of digital currencies.
Grzegorz Dróżdż, CAI MPW, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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