As with last month’s newsletter, the ETF launch completely dominated January’s digital asset news cycle.
The coverage of the launch has been extensive in more mainstream financial news, so we will look at how the predicted potential implications from last month are shaping up. As of 31 Jan, there was a net inflow of $1.46 billion across all eleven spot ETFs. The three biggest flows comprised a $5.6 billion outflow from Grayscale (GBTC) and inflows of $2.7 billion and $2.4 billion into Blackrock’s and Fidelity’s ETFs, respectively. Grayscale was the legacy ETT (exchange traded trust) with $20 billion AUM, which converted to an ETF and offered redemptions for the first time. Its outflow has been attributed to its higher fees than its peers and investors, such as the FTX estate (which sold $1 billion), seeking liquidity at the first opportunity.
Now, reviewing the predicated implications of the ETF:
1. Speculators betting on new ETF products
Ethereum (ETH) is the next digital asset in line to have a spot ETF, with May 23 rumoured as the likely approval or rejection date. Below is the chart of ETH/BTC from 1 January to 8 February 2024. Straight after the launch of the Bitcoin ETF, Ethereum appreciated massively (relatively to BTC) as speculators rotated from Bitcoin to Ethereum; however, since then, Ethereum has slowly weakened. and returned to just above the beginning of the year price. So far, the early speculators were wrong to assume more assets would flow into Ethereum. We will keep monitoring this as we approach the potential approval date.
2. Renewed attention
The chart below is the 24-hour trade volume across all digital assets from 1 August 2023 to 8 February 2024. Although it's cyclical (the dips are weekends, which are typically low volume), there has been a clear increase in trading volume across all assets since last year, with the average volume increasing from c.$25 billion to c.$75 billion for January 2024. Despite the increase, this is lower than the c.$150 billion average trade volume seen in January 2021. The market has picked up, but history shows that activity can still increase much further.
3. Rising tide
If traders were allocating further out onto the risk curve, then one would expect to see the market capitalisation of all tokens, excluding Bitcoin, to increase. Below is a graph of the market capitalisation excluding Bitcoin from 1 January 2024. It hasn’t yet increased as expected. Although the market expected more growth prior to the spot Bitcoin ETF, given the disappointing price action of Bitcoin over the month, one shouldn’t be surprised by the lack of growth of the riskier digital assets.
Overall, the impact of the ETFs has been felt in the trading volume but not in the price action of digital assets. Bitcoin’s weak price performance for the month (up only 0.7%) has been a major factor in the delay in the ‘rising tide’ prediction. Bitcoin’s poor price action has been attributed to GBTC’s strong outflow, which overwhelmed the other inflows for much of the month. However, this is now beginning to slow as 25% of GBTC has already been redeemed, so the true impact of inflows can only be assessed once this subsides in February.
Performance
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