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Parallels in the launch of Gold ETFs ('04) & BTC ETFs ('24)

A letter to Bitcoin ETFs

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Overview

tl;dr

  1. There are several parallels between what's currently happening with Bitcoin ETFs and what happened with the launch of Gold ETFs 20 years ago.

  2. Who will win the market share for Bitcoin ETFs? It all comes down to first mover advantage, fees, liquidity, & good narrative building. My prediction is that Ark and BlackRock take the lead.

  3. Custody of hard assets is a barrier for institutional investors. SEC approved ETFs open the floodgates.

Sections Below

  1. Essential Context

  2. Lead up to the Gold ETFs

  3. First Mover Advantage

  4. Opening the Floodgates

Essential Context

In the last few years, I've known that Bitcoin ETFs were essential to the growth of crypto. They'll bring in large amounts of institutional capital to the ecosystem and decrease regulation concerns for traditional investors.

However, my knowledge of the ETFs were limited to headlines and viral tweets. I didn't understand the implications and nuances.

But in the last couple of weeks, the endless discussion regarding the upcoming Jan. 10th deadline for the Bitcoin spot ETFs lead me no choice but to dive in.

If you're not sure what I'm talking about, the SEC has to decide whether it will approve Bitcoin spot ETFs after rejecting countless proposals in the last decade.

Before we dive in, I'd like to provide introductory context so you can better understand what's happening:

  • Index mutual funds = ETFs. ETFs are passive mutual funds that track an index (i.e. S&P 500). Mutual funds are actively managed, marketed, and sold. While Index funds are merit based and primarily picked by investors based on performance and liquidity.

  • The SEC decides which ETFs are approved. Meaning, the 5 people on the committee get the final vote on the ETF market.

  • The first U.S. ETF was launched in 1993. It's known as SPDR S&P 500 ETF aka SPY. This new investment vehicle allowed investors to trade the entire S&P 500 in a single transaction.

  • You may have heard about BTC ETFs already on the market. Those are futures ETFs. These are based on futures contracts of Bitcoin. The upcoming ETFs everyone is excited about are spot ETFs. The underlying collateral is Bitcoin itself so it is ~1:1 with Bitcoin price movement.

  • The first spot BTC ETF application was submitted by the Winklevoss twins back in July 2013. Since then, countless applications have been rejected. The first futures BTC ETF was approved in October 2021: ProShares (BITO). Unfortunately, they launched in a peak bull market so the price has been in the red for most of its existence.

  • The top 3 asset managers that control the ETF market are StateStreet, BlackRock, and Vanguard. The largest shareholder of 88% of the S&P 500 are one of them.

  • There are 21 BTC spot ETFs on the market in 8 other countries such as Canada, Germany, and Switzerland. So why doesn't everyone just use those? Because it's safer for American institutional investors to use SEC approved products in terms of regulation. And the liquidity in American markets is incomparable.

CoinGecko

Okay, now let's talk about what's happening in the US today.

Chances are looking as optimistic as ever - most experts are confident that we'll be hearing positive news. But what's different this time around?

Primarily, two things.

  1. The SEC has been engaging in active communication instead of the usual radio silence each cycle.

  2. A top 3 asset manager, BlackRock, has entered the group chat. In the last 30 years, the SEC has approved 427 ETF applications by BlackRock and rejected...only 1.

Here are all the players waiting in line right now. Cathie Wood and ARK are leading the pack - they'll be the first to hear back from the SEC.

Okay, so let's say the optimists are right and the first ever spot BTC ETF does get approved. What can we expect?

Well, let's take a look at the history of Gold ETFs and see how that can help.

Lead up to the Gold ETFs

Today, it's obvious that large funds have gold exposure in their portfolio. Gold is seen as a safe bet. But if we go back just 30 years, it was a totally different sentiment:

In contrast, physical gold had a bad name – it had previously been confiscated by governments, attracted sales tax or was a prohibited investment for most fund managers. Also, the gold price was being weakened by central bank selling and producer hedging. There was little investor interest in physical gold.

Around 2000, the narrative around gold started to improve. Central banks stopped selling the asset and there were changes in gold tax laws. Investors were excited to find ways to invest in gold as the price started creeping higher.

However, at the time, in order to be invested in gold, you either had to buy bars / jewelry and safely store them in vaults. Or you had to be a sophisticated investor and trade gold futures. A sliver of them got indirect exposure by betting on gold miners.

STOCK EXCHANGES WERE SET UP TO TRADE EQUITIES AND BONDS, AND GOLD WAS NEITHER, SO WE HAD TO COME UP WITH AN IDEA THAT ALLOWED GOLD TO FIT WITHIN THE EXISTING LISTING RULES. - Graham Tuckwell (pioneer of Gold ETF)

But then, in March 2003, Australia launched the first gold spot etf which made it possible to own gold 1:1 without holding the metal itself. The UK quickly followed and by December 2003, you could do the same on the London Stock Exchange.

After seeing the success of their British counterparts, American investors ran to D.C. trying to be the first ones to launch the gold spot etf in the U.S.

So far, the events sound similar to the Bitcoin market right?

Institutional investors don't want to deal with the hassle of crypto custody and hardware wallets. A couple of other countries already have btc spot etfs. And if large American funds do want btc exposure, they'll do so through buying shares of futures ETFs, Microstrategy, Coinbase, or large Bitcoin mining companies.

CNN Money

First Mover Advantage

Finally, in November 2004, America approved State Street's SPDR ETF application and the race had begun. The first gold spot ETF was live.

In the first three trading days, SPDR had gathered $1 billion in assets!

The next one to launch was BlackRock's iShares IAU in January 2005.

This two month difference handicapped BlackRock since day 1. Why? Because institutional investors love liquidity and State Street had provided more than enough. It was safer for them to stick with what was working.

BlackRock ended up providing lower fees 0.25% vs StateStreet's 0.4% which helped them win back some of the market. But since the beginning, they haven't been able to take over the asset value of SPDR.

And the rest don't even come close.

The ETF market is ruthless. Only the first and the strongest will win. There's room for 2 maybe 3 winners.

Gold ETFs Today

And the same will apply for the Bitcoin ETF.

I believe Ark and BlackRock will be the two winners.

Ark because their application will be the first to get approved. And the firm has $100m ready to bootstrap liquidity in their own ETF so early investors aren't scared. Also, Cathie Wood has publicly been praising Bitcoin for a while now and investors know Ark to be deep in the weeds of tech investments such as Bitcoin, Tesla, etc.

And BlackRock because they are second in line and have the biggest brand name by far out of all the other competitors. It's a no brainer for large investors to trust what BlackRock is doing - they have $10 trillion assets under management.

However, it's worth noting that investors don't have to rush as well. They get the luxury of picking which ETF they want to go with whenever they want. So things may turn out differently. And it's unlikely that retail will come rushing in at least given current crypto market conditions.

Opening the Floodgates

Gold ETFs increased investor interest in the metal tremendously.

In the subsequent 8 years gold’s price quadrupled+ from $400 to $1,800 adding ~$8 Trillion in market cap going from ~$2 Trillion to ~$10 Trillion.

Gabor Gurbacs

There's no doubt that the same will happen for Bitcoin. It may be on a smaller scale, but the floodgates will open regardless.

Less regulation stigma around crypto and access to Bitcoin exposure for the whales will be crucial to the growth of the crypto ecosystem especially as this next halving rolls around.

In the short term, most of the Bitcoin ETF hype is probably priced in. But in the long run, January 10th might go down as one of the most important days in crypto.

I'm excited to how mainstream investors start thinking about Bitcoin if the SEC approval goes through.

I'll probably write a follow up post in a few months to reflect on what I wrote in this letter.

That's all for today - if you enjoyed this post, please subscribe and share!

- YB

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