Bitcoin ETFs: Threat or Opportunity for Crypto Equities?

• Bitcoin ETFs: A Significant Milestone
• The Grayscale Effect
• Impact on the Market
• Investments in Blockchain Companies
• The Future of Crypto-Related Companies
• Business Performance Post-ETF Launch
• The Case of Coinbase
• Challenges for Bitcoin Miners
• Conclusion

Bitcoin ETFs: A Significant Milestone

The much-anticipated Bitcoin$42,260 -0.64% ETFs have finally been launched. By most standards, the launch has been a resounding success. In only six days, the 11 new ETFs amassed nearly $4 billion in assets and collectively traded $10 billion in volume in the first three days.

The Grayscale Effect

However, this success was slightly offset by outflows from Grayscale's Bitcoin ETF (GBTC), which experienced a drop of about $2.8 billion. Prior to receiving ETF approval, GBTC had been a closed-end fund, trading at a substantial discount to its fair value, with no redemption option. Therefore, it is likely that users who felt trapped in the product are now using the ETF as a means of exit liquidity.

Impact on the Market

Despite initial hype, the launch led to a sell-the-news event, resulting in a steady decrease in the value of bitcoin and related industry businesses in the week following the launch. However, this downturn is expected to be a short-term phenomenon, and market stakeholders are keeping a close watch on the GBTC outflows for indications of the selling trend tapering off. As the selling decreases, it is anticipated that mainstream investors who have been avoiding the recent volatility will begin to make significant investments in the market.

Investments in Blockchain Companies

Uncertainty still prevails over whether the launch will also trigger a revival in investments in publicly traded companies with exposure to crypto-assets. Back in December, investors were enthusiastically buying shares in Bitcoin miners such as Riot Blockchain, and crypto stalwarts like Coinbase. The Harvest blockchain index saw a 40% rise in the same month, outperforming Bitcoin and Ethereum$2,315 -2.42%. Yet, since the ETF launch, these stocks have seen a significant drop, clearly underperforming.

The Future of Crypto-Related Companies

Prior to the availability of ETFs, these companies were the only proxies in public markets that provided exposure to the growth of the underlying asset class. Performance of these companies was tied to the price of Bitcoin. With ETFs now available to all, it is expected that investors will begin to evaluate these businesses based on their individual merits rather than simply their association with Bitcoin.

Business Performance Post-ETF Launch

While various businesses have faced a similar downturn, the quality of these companies is widely diverse, and this will become more apparent as the dust settles after the post-ETF sell-off. Coinbase, for instance, is expected to see a reduction in high-margin fee revenue from retail trading due to the launch of the ETF. The concern is that the lower-margin revenue from custody and institutional trading for the ETFs will not be sufficient to offset this loss.

The Case of Coinbase

However, if the asset class continues to increase, retail could potentially bounce back significantly. Coinbase, with its 110 million users (mostly in the U.S.) could still dominate the retail end of the market as it is unlikely that ETFs will be available for most crypto-assets.

Challenges for Bitcoin Miners

Bitcoin miners, on the other hand, are grappling with formidable challenges. With the Bitcoin hashrate near an all-time high, miners need to muster more computational power to earn new rewards. The impending Bitcoin halving in April will further reduce the block reward. Additionally, the growing disagreements over Bitcoin Ordinals, referred to as NFTs for Bitcoin, mean that miners cannot rely on added fee revenue from these novel network implementations.

Conclusion

Some miners may still thrive in this environment, but the era of all boats rising with the crypto tide is definitively over. This may be a hard reality for those who bought these stocks hoping for a big gain from the ETF launch. However, in the larger scheme of things, this is a positive development for the industry. It signifies that the crypto industry is maturing, with investors now having more options and companies having more motivation to operate as profitable, well-run enterprises.

Edited by Jonathan Stoker