Bitcoin ETFs Take Baby Steps to $50 Billion

By Suzanne McGee

(Reuters) – Last October, Matthew Hougan told an industry panel that he expected bitcoin exchange-traded funds (ETFs) to attract $55 billion in assets in the first five years.

At the end of August this year, about eight months after their debut, the 10 new funds approved by US regulators collectively boasted more than $52 billion, according to data from TrackInsight.

“Clearly, I wasn’t optimistic enough,” reflected Hougan, CEO of crypto company Bitwise Investments, wryly. “This is going to be an area that we measure in the hundreds of billions of dollars.”

That remains to be seen. These products track the price of bitcoin, which has risen repeatedly since its birth 16 years ago, ushering in the crypto era. Some market players say bitcoin is inherently speculative, more akin to fine art or wine than gold and commodities, which creates volatility and risk.

The path to broad acceptance as a primary asset can be slow and tortuous. A milestone came in August. That’s when Morgan Stanley decided to allow its network of 15,000 financial advisors to actively recommend at least two of the new bitcoin ETFs — iShares Bitcoin Trust and Fidelity Wise Origin Bitcoin Fund — to clients.

“Now it’s unacceptable not to do the due diligence and the work to understand these products,” said John Hoffman, head of distribution and partnerships at Grayscale Funds, whose firm Grayscale Bitcoin Trust was not part of the first wave of products added to Morgan. Stanley’s platform.

“The risk has kind of reversed for the wealth management channel to the risk of not going forward.”

Retail investors dominated flows into new ETFs. Only a few large institutions, such as the Wisconsin state investment board and a number of hedge funds, have publicly disclosed positions in regulatory filings.

“The first 50 billion came from people who understand bitcoin well,” said Sui Chung, CEO of CF Benchmarks, which developed the bitcoin index that underlies several ETFs.

“Now we’re seeing the next stage: The risk committee people at Morgan Stanley are being dragged, kicking and screaming, to this decision when advisers can no longer say no to clients.”

But the fact that first-timers like Morgan Stanley are getting so much attention indicates how much crypto-terrain ETFs have to cover to become part of the investment mainstream.

“They’re being hailed as cutting-edge to do this, and that reminds us that while they’re welcoming, they’re also seen as risky,” said Andrew Lom, a lawyer at Norton Rose Fulbright whose practice includes fintech.

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For Lom, the real test of whether new ETFs will reach mainstream status will not just be their size, but their liquidity. “We might be there already,” he said. “At some point people start thinking and talking about it as part of the normal investable universe, and then you’ll see modern portfolio theory people start thinking about what allocation to give it.”

That’s when the next test will come: whether model portfolios, the unique investment products that financial advisors increasingly rely on when making asset allocation decisions, will add them to the mix. Even some of bitcoin’s staunchest followers admit it’s at least six to 12 months ahead.

AND ETHER ETFs?

If bitcoin ETFs are at least about to emerge as part of the investment mainstream, the future is murkier for Ethereum spot ETFs.

A month after their July 23 launch, the ether group’s assets totaled nearly $7 billion, according to TrackInsight. BlackRock’s iShares Ethereum Trust hit $900 million in assets, outperforming ETF launches overall, but it suffers compared to BlackRock’s bitcoin product, which hit $1 billion in its first four days of trading.

“A lot of people were excited until the launch, and then it became kind of a ‘sell the news’ event,” said Adrian Fritz, head of research at 21Shares, one of the firms that will launch a spot ETF at the end of July. . “With more education and time, you’ll see even more excitement around the airwaves.”

Others remain more cautious, noting that ether is not just a smaller cryptocurrency, but a very different one.

“If bitcoin is digital gold, then ether is digital oil,” said CF Benchmarks’ Chung. “The reason ethereum could go up in value is that people might need it to move assets across the digital network, just like people use oil to make the real world run.”

That hybrid nature also requires both regulators and investors to undertake more research and due diligence, he and others say.

“The sale will be longer and more complicated,” Chung said.

(Reporting by Suzanne McGee; Graphics by Vineet Sachdev; Editing by Pravin Char)