Spot Bitcoin ETPs Dominate Even as Ether Offers Alternatives

When the U.S. Securities and Exchange Commission reversed course and approved the listing and trading of bitcoin exchange-traded products (ETPs), it was following a court ruling by taking what Chair Gary Gensler said was “the most sustainable path forward.” He concluded his accompanying statement last January 10 by saying, “We did not approve or endorse bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.”

Pent-up demand was awaiting the new products – often referred to as exchange-traded funds (ETFs), which are a type of ETP that holds regulated securities under the Investment Company Act of 1940. The biggest spot bitcoin fund, BlackRock’s iShares Bitcoin Trust (IBIT), grew to more than $40 billion in assets under management as of November 15. The next-ranked Grayscale and Fidelity funds’ AUMs were under $20 billion.

Spot crypto ETP inflows surged, along with the price of bitcoin, following the presidential election victory of Donald Trump, who had taken pro-crypto positions.

Spot ether ETPs, holding the second-biggest cryptocurrency by market capitalization after bitcoin, began trading on July 23. Their mid-November aggregate market cap of $8 billion significantly trailed the bitcoin products’ $120 billion, according to Blockworks’ ETF Tracker.

The trend in Europe is reflected in data from SIX Swiss Exchange when recently announcing the new listing of two DWS Xtrackers ETPs. For 376 ETPs and derivatives with cryptocurrency underlyings, bitcoin accounted for 45.2% of trading volume, ether 15.0%. (Solana was third, at 11.5%.)

Growth of hypothetical $10,000 in BlackRock iShares Bitcoin Trust ETF, year-to-date through November 14.

A July 23 post in Swiss crypto bank Sygnum’s Future Finance blog said that bitcoin’s dominance could be explained by its popularity as a crypto-market on-ramp as well as its presence in options and futures markets. There was some rotation early this year into Solana and other tokens as retail ether trading lagged, but Sygnum perceived a momentum shift with the SEC’s approval of ether ETPs. Reputable issuers like BlackRock and Fidelity “brought much higher levels of trust and confidence among many skeptical or sidelined investors – especially after spot bitcoin ETFs became the most successful ETF launch of all time,” the bank said.

Regulation and Safety

The ETPs’ attractiveness is attributed to perceived safety and ease of trading in a market that has languished in past “crypto winters” and was stung by the 2022 collapse of the FTX exchange. Under the Securities Act of 1933, ETPs are subject to less burdensome regulations than ETFs while also falling under SEC oversight.

“When you buy an ETP, you get the assurance of a premier asset manager that won’t shut down overnight,” noted Sidley Austin partner Kenny Terrero.

There are other vehicles: ETPs backed by Bitcoin futures contracts began trading on regulated exchanges in October 2021, and those backed by Ethereum futures in October 2023. The assets under management were, respectively, $7.1 billion and $529 million as of November 11, according to CFRA Research.

Investor interest in the futures ETPs has been muted in part because having to regularly roll over the underlying contracts can eat into returns, said CFRA head of ETF research and analytics Aniket Ullal.

Options on spot bitcoin products debuted on November 19, with those on BlackRock’s IBIT immediately ranking among the most active non-index options.

Rapid Take-up

ETFs on average take 3.5 years to reach $1 billion in AUM, Ullal pointed out. BlackRock’s IBIT – “the fastest growing ETP in history” – hit that mark in the first week of trading; the firm’s iShares Ethereum Trust (ETHA) took three months.

Aniket Ullal, CFRA Research

Holding cryptocurrencies directly and trading them, he added, is more complicated and expensive than trading products on regulated exchanges, and it carries anti-money laundering (AML) and know your customer (KYC) risks.

21Shares and VanEck each filed with the SEC in June and are awaiting approval to issue ETPs tied to the spot price of Solana crypto tokens. As with Ethereum, Solana tokens embed smart contracts that allow for execution of transactions without requiring intermediaries.

Methods of Staking

The structures of Ethereum and Solana, launched in 2015 and 2020, offer unlimited token supply. In their creation process, known as proof-of-stake, a network of validators contribute, or “stake,” their own tokens in exchange for a chance to validate a new transaction and earn more of the cryptocurrency.

Matthew Sigel of VanEck

Bitcoins, whose supply is finite, are created by proof-of-work, a compute-intensive “mining” process.

Matthew Sigel, head of digital assets research at VanEck, explained that to create tokens in a proof-of-stake blockchain, tokens are deposited in a smart contract, providing liquidity to the network in return for yield that may be attractive to some investors. The SEC’s approval of spot ether ETPs does not permit staking. That may prompt sophisticated investors to invest directly in proof-of-stake cryptocurrencies, slowing the growth of their ETPs.

“Because the Ethereum ETFs lack staking and in-kind creations and redemptions, so far they’ve been less attractive to institutional investors trying to get exposure to the most compelling features of these blockchains,” Sigel said.

On SIX Swiss Exchange as of November 19, Bitwise Aptos Staking ETP (APTB) is the first Aptos Staking ETP in the world, both retail- and institutional-accessible. The Aptos layer 1 blockchain, which traces its origins to Meta Platforms’ Diem project (previously Libra), was launched in 2022. Aptos Labs, a core contributor, has institutional backers including Andreessen Horowitz, Apollo Global Management, PayPal Ventures and Franklin Templeton Investments.

Greater Retail Demand

CFRA’s Ullal said that a review of quarterly 13F filings, by institutional investment managers disclosing their holdings, found only one pension fund holding the securities.

“We estimate that 75% to 80% of initial demand for the ETPs was from retail investors,” he said, though more institutions are now seeking exposure to crypto assets, including via ETPs. They tend to be hedge funds such as Two Sigma and Millennium Management.

“We do expect institutional holdings to go up over time,” the analyst continued. “It takes time for large asset managers and pensions to do the due diligence.”

VanEck’s Sigel foresees accelerating institutional interest in smart-contract cryptocurrencies and their ETPs as the blockchain, or distributed ledger, technologies gain acceptance in other applications. He pointed to Hivemapper, which uses Solana in an open-source challenge to Google Maps and the licensing fees charged to the likes of FedEx and Uber.

“These projects will be hedges on investors’ allocations to Big Tech,” Sigel said. “They have the potential to take margin away from current web platforms. There should be a way to cut the cost of that data dramatically by democratizing ownership of the network.”