Spot the Highs: Bitcoin ETFs 1 week later…
Nazed Mannan, Senior Product Manager, BMLL
The U.S. Securities and Exchange Commission approved 11 new Bitcoin exchange-traded fund (ETF) applications on Wednesday 10 January which has led to a dramatic increase in trading volumes. Listed on NYSE Arca, Cboe BZX and Nasdaq exchanges, these ETFs directly track the Spot for Bitcoin, whereas before, prices were indirectly tracked using futures contracts. This is a significant milestone for cryptocurrencies as Spot Bitcoin ETFs help make investing in this asset class more accessible, bringing more retail and institutional investors to the crypto space by removing the concerns around custody or security issues. While early signs are positive, time will tell whether these trading volumes are here to stay.
In this article, we look at the impact of these new Spot Bitcoin ETFs one week on.
Demand for Cryptocurrency ETFs
Looking at a global universe of ETFs with an underlying crypto component (including the new Spot Bitcoin ETFs), in Figure 1 it can be seen that since the first cryptocurrency ETFs were issued, overall volumes increased to new highs month-on-month over the last quarter. In January, notional traded grew six times higher ($21bn dollar increase) than that of October last year, currently at $25bn month-to-date. Speculation leading up to, and including approval has clearly stimulated this activity resulting in a broader increase across cryptocurrency ETFs overall.
Spot versus Non-Spot
The new Spot Bitcoin ETFs have traded $14bn in total following their launch on Thursday 11 January, though declining now in daily volumes as seen in Figure 2. Comparatively this volume is larger than the volume for the entire global universe of crypto-based ETFs combined. Other non-spot cryptocurrency ETFs accounted for $11bn for the month-to-date, which was still up by an incredible 175% versus December 2023.
Listed Stocks within the Crypto Industry
What has been the effect on equities? I picked a dozen stocks that are playing a significant role in the development of the crypto asset class. Coinbase (COIN:XNAS) and Marathon Digital Holdings (MARA:XNAS) stood out with volumes jumping up 86% and 276% respectively between December 2023 and January 2024 (see Figure 3). There has been some carry-over effect but appears only to have impacted a few of these stocks in a material way.
Spot Bitcoin ETF Market Share
Going back to the new ETFs, Figure 4 shows that Grayscales GBTC accounts for the lion’s share, taking 54% of the volume across the new Spot Bitcoin ETFs. iShares and Fidelity followed with 20% and 15% of the volume respectively. Figure 5 shows nearly half (48%) of trading occurred off-exchange (ATS/OTC venues as reported by FINRA) - especially important to understand when sourcing liquidity and limiting market impact.
Quote Quality, Spreads & Top-of-Book Depth
Which venues are providing the best quotes and deepest liquidity in these ETFs? Exclusive Time at CBBO expresses the time duration that a venue is exclusively providing the best quote (including odd lot quotes) relative to the other venues, and provides an excellent measure for venue price-quality. Figure 6 shows that out of the 15 lit exchanges in the US, Nasdaq, NYSE Arca and BATS are the top three exclusive BBO providers for these ETFs with 35%, 29% and 26% of the time respectively.
Observing Time Weighted Average Spreads in Figure 7, Fidelity’s Bitcoin Fund (IBIT:XNAS) had the tightest spread (12 bps) across lit venues with the lowest variance whilst Hashdex Bitcoin Fund (DEFI:ARCA) sits on the other end of the spectrum with the widest spread (125 bps) and highest variance. Larger differences were observed for the less liquid ETFs.
Viewing a Liquidity Around BBO metric shows the resting liquidity at different levels of the order book, here I can assess the median top-of-book notional across venues for these 11 ETFs and their variability. As seen below in Figure 8, both NYSE Arca and Nasdaq top-of-book liquidity has declined by more than 50% since launch, but still remains significantly greater than other venues.
A dramatic effect on the cryptocurrency ecosystem
Greater standardisation and alignment of market access, regulation, and investor protection has significantly reduced the barrier to entry to the crypto asset class for both retail and institutional investors. One week in, the SEC’s approval for Spot Bitcoin ETFs has already encouraged broader adoption with trading volumes growing five times larger than what they were and at record highs. These changes have had a dramatic effect on the overall cryptocurrency ecosystem. Time will tell whether these volumes persist, but the early signs are positive.
What is clear, however, is that market practitioners with an interest in cryptocurrencies need to manage trading strategies and risk across asset classes as adoption grows. High quality Level 3 exchange data, a deep suite of trading analytics and the right research tools are necessary to respond to the evolution of global market structure and liquidity fragmentation.