In 2021, the first bitcoin(CRYPT: BTC) Exchange-traded funds (ETFs) arrive on the US market. After launch, morning star Analyst Ben Johnson told investors in no uncertain terms: “These are not the Bitcoin ETFs you are looking for.” This is because the first generation of Bitcoin ETFs buy and sell futures contracts, rather than investing in the cryptocurrency itself.
The problem with that strategy is that price changes in futures contracts do not always reflect Bitcoin price changes. Additionally, to maintain indefinite exposure, issuers launch Bitcoin futures contracts on a month-to-month basis, meaning they sell contracts as the expiration date approaches and purchase new contracts. But renewing contracts costs money and the fees are passed on to shareholders.
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The result is that early Bitcoin ETFs provide indirect exposure to Bitcoin and consequently fail to closely track its price. For example, futures-linked bonds ProShares Bitcoin ETF has declined 37% since its market debut in October 2021, but Bitcoin has gained 60%. In other words, the first Bitcoin ETF to hit the US market has underperformed Bitcoin by 97 percentage points since its inception.
Morningstar’s Ben Johnson was right: Those were not the Bitcoin ETFs investors wanted. Fortunately, Bitcoin ETFs (which actually own Bitcoin) launched in January 2024, and the cryptocurrency is now doing something it has never done before: it is seeing strong adoption among institutional investors.
Here’s why that’s important.
The SEC approved 11 spot Bitcoin ETFs in January 2024. Those new funds allow investors to add Bitcoin exposure to existing brokerage accounts, while eliminating the hassles and high fees associated with cryptocurrency exchanges.
Consider this assessment from John Eade, president of Argus Research:
Not long ago, the only way to gain exposure to Bitcoin was to invest in it directly. The process was arduous and required self-service in an unregulated market. But Bitcoin investing has come a long way thanks to the January debut of spot Bitcoin ETFs. This new type of value gives investors exposure to Bitcoin without the need to purchase, store or manage it.
Importantly, because Bitcoin spot ETFs buy and hold the cryptocurrency rather than futures contracts, they track the price of Bitcoin very closely. For example, the iShares Bitcoin Trust(NASDAQ:IBIT) It has returned 110% since its debut in January 2024, while Bitcoin itself has advanced 111%.
Consequently, the new Bitcoin spot ETFs have already unlocked substantial demand among retail investors and institutional investors, such that several experts have called them the most successful ETF launches in history. In particular, the iShares Bitcoin Trust stands out. Reached $10 billion in assets faster than any registered ETF, according to The Wall Street Journal.
Institutional investors have largely contributed to that trend. The number of institutions holding a spot Bitcoin ETF increased from 965 to 1,100 between Q1 and Q2 2024, so they are “being adopted by institutions at the fastest rate of any ETF in history,” according to Matt Hougan , head of investments. Official at Bitwise.
This has colossal implications for the future trajectory of Bitcoin price. Institutional investors have around $120 trillion in assets under management, and allocating even a small fraction of that sum to Bitcoin could drive its price much higher. In fact, Ark Invest’s Cathie Wood believes that institutions will end up allocating “a little more than 5% of their portfolios to Bitcoin,” driving the price of a single Bitcoin to $3.8 million.
Image source: Getty Images.
In November 2024, the Nasdaq Stock Market introduced options trading on the iShares Bitcoin Trust, a milestone that provides another catalyst for institutional adoption. Options contracts give the holder the right (but not the obligation) to buy or sell securities at a predetermined date and price.
An important application of options trading is hedging long positions. For example, institutional money managers with positions in the iShares Bitcoin Trust could protect their portfolios from a potential Bitcoin decline by purchasing put options, which give the holder the right to sell a security at a specific price for a predetermined period.
Bitcoin spot ETFs have already boosted institutional demand for Bitcoin, so that the price of the cryptocurrency has risen 111% since the new funds hit the US market in January. And demand for spot Bitcoin ETFs could continue to rise as institutions incorporate options into their trading strategies. That could drive the price of Bitcoin even higher in the coming years.
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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Bitcoin. The Motley Fool has a disclosure policy.
Bitcoin Is Doing Something It’s Never Done Before and It Can Make Big Profits originally posted by The Motley Fool
