Key Takeaways:
- BlackRock, the world’s largest asset manager, launched the iShares Bitcoin Trust (IBIT) in early 2024.
- The approval of 11 spot Bitcoin ETFs by the US Securities and Exchange Commission (SEC) in January 2024 represented a major shift in the regulatory landscape, reflecting growing demand and confidence in Bitcoin as a viable asset class within the traditional financial (TradFi) system.
- This product is especially appealing to institutional investors looking for regulated exposure to cryptocurrency.
- Since its launch, IBIT has become the most traded Bitcoin exchange-traded product (ETP), contributing to increased liquidity and potentially more efficient price discovery in the Bitcoin market.
- Strategies like Dollar Cost Averaging (DCA) and regular portfolio rebalancing are recommended to manage risks associated with Bitcoin’s price fluctuations.
Introduction
The approval of 11 spot Bitcoin exchange-traded funds (ETFs) by the US Securities and Exchange Commission (SEC) in January 2024 marked a significant milestone in the mainstream acceptance of digital assets. One of the 11 is IBIT, BlackRock’s US spot Bitcoin ETF that offers traders a new way to gain exposure to Bitcoin without directly owning and storing the cryptocurrency.
This article covers the rise of Bitcoin ETFs, BlackRock’s entry into the crypto space, and the potential impact of IBIT on the Bitcoin market.
The Rise of Bitcoin ETFs
Brief History of Bitcoin ETFs
The journey of Bitcoin ETFs began years ago, with the Winklevoss twins filing for the first Bitcoin ETF when Bitcoin was trading at just $90. Despite their early start, the twins’ proposal was rejected by the SEC, citing concerns about the cryptocurrency market’s risks. This rejection set the tone for years to come, with the SEC turning down over a dozen proposed Bitcoin ETFs.
Regulatory Landscape
The SEC’s cautious approach stemmed from concerns about market manipulation and investor protection in the cryptocurrency space. This stance led to a series of rejections, including a notable day in August 2018 when nine proposed Bitcoin ETFs were simultaneously rejected. However, the landscape began to shift in October 2021 with the launch of the first US-listed Bitcoin ETF, the ProShares Bitcoin Strategy ETF (BITO) — a Bitcoin futures ETF — which gained $1 billion in assets in just two days.
Market Demand
Despite regulatory hurdles, demand for Bitcoin ETFs remained strong, particularly amongst institutional investors seeking a regulated way to gain exposure to the cryptocurrency market. This demand was driven by the potential benefits of Bitcoin ETFs, such as increased liquidity, reduced custody risks, and the ability to trade on traditional exchanges. The approval of spot Bitcoin ETFs by the SEC on 10 January 2024 marked a significant milestone, with 11 ETFs simultaneously approved. This development has led to a surge in daily ETF trading volumes, peaking at nearly $10 billion in March. While daily volumes have dropped since then, they still consistently trade in the billions, with an October high of $3 billion at the time of writing.
BlackRock’s Entry Into the Crypto Market
BlackRock’s Background
BlackRock, a global financial management corporation based in the United States, has evolved from an eight-person start-up to the world’s largest asset management firm over the past 30 years. BlackRock offers a wide range of financial products and services, including mutual funds, ETFs, retirement planning, and risk management.
Motivation Behind IBIT
BlackRock’s entry into the crypto market with the iShares Bitcoin Trust (IBIT) reflects the growing demand for cryptocurrency investments, particularly amongst millennial traders (83% of millennial millionaires hold crypto) and the cryptocurrency asset class, which grew to over $1 trillion in a decade.
The IBIT fund’s rapid success, surpassing $1 billion in assets under management (AUM) within its first week of trading, demonstrates strong user demand and growing interest in regulated traditional financial (TradFi) vehicles for Bitcoin exposure.
IBIT: BlackRock’s US Spot Bitcoin ETF
Overview of IBIT
IBIT’s primary goal is to reflect the performance of Bitcoin’s price. It enables users to access Bitcoin through an exchange-traded product (ETP) with no need for direct Bitcoin ownership. As the most traded Bitcoin ETP since its launch, IBIT provides lower fees than some of its competitors.
Bitcoin: the Underlying Asset
The underlying asset of IBIT is Bitcoin. Since its inception in 2008 by an individual or group using the pseudonym Satoshi Nakamoto, Bitcoin — often referred to as ‘digital gold’ — has captivated the financial world and grown to become the world’s foremost digital currency, celebrated for its autonomy, security, and potential as a store of value.
Launched in 2009, Bitcoin operates independently of any central authority, such as a government or bank, and is used to buy goods and services online or exchanged for other cryptocurrencies. It is based on a technology called blockchain, a decentralised ledger that records all transactions made within the network, and does not have physical properties, existing solely in digital form. Each Bitcoin transaction is recorded on the blockchain, making it transparent and auditable.
As a large part of the global population remains unbanked — with no access to financial services or ability to qualify for bank accounts — Bitcoin is capable of providing financial inclusivity, as anyone with an internet connection can, in principle, access and use Bitcoin, regardless of their location.
Learn more about Bitcoin at our Bitcoin Hub.
IBIT’s Structure and Operations
Fund Management
IBIT is managed by BlackRock, while the underlying asset of Bitcoin is held by a cryptocurrency exchange. The trust’s Bitcoin holdings are stored in a combination of hot and cold wallets, ensuring high levels of security. This approach eliminates the need to manage digital wallets or navigate self custody of crypto assets.
Pricing and NAV Calculation
IBIT’s net asset value (NAV) is calculated daily based on the prevailing market price of Bitcoin, providing traders with transparency into the trust’s performance. The Trustee values the trust’s Bitcoin using the CF Benchmarks Index. It’s important to note that the amount of Bitcoin represented by IBIT shares will decrease over time due to fees and expenses. Without sufficient increases in Bitcoin’s price to offset this decrease, the share price may decline.
IBIT vs Other Bitcoin Investment Options
When considering Bitcoin investments, traders have several options to choose from. Below is how IBIT compares with other investment methods.
Direct Bitcoin Ownership
Owning Bitcoin directly involves traders purchasing and storing the cryptocurrency themselves. While this is the only method that offers holders full control over their assets, it requires managing digital wallets and navigating complex custody arrangements. Unlike Bitcoin ETFs, holding BTC directly does not involve management fees that reduce the value of the holdings over time; the only fees due are trading fees.
Bitcoin Futures ETFs
Bitcoin futures ETFs, like the ProShares Bitcoin Strategy ETF (BITO), invest in Bitcoin futures contracts rather than holding the actual cryptocurrency. This makes them a derivative product.
These ETFs may experience additional volatility due to basis risk and leverage used in futures contracts. IBIT, in contrast, is a spot ETF that holds actual Bitcoin, providing more direct exposure to price movements.
Other Spot Bitcoin ETFs
While all spot Bitcoin ETFs track Bitcoin’s performance, they differ in fees and management. IBIT, managed by BlackRock, currently has an expense ratio of 0.25%. Comparatively, Grayscale’s Bitcoin Trust charges 1.5%, while Franklin Templeton’s Digital Holding Trust bills 0.19%, with the latter offering the lowest fees of all spot Bitcoin ETFs (at the time of writing).
Potential Impact of IBIT on the Bitcoin Market
Increased Institutional Adoption
As the cryptocurrency market matures, more financial entities are incorporating crypto ETFs into their portfolios, signalling growing confidence in digital assets. IBIT is the largest of the 11 approved spot ETFs. The simplified access and regulatory compliance make it attractive to institutions, easily enabling them to integrate Bitcoin into existing portfolios.
Price Discovery and Liquidity
IBIT has been the most traded Bitcoin ETP since its launch, potentially leading to lower transaction costs for holders. The higher liquidity flowing to Bitcoin through TradFi access makes it easier to buy and sell large quantities without significantly affecting market prices. Additionally, the increased trading volume can potentially contribute to more efficient price discovery in the Bitcoin market.
Market Volatility Considerations
While IBIT provides exposure to Bitcoin in a TradFi wrapping, holders must still be aware of the coin’s volatility. Bitcoin’s price can experience long and sudden drawdowns, which some traders welcome as opportunities, but HODLers might not.
However, it still has typically low correlation with traditional assets like stocks and bonds; hence, long time horizons can provide a modest diversifying effect in a portfolio. To navigate volatility, consider using common portfolio management methods like Dollar Cost Averaging and regular rebalancing.
Conclusion
BlackRock’s entry into the Bitcoin market with IBIT has had a significant impact on the cryptocurrency landscape, bridging the gap between traditional finance and digital assets. The launch of IBIT, along with other spot Bitcoin ETFs, marks a turning point in the mainstream acceptance of cryptocurrencies, leading to increased institutional adoption and improved market liquidity.
As the crypto market continues to evolve, IBIT provides a regulated vehicle for Bitcoin investment; however, traders should keep in mind the inherent volatility of cryptocurrencies and use common portfolio management strategies to navigate potential risks.
Due Diligence and Do Your Own Research
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Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.
