The realm of cryptocurrencies has undergone a remarkable transformation with the introduction of bitcoin exchange-traded funds (ETFs). In October of the previous year, Matthew Hougan, CEO of Bitwise Investments, projected that spot bitcoin ETFs would accumulate $55 billion in assets within five years. By late August this year, just eight months after their launch, the ten newly approved funds by U.S. regulators collectively amassed over $52 billion, as reported by TrackInsight.
Hougan, reflecting on his initial forecast, admitted, “Clearly, I wasn’t being bullish enough. This is going to be an area that we measure in hundreds of billions of dollars.” His observation underscores the underestimated potential of bitcoin ETFs, despite the rapid growth they have already experienced. However, the path to mainstream acceptance for bitcoin ETFs is fraught with obstacles. Bitcoin, since its inception 16 years ago, has been marked by substantial price volatility, leading many market participants to view it as a speculative asset. Some even compare it to art or fine wine rather than traditional commodities like gold, further contributing to its perceived risk.
A significant milestone in the journey toward mainstream acceptance was achieved in August when Morgan Stanley allowed its 15,000 financial advisers to actively recommend at least two of the new bitcoin ETFs—the iShares Bitcoin Trust and the Fidelity Wise Origin Bitcoin Fund—to clients. This development signaled a notable shift in how bitcoin ETFs are perceived within the wealth management industry. John Hoffman, head of distribution and partnerships at Grayscale Funds, emphasized the necessity of due diligence and understanding these products. He stated, “It is now unacceptable not to do due diligence and the work of understanding these products.” Hoffman pointed out that the risk has shifted from not investing in bitcoin ETFs to the risk of not advancing with them.
Retail investors have predominantly driven the inflows into these new ETFs, with only a few large institutions, such as the state of Wisconsin’s investment board and select hedge funds, publicly disclosing their positions. Sui Chung, CEO of CF Benchmarks, which developed the bitcoin index underpinning several of the ETFs, noted that the initial $50 billion came from individuals well-versed in bitcoin. The next phase involves persuading risk committees at institutions like Morgan Stanley to adopt these products.
Despite early successes, the journey towards widespread acceptance for crypto ETFs remains challenging. Andrew Lom, an attorney at Norton Rose Fulbright specializing in fintech, highlighted that early adoption is often perceived as risky. The true test of whether these new ETFs will achieve mainstream status lies not only in their size but also in their liquidity. Lom suggested that once bitcoin ETFs become part of the normal investable universe, proponents of modern portfolio theory will begin considering their allocation. This shift will lead to the inclusion of bitcoin ETFs in model portfolios, which financial advisers increasingly rely on for asset allocation decisions. However, even the most ardent supporters of bitcoin acknowledge that this milestone could still be six to 12 months away.
While bitcoin ETFs are on the path to mainstream acceptance, the future for spot ethereum ETFs remains uncertain. A month after their July 23 launch, assets in the ether group totaled nearly $7 billion, according to TrackInsight. BlackRock’s iShares Ethereum Trust reached $900 million in assets, surpassing other ETF launches but still trailing behind BlackRock’s bitcoin product, which reached $1 billion in its first four days of trading. Adrian Fritz, head of research at 21Shares, noted that initial excitement around ether ETFs waned after their launch. However, he believes that with more education and time, enthusiasm for ether will grow.
Despite this optimism, others remain cautious, citing fundamental differences between bitcoin and ether. Sui Chung of CF Benchmarks likened bitcoin to digital gold and ether to digital oil, emphasizing that ether’s value may rise due to its utility in moving assets around the digital network. The hybrid nature of ether necessitates thorough research and due diligence from both regulators and investors. Chung acknowledged that the sales pitch for ether ETFs would be longer and more complex.
In essence, the journey of bitcoin ETFs toward mainstream acceptance is well underway, marked by significant milestones. Nonetheless, challenges persist, and achieving widespread adoption will require continuous education, diligent research, and overcoming risk perceptions. The future of ether ETFs, while promising, remains uncertain and will necessitate further efforts to gain traction in the investment community.
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