Market View
US spot bitcoin ETFs have seen tremendous net inflows in their first month since launch, totaling an impressive US$3.3B (over $4.2B year-to-date). This has pushed their total assets under management to around $36.8B. In comparison, the median expectation from our survey of institutional participants prior to the ETF approvals was closer to $1B in inflows.
This momentum has helped the total crypto market capitalization recover to $2T, last seen in March 2022. We believe bitcoin in particular (and crypto more generally) should remain well-supported in the next 3-6 months, as more institutional players adjust to the new ETF reality alongside the ongoing global narrative of monetary reflation. That said, there are some negative seasonal factors in March that may serve to unsettle that path.
Looking more broadly at the ETF landscape, the net inflows for bitcoin ETFs even surpassed those attracted by State Street's SPDR Gold Shares ETF (GLD) in its first month - historically, one of the most successful ETF launches on record. GLD brought in $1.8B in inflation-adjusted dollars between October 18 and November 18, 2004. In fact, Bloomberg puts BlackRock’s iShares Bitcoin Trust (IBIT) and Fidelity’s Wise Origin Bitcoin Fund (FBTC) “among the top 0.1% when it comes to new ETF launches out of the about 5,500 that took place over the past 30 years.”
Although the rebalancing flows (out of certain funds into others) have started to settle down, there are a few sources of technical selling pressure that are still in the pipeline. On February 14, Genesis Global Holdco LLC received permission from the United States Bankruptcy Court in the Southern District of New York to repay creditors based on its holdings of:
- 35.9M shares ($1.66B as of February 15) of Grayscale Bitcoin Trust (GBTC)
- 8.7M shares ($209M) of Grayscale Ethereum Trust (ETHE) and
- 3.0M shares ($38M) of Grayscale Ethereum Classic Trust (ETCG).
The ruling allows Genesis to either (1) convert shares of these funds into their underlying BTC, ETH or ETC on behalf of creditors (for example, by selling GBTC and buying BTC) or (2) sell the shares outright and distribute the cash. Note too that the confirmation hearing for Genesis’ chapter 11 bankruptcy plan is scheduled for February 26 (9:30am ET), where the court will approve, reject or defer the decision on the debt repayment plan. It’s not yet clear how much the additional GBTC outflows could go into other US spot bitcoin ETFs, if not otherwise used to purchase bitcoin directly to repay creditors. Our view is that much of these funds will likely remain within the crypto ecosystem, contributing to a neutral overall effect in the market.
Ethereum Ecosystem Excitement
Meanwhile, open interest on both CME bitcoin and ether futures have recovered over the last six business days, with the former setting a new all time high of $6.3B (see Chart 1). The revived institutional interest isn’t surprising given crypto’s recent strong performance and with CME bitcoin futures basis trading closer to 16% (30d annualized). That said, we think there is room for open interest on ether to increase relative to bitcoin given a number of major Ethereum catalysts that could occur over the next several months, including a potential spot ETF approval in the US, as we discussed in our most recent monthly outlook.
Recently, Franklin Templeton also filed for a spot ether ETF (making it the eighth applicant), and Ark 21Shares has amended their filing to include language to enable staking. Given the strong inflows into spot bitcoin ETFs, we expect more issuers to turn their attention to the second largest cryptocurrency over the next few months. Market players are watching to see if the SEC begins to actively engage with issuer applications, as that could affect their perceived odds of approval.
Ethereum’s technical onchain progress also dovetails with the structural market change that a spot ether ETF could represent. First, the Geth client majority risk has largely been mitigated with updated measurements showing that less than 50% of clients currently run the software, down from its former 85% supermajority. This quick turnaround follows separate issues earlier in January that took Ethereum’s Besu and Nethermind clients temporarily offline and raised concerns around Geth centralization risks. Ethereum’s client diversity underpins its stability and speaks to the maturity of the network compared to other smart contract platforms.
The network continues to make other technical improvements as well – albeit with some delays. The Dencun upgrade (initially expected in 4Q23) is now scheduled for March 13, 2024. The successful upgrade and adoption of Proto-Danksharding will introduce blob storage and serve to further strengthen the feasibility of Ethereum’s long-term rollup scalability roadmap, in our view. With an increasing number of data availability solutions (like Celestia and EigenDA) also providing alternative solutions for rollup data posting, we believe that the costs of rollups are likely to decrease by an order of magnitude throughout 2024.
Finally, we think ether’s role as a reward-generating, proof-of-stake asset will become increasingly important. Ether continues to be net deflationary from its EIP-1559 burn mechanism, seeing an annualized 0.5% deflation rate in the past seven days with overall supply having declined 0.3% since the Merge. At the same time, validators have staked about 25% (~30M ETH) of the total ether supply – in line with our expectations published a year ago. This is more than double the amount staked during the Merge in September 2022.
Spilling the tea on (re)staking
In our view, protocols centered around staking – and more recently restaking – are poised to usher in a “DeFi renaissance” of sorts centered around real yields. EigenLayer, the primary restaking project on Ethereum that enables the rehypothecation of staked ether to secure other services, saw its total value locked (TVL) increase from $1.1B to $4.3B YTD after temporarily lifting deposit caps. This is more than the aggregated TVL of Uniswap and Compound across all chains, and is approaching that of the largest protocols by TVL, Aave and Maker.
The interest in restaking protocols has likely been the driver behind the recent increase in staked ETH, which has materialized in a validator entry queue that has not emptied out since the end of January (see Chart 2).
Note that EigenLayer has not yet launched any actively validated services (AVSs) on mainnet at this time. Secondary protocols built on top of EigenLayer offering liquid restaking tokens or other onchain exotic products have also seen tremendous TVL growth. We believe that a successful restaking ecosystem with attractive additional yield could be an underappreciated anchor for ether liquidity. Although EigenLayer’s exact mainnet launch date has not yet been confirmed, its anticipated 2Q24 launch may augment interest in ether around the same time as the ether ETF approval deadlines (likely late May).
