Spot Bitcoin exchange-traded funds (ETF) are close to their first month anniversary of operating, but there is a chance the field of ETFs may shrink by the end of the year, said Valkyrie Funds’ Chief Investment Officer Steven McClurg.
McClurg predicts that of the ten issuers currently operating, only "about seven or eight" will be left standing. The reason, he tells Decrypt, is because the costs of running a spot ETF for Bitcoin may prove too onerous—especially amid a race to the bottom fee-cut war that can hurt profitability for issuers that are struggling now.
"If you don't gather $100 million [of assets under management] by now, you might as well cut it loose," McClurg said.
Since the Securities and Exchange Commission granted its approval to the first batch of Bitcoin spot ETFs on Jan. 10, the influx of funds has been strong. On the first day of trading alone, there was $4.5 billion in trading, a massive start by any standard. In the last day alone there was another $400 million in inflows, according to Bloomberg analyst James Seyffart.
In looking back at the last month, McClurg said that events in the market largely fell in line with what Valkyrie's expectations were ahead of the launch.
The exception, McClurg said, was an expectation of higher outflows from Grayscale, whose conversion from a trust to an ETF led to a sell-off in Bitcoin that contributed to a drop in value to below $41,000 before rebounding. However, even if this sell pressure has eased lately, McClurg expects that more outflows may follow and be distributed among other ETFs.
With nine other rivals in this space, including Wall Street goliaths like BlackRock and Fidelity, Valkyrie is facing steep competition. Since receiving approval to launch, BlackRock’s iShares Bitcoin ETF and the Fidelity Wise Origin Bitcoin Fund have already crossed the $3 billion mark in assets under management in the last month, while Ark Invest's 21Shares and Bitwise's ETFs saw inflows of above $700 million as well.
In light of this, McClurg expressed satisfaction with how Valkyrie has done, noting that it has outperformed ETFs operated by larger issuers, something he chalks up to his firm’s long history of working with digital assets and in traditional markets. Valkyrie saw about $123.7 million in AUM as of Feb. 8, a much smaller figure than its massive peers, but McClurg says that beating them isn’t the point.
"You're not going to beat BlackRock and Fidelity. They have captive markets" McClurg explained. "But if you go down to the next tier, I think we're doing quite well."
The intensity of the ETF competition is fierce, and there is nowhere this is expressed more than the rounds of fee cuts that took place before and after launching. These cuts are aimed at luring in more investors, but they come with the trade-off of eating into an ETFs returns.
On Jan 11, Valkyrie set its sponsor fee to 0.25%, equal to ones charged by BlackRock and Fidelity. With this, Valkyrie is looking to avoid the unenviable spotlight of being an outlier, said McClurg, but he decried the cuts as “unfortunate” at such an early stage.
With the high costs that come with running a spot ETF, including expenses for security and custody, these cuts may risk becoming difficult to sustain for any issuers that are lagging right now. It is these challenges to profitability that lends to McClurg's prediction that the current crop of issuers is likely to shrink by next year.
“I do think that we're going to see some of the issuers going through the pain of canceling their Bitcoin spot ETFs because number one, they're not making money. Number two, they'll never make money," said McClurg.
"I think I think if you want to identify who's desperate look for Bitcoin spot Super Bowl ads," he added.
Edited by Ryan Ozawa.