A spot Bitcoin exchange-traded fund (ETF) is approaching its first month of operation, but the ETF sector is likely to shrink by the end of the year, said Steven McClurg, chief investment officer at Valkyrie Funds.
McClurg predicts that of the 10 issuers currently in operation, only “about seven or eight” will remain. That’s why, he says. decryptionThis is because the costs of running a Bitcoin spot ETF may be too burdensome. This is especially true amid the ongoing battle to lower minimum fees, which could harm the profitability of struggling issuers.
“If we don’t raise $100 million (of assets under management) by now, we might as well just leave it alone,” McClurg said.
Fund inflows have been brisk since the Securities and Exchange Commission approved the first Bitcoin spot ETF on January 10th. On the first day of trading alone, $4.5 billion was transacted, a huge start by any standards. It is said that there was an additional inflow of $400 million on the last day alone. Bloomberg analyst James Seyffart.
Looking back on the past month, McClurg said events in the market were largely in line with Valkyrie’s expectations ahead of launch.
The exception, McClurg said, is that more leaks are expected in grayscale. Grayscale converted from a trust to an ETF, which resulted in a Bitcoin sell-off, sending its value down to less than $41,000 before rebounding. But even if this selling pressure has eased recently, McClurg expects more outflows to follow and spread to other ETFs.
With nine other rivals in the space, including Wall Street heavyweights like BlackRock and Fidelity, Valkyrie faces stiff competition. BlackRock’s iShares Bitcoin ETF and Fidelity Wise Origin Bitcoin Fund have already surpassed $3 billion in assets under management last month since receiving approval for launch, while Ark Invest’s 21Shares and Bitwise’s ETFs have also seen inflows of more than $700 million.
In response, McClurg expressed satisfaction with the way Valkyrie performed, noting that it outperformed ETFs run by larger issuers. This reflects his company’s long history of collaboration in digital assets and traditional markets. Valkyrie had about $123.7 million in AUM as of Feb. 8, a much smaller figure than its larger competitors, but McClurg said beating them isn’t important.
“You can’t beat BlackRock and Fidelity. They have a captive market,” McClurg explained. “But when you get down to the next level, I think you’re doing pretty well.”
The intensity of ETF competition is fierce, and nowhere is this better expressed than in the fee cuts that occur before and after launch. These cuts are intended to attract more investors, but they come at the cost of eating into ETF returns.
On January 11, Valkyrie set its sponsor fee at 0.25%, the same as BlackRock and Fidelity. In doing so, Valkyrie seeks to avoid the unenviable spotlight of being an outlier, McClurg said. But he condemned the cuts at such an early stage as “unfortunate”.
The high costs of operating spot ETFs, including security and storage costs, risk making these cuts difficult for issuers currently lagging behind to sustain them. It’s these challenges to profitability that support McClurg’s forecast that the number of current issuers will likely decline by next year.
“I think some issuers will go through the pain of canceling their Bitcoin spot ETFs. First of all, they are not making money. Second, they will never make any money,” McClurg said.
He added, “I think if you want to see who’s desperate for a Bitcoin spot Super Bowl ad, that’s it.”
Edited by Ryan Ozawa.