Bitcoin recently hits the symbolic 100,000 dollar mark as spot ETFs surge in popularity among investors.
There is no fundamental reason behind bitcoin’s current price. When an asset’s price becomes detached from its intrinsic value and is entirely driven by sentiment, it can theoretically rise indefinitely, especially when supply is limited. Predicting price movements in such a context is therefore meaningless.
A more significant milestone than the 100,000 dollar mark is perhaps the mainstream acceptance of cryptocurrency, driven by the advent of bitcoin spot ETFs in the United States.
Largest bitcoin holders
At the start of 2024, bitcoin spot ETFs made their debut in the US, launched by asset managers such as iShares, Fidelity, and Invesco. These SEC-approved funds have quickly accumulated billions of dollars and are now the largest holders of bitcoin. The spot bitcoin ETF has even become the fastest-growing ETF category in history.
In the first ten months of 2024, American investors poured nearly 27 billion dollars into funds within the Morningstar digital assets category. The iShares Bitcoin Trust alone attracted 25.9 billion dollars since its launch in January 2024. This inflow is primarily driven by retail investors, while interest in bitcoin among active fund managers in the US remains limited.
A superior option
Whether you are a fan or not, these ETFs represent a clear improvement over bitcoin futures ETFs, which entered the US market in October 2021. Futures ETFs incur additional costs associated with rolling over from one futures contract to another. Spot bitcoin ETFs, by contrast, invest directly in “physical” bitcoins, sparing investors from such concerns. Instead, they can focus on differences in fees (relative to volatility) and liquidity among the available ETFs.
The European landscape
European investors have had access to Exchange Traded Products (ETPs) linked to bitcoin for years but not to ETFs holding physical bitcoin, as Ucits regulations prohibit this. Instead, Exchange Traded Notes (ETNs) are commonly used. ETNs are debt securities dependent on the creditworthiness of the issuer. Their performance tracks bitcoin but relies on the issuer’s management of the product.
Morningstar has also created a new digital assets category for European investors, encompassing 190 funds, 87 percent of which are ETPs. The largest of these is the CoinShares XBT Provider Bitcoin Tracker EUR ETN, launched in September 2015, with 1.5 billion euro in assets under management. It is also one of the oldest strategies in its category. (More than half of all funds were introduced in 2022 or later.)
Morningstar does not provide ratings or qualitative research for this category but does track inflows and outflows. In contrast to the US, European investors withdrew nearly 98 million euro during the first ten months of this year, with total assets amounting to 11 billion euro as of the end of October.
Fund Radar
This week, there is no strategy prominently on Morningstar’s radar or identified by its analysts as having a strong management team and a robust investment process. However, there is a fund relevant to this topic, given its focus on companies that stand to benefit from developments in digital assets and wallets.
The ARK Innovation ETF’s quest for disruptive innovators has its merits and may appeal to aggressive investors, but it has yet to prove that the risks it takes are worthwhile. Cathie Wood’s much-discussed fund receives a negative rating from Morningstar analysts.
This strategy stands out due to its bold exposure to five technology platforms, including artificial intelligence, blockchain, DNA sequencing, energy storage, and robotics. Wood believes these technologies will transform entire economic sectors. However, the fund deviates significantly from broad market or growth indices, which are packed with profitable companies with long histories.
Instead, it focuses on early-stage companies promising rapid revenue growth but also limited profits and an uncertain future. The fund’s blockchain and crypto exposure comes primarily through its holdings in crypto exchange Coinbase (10 percent of assets) and Block (4.2 percent). Additionally, Tesla (14.9 percent of holdings) also has bitcoin on its balance sheet.
To succeed in this field, predictive talent is crucial, which ARK Investment Management appears to lack. Wood’s reliance on instinct when constructing the portfolio poses a risk, while the company has also struggled to develop and retain its investment personnel. Extreme volatility in returns characterises this strategy.
Thomas De Fauw is a manager research analyst at Morningstar. Morningstar analyses and rates investment funds based on quantitative and qualitative research. Morningstar is part of the expert panel at Investment Officer.