Crypto exchanges have become wildly popular ways for investors looking for access to cryptocurrency to do so in a one-stop-shop manner. The cost of convenience, however, can be sky-high, as crypto exchanges bring in huge amounts of revenue from trading fees that affect their broad retail investment base. A spot bitcoin ETF could help to turn that tide and greatly benefit investors and the entire crypto space in the long run, as Eric Balchunas, Bloomberg Intelligence senior ETF analyst, and Athanasios Psarofagis, Bloomberg Intelligence ETF analyst, write in a recent paper.
Coinbase, one of the largest cryptocurrency exchanges, bought a coveted Super Bowl ad spot that featured a floating QR code and was so popular that traffic to the app temporarily crashed once the ad launched. Ads during the Super Bowl can cost up to $7 million dollars for a 30 second spot, a drop in the bucket compared to the $6 billion that Coinbase has made in revenue in the last year.
In the previous 12 months, crypto exchanges have brought in $50 billion in revenue, according to Bloomberg Intelligence data. To put that in perspective, that is more than three times the amount that ETF market makers generate, despite the fact that they handle 36 times the volume.
Because a spot bitcoin ETF doesn’t exist, the closest comparison that can be made for crypto investing via a crypto exchange is to an ETF like the ProShares Bitcoin Strategy ETF (BITO), which has trading fees close to 0.01%. This trading fee is anywhere between 30-150 times cheaper than what Coinbase offers for its users, depending on if a user is Coinbase Pro or a general retail user.
Image source: Eric Balchunas’ Twitter
The Benefits of a Spot Bitcoin ETF Would Come From the Wrapper
Historically, ETFs have disrupted the spaces that they offer exposure to, bringing down costs while creating liquidity. Stockbrokers used to charge high fees for their services because they were some of the only options available; these days, ETFs offer a tax-efficient and generally low-cost exposure for investors, attracting even greater investment opportunities.
The continued growing popularity of ETFs as an investment vehicle and the benefits that they offer to investors have proven the merits of an ETF within any space, but particularly in crypto. By providing some of the only easy access for investors routing through crypto exchanges that charge high trading fees on every transaction, an alternative, tax-efficient, low-cost investment vehicle would bring a flood of new investors into the space and result in reduced fees across the board.
The demand potential wouldn’t just be from investors but also from advisors, who currently handle an estimated $23 trillion in AUM according to Cerulli Associates. If advisors were to allocate even 2%-3% of their clients’ portfolios into a crypto investment of some sort, that would equate to $1 trillion. That’s a lot of opportunity within a space that for now remains somewhat slim on ETF options, and entirely devoid of spot cryptocurrency ones.
Bitcoin futures ETFs remain a less ideal crypto investment for some seeking cryptocurrency exposure, namely because of their very nature as a futures product, which means that they carry a 10%-20% annual roll cost, but for now they remain one of the only cryptocurrency-adjacent ETF offerings. The roll cost keeps this type of crypto investment off the table for many advisors and institutional investors who simply cannot justify the contango bleed that can occur. Still, BITO and other bitcoin futures ETFs are viewed as a first step in the journey to a spot bitcoin ETF, which would offer many benefits to investors and crypto in general.
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