Looking Beyond the ETFs
January 2024 Commentary
Hopes for an SEC approval of spot Bitcoin ETFs were duly rewarded on January 11, Running Bitcoin Day. Ten sponsors, including Blackrock, Fidelity, Van Eck and Bitwise, promptly started trading their ETFs on Jan 12. Having achieved such a milestone, high-fives and other congratulatory gestures were passed around, but the market kind of shrugged it off. BTC and the rest of the digital assets market were range bound albeit with a bit of volatility for the month. In a sense with such a fast pace of change, it’s no surprise that the markets had priced this in over the previous months and are now asking, “so, what’s next?”
Selling the News
During January, BTC prices ranged from a high of almost $48,500 to a low of $38,740, representing an intra-month drop of close to 20%. Much of this pullback has been attributed to the massive exit from the more expensive Grayscale BTC ETF (total expense ratio of 1.50%) into the lower cost ETF alternatives.
Source: Dune Analytics, h/t @hildobby
Cumulatively since the date of the ETF approvals through February 5, Grayscale experienced an outflow of 143,820 BTC, or approximately $6 billion (assuming roughly an average BTC price of $42,000). Much of this was due to the FTX bankruptcy estate offloading its GBTC holdings to pay its creditors. In contrast, over the same period, the new spot BTC ETFs together gathered a net inflow of $1.59 billion with Blackrock and Fidelity being the main beneficiaries.
Next Up, Dencun
Mild excitement is building up around an expected spot ETH ETF approval in the latter half of May, but even this event is a bit passé. In and of itself, this second ETF approval is unlikely to be the catalyst for mass adoption. Instead, we're quite excited by the Dencun upgrade to both Ethereum's consensus and execution layers. Dencun is part of the Surge in Ethereum's original roadmap and aims to increase the scalability and efficiency of the network. Throughput is expected to improve by two orders of magnitude to about 1,000 TPS from the current average of 13 TPS and gas fees are expected to be reduced by 90%.
The central feature of Dencun is EIP4844 or proto-danksharding, an intermediate step towards danksharding. Rather than tracking all the transaction data which can be expensive to process and store, this Ethereum Improvement Proposal "introduces data blobs that can be sent and attached to blocks. The data in these blobs is not accessible to the EVM and is automatically deleted after a fixed time period (1-3 months)", thereby saving on storage while improving execution speed.
What's All This Throughput For?
Among those who had experienced the collapse of the telecom companies in 2000 along with the burst of the Internet Bubble, many had asked what would be the use of all this fibre optic capacity. It took several years but today, we are not asking these silly questions. Video streaming, massive multiplayer games, and financial applications are just a few examples of how this capacity is being fully utilized.
Similarly, crypto-tourists may also be asking questions about the capacity being built on-chain and by Layer-2 solutions. Do we need more NFT minting of janky jpegs or DeFi trading of financial structures that the average user barely understands? However, practical applications are not that far away. One only needs to look at the efforts of the tokenization of real-world assets (RWAs) to understand the real-world use cases. Most of the effort thus far has been to tokenize private credit and Treasuries. Since our report back in August 2023, tokenized private credit has remained range-bound with about $600 million in outstanding loans, while tokenized US Treasuries have steadily increased by about 30% to now represent approximately $860 million worth of debt.
Source rwa.xyz
These numbers may sound paltry against the backdrop of the trillions of dollars that various traditional assets represent. However, we are only seeing the tip of this trend. Last quarter, CoinTelegraph’s review of the tokenization of RWAs highlighted a BCG report that projects tokenized assets to potentially grow to about $16 trillion by 2030, and a joint BNY Mellon – Celent survey that indicated that “91% of institutional investors are interested in putting their money into tokenized assets”. And why not? The spot BTC ETFs moved a digital asset onto traditional financial rails. But these financial rails are in need of a serious upgrade. Financial institutions have been working for years trying to move to T+1 settlement and are finally ready to make that leap by the end of May 2024. Reducing settlement time will bring many benefits, among which include reducing counterparty risk and allowing for more efficient use of collateral. But digital assets on the blockchain rails already settle T+0 and are up and running 24/7. It only makes sense to move traditional assets onto the digital asset rails through tokenization. Sure, regulatory upgrades will be required but once the institutions are onside, that will quickly follow. In the meantime, much work has been poured into protocol improvements with noticeable outcomes. That drives true adoption for real-world use cases and accrues value to the protocols.