Massive growth potential for the Bitcoin ETFs
Also how ETF fees matter for performance and banks milking the BTFP
Welcome to the Friday edition of the Ecoinometrics newsletter.
Every week we bring you the three most important charts on the topics of macroeconomics, Bitcoin and digital assets.
Today we'll cover:
Massive growth potential for the Bitcoin ETFs
ETF fees matter for performance: let’s take a look at those Bitcoin ETFs
Banks needed Fed loans to survive, now they are making money from them
Each topic comes with a small explanation and one big chart. So let’s dive in.
In case you missed it, here are the other topics we covered this week:
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Massive growth potential for the Bitcoin ETFs
It took years but the SEC finally approved a first batch of eleven Bitcoin ETFs.
In my opinion this is really a major unlock for Bitcoin's long term growth. Those ETFs remove all friction to get exposure to Bitcoin for the average investor. As a result the pool of potential Bitcoin investors has greatly expanded.
In particular those ETFs allow anyone to add Bitcoin exposure to their retirement account. We discussed the importance of that in our research note last Wednesday.
Now the question is how big are those ETFs going to be.
We can't know for sure but we can look at the landscape of existing ETFs to get a sense of scale.
At the moment the Grayscale Bitcoin Trust is the only Bitcoin ETF to have real scale (since they converted from another structure). As I write those lines GBTC has $28 billion of assets under management and holds 620,000 Bitcoins.
But that's only half of the size of GLD, the largest gold ETF.
In turn the largest gold ETF is only half the size of the tenth largest ETF in the world (the Vanguard Growth ETF with $100 billion of assets under management).
And compared to the SPY (the largest ETF out there) which has about $500 billion of assets under management, GBTC is really small.
What that means is that there is a lot of money that can flow in the Bitcoin market via those ETFs. Massive potential for growth.
ETF fees matter for performance: let’s take a look at those Bitcoin ETFs
When you invest in an ETF fees are really important. They can make a big difference in the performance of your investment over the long run.
Say you invest $100k today in two Bitcoin ETFs. On have a fee of 0.25% and the other 1.5%. Assume that Bitcoin grows at a 30% annualized rate for the next 10 years. The performance of your investment is then:
$1.344m for $100k invested with the fund having 0.25% fees.
$1.185m for $100k invested with the fund having 1.50% fees.
That's a big difference.
So what kind of fees are those eleven Bitcoin ETFs that have just been approved charging for their service?
Well, the good news is that most of them are in the expected range for this kind of product. But there are two exceptions.
Check out the chart.
Banks needed Fed loans to survive, now they are making money from them
The Bank Term Funding Program introduced in March 2023 went from being a lifeboat to regional banks facing liquidity issues to becoming a cash cow for those banks.
If you remember, 2023 saw the collapse of three large regional banks: Silicon Valley Bank, First Republic Bank and Signature Bank. The reason was simple.
They faced bank runs and didn't have the liquidity to put up the cash. Banks invest most of the cash customers give them in US Treasury bonds. But thanks to the aggressive rate hike policy of the Federal Reserve, US Treasury bonds have lost a lot of their value. So the banks could not face redemptions.
To avoid that the Bank Term Funding Program is a loan program that was put forward by the Federal Reserve as a way to provide liquidity to those banks that faced similar issues.
Up to this point everything is fine. But since November last year something changed.
You see those banks that can borrow money from the BTFP can also deposit their money at the Federal Reserve. And as it turns out, since November the interest rate they get from depositing the money at the Federal Reserve is higher than the interest rates the Federal Reserve is charging them on the BTFP loans.
The result is that banks are quietly borrowing money they don't need from the BTFP to immediately turn around and deposit it in their account at the Federal Reserve to lock in a profit with the rate differential.
That escalated quickly.
Now the BTFP is shutting down soon so that will be the end of free money. But regardless that's an interesting story about creating money out of nothing.
That’s it for today. I hope you enjoyed this. We’ll be back next week with more charts.
Cheers,
Nick
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