Purpose ETF growth slows price premium remains

Meteoric growth of Purpose Bitcoin ETF slows, but price premium remains

The first Canadian exchange traded fund’s massive initial inflow subsided at around $500 million, but it still commands a price premium over BTC of nearly 30%

North America’s first Bitcoin exchange-traded fund has reached 722 million Canadian dollars of assets under management—equivalent to about $571 million. 

Despite that impressive number, the recently launched Purpose Bitcoin ETF’s growth has slowed dramatically after an initial outpouring of pent-up demand.

Data reported by asset manager Purpose Invest as of March 4 show that the fund already holds nearly 11,300 BTC. The firm announced that its investment product was approved by Canadian regulators on Feb. 12 but launched on Feb. 19, which means that—on average—the fund saw nearly $38 million of daily inflow of funds. 

However, the vast majority of that came in the first five days, at which point inflows slowed dramatically, confounding expectations. Purpose attracted more than 2,250 bitcoins on Feb. 22, and more than 1,000 on Feb. 23, reaching 9,320, according to blockchain data provider Glassnode. It has not reached 500 since.

The smashing start may have led to unreasonable expectations. On Feb. 19, Bloomberg Intelligence’s Eric Balchunas predicted it would reach $1 billion in assets under management (AUM) by Feb. 26.

However, that proved to be wishful thinking.

“The initial surge in interest was evidence of some combination of pent-up demand, investors switching from other means of getting Bitcoin exposure, and the fact that Bitcoin’s price was notching new highs as the Purpose ETF began trading,” Ben Johnson, Morningstar’s global director of ETF research, told Bloomberg on March 3. “Longer term, I expect volumes will be correlated with Bitcoin’s price.”

Still, both the forex-hedged and non-forex hedged versions of the Purpose Bitcoin ETF trade at a premium of nearly 29% when compared to the value of the Bitcoin backing it. The United States dollar version of the fund trades at just about a 2% premium.

By contrast, the Grayscale Bitcoin Trust (GBTC)—the world’s biggest tradable Bitcoin-backed fund—currently trades at $46.14 per share, with about $47 worth of Bitcoin per share. 

Purpose Investments gave several explanations for that dis[arity, noting that Grayscale costs investors a yearly management fee of 2%, while its ETF only costs half as much. Purpose also claims on its website that ETFs have some advantages when compared to closed-end funds such as GBTC:

“An ETF provides a more pure exposure to Bitcoin and the structure better reflects what investors are looking for – to track the price of Bitcoin. Unlike ETFs, closed-end funds cannot quickly add or remove units to maintain consistent exposure.”

The asset manager argued that when a fund like GBTC is trading at a premium, its investors can sustain losses when the premium is lost or turned into a discount due to fluctuations in demand. An ETF is reportedly better suited to avoid this kind of problem thanks to its creation and redemption process.

As Modern Consensus’ Markets Report column noted this morning, Bloomberg Intelligence’s Mike McGlone had a different perspective, saying Grayscale’s negative premium may suggest a price bottom has been reached and a new bull run—perhaps to $100,000—is in the cards.

Purpose’s success has fueled calls for the U.S. Securities and Exchange Commission (SEC) to approve an American ETF, with investment management firm VanEck filing with the regulator to launch a Bitcoin ETF on Dec. 30, 2020. Valkyrie Digital Assets followed suit on Jan. 22, Bitwise Investments on Feb. 5, and New York Digital Investment Group on Feb. 17.

Also, recent credible rumors have it that major United States investment bank Goldman Sachs may also soon file with the SEC to launch its own Bitcoin ETF after starting to offer Bitcoin futures trading.

Many experts expect that approval will be coming soon, in large part due to a change of leadership at the SEC is now headed up by Gary Gensler, who taught digital assets and blockchain at MIT until being tapped by the Biden administration. 

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Adrian is a newswriter based out of Pisa, Italy. He's passionate about cryptocurrency, digital rights, IT, tech and futurology and likes to think about the future in a positive way.