The popularity of exchange-traded funds (ETFs) is almost unfathomable. They’re not the first type of ETFs – they entered the market in the 1990s. Crypto ETFs entering standard exchanges was a massive move for cryptocurrencies, with effects spreading to everything from BTC to SGD to Solana (currently applying for approval of ETFs). Bitcoins ETFs started the trend and definitely had the biggest impact on the market compared to other ETFs.
Below, we’ll explore why ETFs are still experiencing massive inflows.
ETFs: Phenomenal Momentum
ETFs have developed significant momentum across global markets. They’ve put cryptocurrency in a stable position. Or at least, more of a position of exponential growth. And even though there are only Bitcoin and Ethereum ETFs currently, the effects across the cryptocurrency market were widespread.
ETF market growth in the United States US ETFs hit $7 trillion as of Q1 2024, currently holding $47.7 billion. ETFs hold around 4% of the 21 million BTC supply, having almost $16 billion of inflows since launching in January.
It’ll be interesting to see how the Bitcoin ETF phenomenon continues to influence global financial markets. The hype was so immense when Bitcoin first released its ETF, and we have to say that Ethereum didn’t have as much hype. For Ethereum, the perks were more felt across the network, with gas fees dropping dramatically. They didn’t experience the same inflow that Bitcoin did.
Perhaps the same will happen for Solana, pending approval of their release of a spot ETF. Solana is an even smaller network than Ethereum.
Can This Growth be Sustained?
But can the extraordinary growth rates be sustained over the next five years? It would seem that way. Spot ETFs are changing the way traditional financial markets see cryptocurrency.
Growth Projections
The market participants see ETF growth continuing into the future at a fast pace and high levels. Of those quizzed in one study, more than half believe global ETF AUM will hit a minimum of USD 18 trillion by 2026 – and that’s just one example. We can’t only talk about cryptocurrency ETFs because
Some think BTC will reach $120,000 by the end of the year, but that could be an unrealistic growth rate if we’re being honest. It’s more likely to increase a steady amount over the next five years and Bitcoin continues to become a mainstream currency. And if you think about it, it really does feel like more of a currency. You can pay using Bitcoin at most checkouts as if it’s fiat currency.
The United States has seen strong ETF inflows. Well, it’s the center of ETF trading compared to other countries. US ETFs attracted $151 billion of fixed income-related flows during the first quarter of 2024, along with $53.6 billion into equities funds and money market funds, expanding by a further nice amount, reaching nearly $18 billion in YTD total flows at one point. That just goes to show the widespread acceptance ETFs have in asset classes across the board.
You’d be lying if you said you weren’t interested in spot ETFs, and the fact they’re tied to traditional exchange markets makes them an easy investment. It feels like less risk and less of the unknown, which is often a common barrier to entry for amateur investors.
Trends: Innovation as a Competitive Advantage
The standard view of ETFs has been a passive investment model based on market indices. They’re so much more than that.
The evolution of the ETF market is quickly generating unique investment opportunities. While equity and fixed-income products may still be the two largest components of the ETF universe, rapid innovation has created endless product types and investor options.
Yes, not everyone is convinced about investing in ETFs simply because they’re attached to standard exchange markets, but the continued growth of ETFs and coins like Solana about to enter should solidify their place in the market.
While thematic ETFs, active strategies, and crypto are called out as potentially high areas of demand, these manifestly underweight expectations in a 2-3 year time frame. The increasing popularity of active ETFs is one such example. Active ETFs were nearly 30% of ETF flows in Q1 2024 even though they have less than a seven percent share of total US ETF assets under management This change shows an increase in interest in market-beating tactics.
Meeting Stakeholder Expectations
If ETFs have been the greatest single innovation in money management over the past 30 years, it appears likely that ESG will be next. A growing portion of investors, regulators, and societal stakeholders want environmental concerns to become mainstream in global finance.
This growing emphasis on ESG creates a whole new suite of product innovation opportunities within the ETF space, with many different providers developing customized indices aligned with environmental goals to meet massive amounts of investor capital. Respondents of one survey are very much aware of these changes and therefore reshaping their operations.
It’ll be interesting to see how the ETF market continues to develop, especially as coins like Solana prepare to make their way into the market. You can’t deny that ETFs bring a long-needed sense of credibility to cryptocurrencies.