Bitcoin ETF issuers may decline by the end of the year, says Valkyrie CIO

Spot bitcoin exchange-traded funds (ETFs) are nearing their first anniversary, but the ETF field is likely to shrink by the end of the year, said Steven McClurg, chief investment officer of Valkyrie Funds.

McClure predicts that only “seven or eight” of the ten currently operating issuers will remain standing. The reason, speaking for crypto, is that the costs of running an ETF for bitcoin can be prohibitive—especially in the midst of a race to the bottom that could hurt the profitability of issuers that are currently struggling.

“If you don't raise $100 million [of assets under management] Now you can solve it too,” McClure said.

Fund flows have been strong since the Securities and Exchange Commission authorized the first Bitcoin spot ETFs on January 10. On the first day of trading alone, $4.5 billion was traded, a huge start by any standards. It was another $400 million in revenue on the last day alone, Bloomberg analyst James Seifert said.

Looking back over the past month, McClure says events in the market have largely fallen in line with what preceded Valkyrie's anticipated launch.

The difference, according to McClurg, was the expectation of higher outflows from Grayscale, whose switch from trusts to ETFs led to a selloff in Bitcoin, which contributed to its value falling below $41,000 before resuming. However, even if this selling pressure has subsided recently, McClurg expects more outflows to follow and be distributed among other ETFs.

Valkyrie is facing stiff competition from nine other rivals in this space, including Wall Street goliaths like BlackRock and Fidelity. After receiving approval to launch, BlackRock's iShares Bitcoin ETF and Fidelity Wise Origin Bitcoin Fund passed the $3 billion mark in assets under management last month, while Arc Invest's 21shares and BitWise ETFs saw more than $700 million in revenue.

In light of this, McClure expressed satisfaction with Valkyrie's performance, noting that it outperformed ETFs managed by large issuers, citing the company's long history of working with digital assets and in traditional markets. Valkyrie saw about $123.7 million in AUM as of Feb. 8, a much lower figure than its giant peers, but McClure said beating them isn't the point.

“You're not going to beat BlackRock and Fidelity. They have captive markets,” McClurg explained. “But if you get down to the next level, I think we're doing pretty well.”

The intensity of ETF competition is fierce, and nowhere is this more evident than in fee cuts before and after launch. These cuts are aimed at attracting more investors, but they also come with the trade-off of eating into ETF returns.

On January 11, Valkyrie lowered its sponsorship fee to 0.25%, matching those charged by BlackRock and Fidelity. With that, Valkyrie is looking to avoid the unsavory focus of being rugged, McClurg said, but he blamed the cuts at an early stage as “not tragic.”

With the high costs that come with running a spot ETF, including security and protection costs, these reductions may be difficult to sustain for any issuers that delay now. It's these profitability challenges that have lent themselves to McClure's prediction that the current crop of issuers could shrink next year.

“I think we're going to see some issuers go through the pain of canceling their Bitcoin spot ETFs because they're not making money number one. Number two, they never make any money,” McClure said.

“I think if you want to identify who is desperate for Bitcoin spot Super Bowl ads,” he added.

Edited by Ryan Ozawa.