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Bitcoin's Performance Amid ETF Flux – a Closer Look at Fidelity and BlackRock

Posted on by The INO.com Team

On January 10, 2024, the Securities and Exchange Commission (SEC) authorized 11 U.S.-listed exchange-traded funds (ETFs) focused on Bitcoin investments, subsequently unlocking a new asset class for a broad spectrum of investors and simplifying the path to gaining direct exposure to the digital currency.

This highly anticipated decision garnered significant participation from institutional and retail investors in the cryptocurrency market, spurring substantial inflows. Notably, new U.S. spot Bitcoin ETFs witnessed $4.6 billion in volume on their inaugural trading day, as per data from the London Stock Exchange Group.

A week after the launch of these ETFs, intriguing patterns began to materialize. Spot Bitcoin ETFs currently command more than 100,000 Bitcoin, which implies an Asset Under Management (AUM) estimated at approximately $4 billion. This important revelation signifies the escalating amalgamation of Bitcoin into traditional financial systems and underlines the amplified role of cryptocurrency within the investment community.

Grayscale, leading the pack as the largest Bitcoin holder in the ETF segment, remains at the cutting edge of this Bitcoin acquisition drive. Its holdings reached an impressive tally of 552,681.2268 BTC. This substantial investment further solidifies Grayscale's standing as a major contributor in the crypto sphere and hoists Bitcoin ETFs above Silver to rank them as the second-largest commodity ETF based on holding size.

Following Grayscale's lead, BlackRock’s ishares Bitcoin Trust (IBIT) secures its position as the runner-up in terms of Bitcoin holdings with an impressive 39,925 BTC in its vault. Fidelity Wise Origin Bitcoin Fund (FBTC) continues to hold robust with 34,126 BTC. These figures exhibit significant engagement from leading financial institutions in the expanding cryptocurrency market, marking a considerable shift toward digital assets in investment strategies.

Upon winning ETF approval, Bitcoin's price momentarily soared to $48,000, only to face a subsequent downturn. This volatility alludes to an unpredictable market where current selling pressures seem to outweigh buying activities.

Adding to the uncertainty is BitMEX founder Arthur Hayes foreseeing a further dip in Bitcoin's value below the $40,000 mark, a prediction affirmed by acquiring 29Mar $35k strike puts. Hayes' cautious approach mirrors his acquisition, amounting to 5 BTC, revealing a reserved perspective for the immediate future of this cryptocurrency.

The existing market landscape, combined with expert evaluations and forecasts, hints at a potential slump for Bitcoin in the near term. While the approval of spot Bitcoin ETFs stands as a critical step in Bitcoin's mainstream acceptance, the path ahead presents an element of vagueness.

U.S. Spot Bitcoin ETF fluctuations could be rooted in various factors apart from Bitcoin's price oscillations. The spot Bitcoin ETFs depend on Authorized Participants (APs) to create and redeem ETF shares in return for Bitcoin. These APs procure Bitcoin from varied platforms, which might differ in liquidity levels, fees, and risks; these variations can impact the price of the ETF and the NAV of funds. Furthermore, management fees could also have an impact on the returns on ETFs.

Of the 11 freshly introduced spot ETFs, two funds particularly stood out in terms of net inflows: BlackRock’s ishares Bitcoin Trust (IBIT) and Fidelity Wise Origin Bitcoin Fund (FBTC).

BlackRock and Fidelity commanded the investors' attention, jointly netting 68% of all inflows during the first week (IBIT accounting for 37% and FBTC for 31%). IBIT swiftly amassed $1 billion in assets within four days of trading, while FBTC achieved the same feat on the fifth trading day. The two funds have each generated over $2 billion in trading volumes since inception.

The regulatory nod sparked intense competition for market share among the issuers. The issuers have deployed strategies to cut expense ratios and offer fee waivers. For instance, the FBTC underwent an initial proposal of a 0.39% fee, which was later reduced to 0.25%, coupled with a fee waiver effective until July 2024. Meanwhile, IBIT charges a 0.12% fee for the first 12 months for assets up to $5 billion. Both IBIT and FBTC charge 25 basis points in fees.

Investors considering a Bitcoin ETF should bear in mind that although these ETFs generally operate in a similar fashion with minor disparities, the expense ratio remains a pivotal factor in the decision-making process.

Let's delve deeper into the Bitcoin ETFs leading the pack now.

ishares Bitcoin Trust (IBIT)

IBIT, the BlackRock-owned Bitcoin ETF, emerges as a leading choice for retail investors due to its superior liquidity and affordable expense ratio. As a titan in the financial world, BlackRock remains unparalleled in its position as the most extensive ETF manager globally, with an AUM of $3.5 trillion across its portfolio of global ETF investment vehicles as of December 31, 2023. This powerhouse backing makes IBIT an assured choice for those seeking Bitcoin offerings buttressed by a sophisticated and large-scale financial structure.

The planning is such that IBIT vows an accessible expense ratio of 0.12% for the fund's initial $5 billion in assets over the ensuing year. An annual expense ratio of 0.25% is projected to kick in from January 2025.

Standing true to its promise of liquidity, IBIT has already amassed over $1 billion worth of Bitcoin in its reserves, a feat rivaled only by the SPDR Gold Trust (GLD), which impressed the markets by garnering $1 billion in assets within three days of its inauguration in 2004.

As of January 22, IBIT had $1.34 billion in AUM and an impressive NAV of $22.86. It registered net inflows of $1.12 billion over the past five days. IBIT holds about 39,925 BTC, valued at roughly $1.62 billion.

Despite experiencing a dip of 7.2% over the last five days, closing the last trading session at $22.95, IBIT maintains its allure among investors. Its swift popularity underscores it as an ideal option for those looking to diversify their portfolio with cryptocurrency and cultivate growth over time.

Fidelity Wise Origin Bitcoin Fund (FBTC)

FBTC, another notable name in Bitcoin ETFs, boasts a low expense ratio. However, investors with significant capital ready for deployment into Bitcoin ETFs are in luck, as FBTC has decided to waive even these modest fees until August 1, 2024. After this date, it will implement an expense ratio of 25 basis points.

Notably, Fidelity serves as the largest 401(k) plan and service provider in the nation. This development positions both individual investors and asset managers to seamlessly incorporate Bitcoin into comprehensive retirement strategies.

Crypto bears might argue against such a move, but it's worth considering: Would a competent asset manager willingly forsake prospective gains by excluding a Bitcoin ETF from their client portfolio? Allocating even a small portion toward this asset could potentially yield substantial returns in relation to the total investment, given Bitcoin's impressive performance trajectory over the past decade. Concurrently, with individuals reevaluating their 401(k) strategies leading up to 2024, a surge of capital directed toward FBTC is predictable.

As of January 22, FBTC had $1.21 billion in AUM and an NAV of $35.08. Its net inflows were $1.07 billion over the past five days. FBTC holds about 34,126 BTC, valued at roughly $1.37 billion.

Despite these positive indicators, FBTC plunged 7.3% over the past five days, closing its last trading session at $35.18.

Bottom Line

With the advent of Bitcoin ETFs, investing in this unique asset class has become less complex, potentially elevating its position within the financial industry. These recently launched ETFs provide a broad spectrum of investors with a simpler approach to gaining exposure to the crypto asset.

Shortly before the SEC approved the ETFs, it re-emphasized its previous "no FOMO" cautionary message to investors. Aimed at highlighting the volatility of digital assets, the warning underlines how investments tied to current popular trends like cryptocurrencies can experience periods of severe fluctuations, translating into drastic changes in value both positively and negatively.

The SEC's approval brings much-needed standardization and regulatory supervision to digital asset investment. However, experts are advising mainstream investors to proceed with caution, pointing out that Bitcoin still distinguishes itself as a speculative asset.

News of Bitcoin ETFs has made headlines, even though their trading results may not meet the initial hopes of crypto bulls. Nevertheless, many see brighter days closing in. Potential future record cash inflows into these funds might be on the horizon as financial advisors and wealth managers consider incorporating them into their clients' diversified portfolios.

Bitcoin's primary utility arises from its function as a form of value storage akin to gold. The day that central banks initiate the acquisition and storage of Bitcoin will signify its arrival at the forefront of the financial world. The price is now around $39,000, and it appears to be headed lower. After the establishment of a true base, a progressive increase in its price over time could be projected as governments devalue their fiat currencies.

With the introduction of spot ETFs, we're starting to see the beginnings of real price discovery. This process could further develop in a couple of months.

Prestigious investment managers such as Fidelity and BlackRock’s iShares should not be overlooked in this space. Their competitive edge in the traditional ETF fees arena may eventually give them an advantage over smaller rivals. Considering the slight disparity in fees between these funds and market leaders, long-term Bitcoin ETF investors might consider opting for these established alternatives.

Although the issuer’s role is arguably minor, ETFs governed by larger asset managers could be more resistant to liquidity issues arising from insufficient demand.

As an example, the IBIT ETF concluded January 22 trading at a 0.41% premium to its net asset value, indicating high demand. On the other hand, the FBTC traded at a 0.30% discount relative to its net asset value, suggesting weaker demand.

In view of the overall market situation, adopting a strategic position in IBIT and FBTC once the price stabilizes would be prudent.

Is Ford Motor (F) Stock Gearing up to Crash and Burn?

Posted on by The INO.com Team

Ford Motor Company (F) has been dealing with the United Auto Workers (UAW) strikes. Now, another difficulty confronts the automaker — it recently issued two separate recalls, affecting 273,127 vehicles across the United States. The two models impacted are the 2020-22 Ford Explorer and the Ford Mustang Mach-E.

The larger recall applies to 238,364 Ford Explorers produced between 2020 and 2022. According to filings with the National Highway Traffic Safety Administration (NHTSA) from Ford, a defectively manufactured mounting bolt in the rear axle might snap, potentially resulting in vehicle roll-aways even when parked. The issue stems from this bolt enduring constant bending forces during acceleration, resulting from torque transmission.

If the bolt fails after sufficient vehicular launches, the axle might shift, disconnecting the driveshafts or half-shafts from the integrated powertrain system. If complete separation occurs, the transmission becomes unlinked from the car's wheels, paving the way for possible roll-aways as engaging the park gear would no longer prevent wheel spin.

According to a Ford report, 396 customers reported incidents linked to this problem, often signaled by loud clunking or grinding sounds. Less than 5% of these cases resulted in vehicle roll-away or impaired vehicular control. However, as a remedial measure, F will replace the faulty bolt and implement a re-engineered subframe bushing to ensure correct axle positioning.

The second recall targets 34,763 Mustang Mach-E models fitted with extended-range batteries. This rectification is due to an overheating battery contactor potentially causing a loss of motive power when driving. As per F, this can occur when the vehicle has experienced fast DC charging followed by intense acceleration.

This is the second recall to involve battery contactors on the Mustang Mach-E. Last year, a similar complication led the company to recall 48,924 Mach-E models and replace a diagnostic control module with an alternate model capable of monitoring the battery contactor's temperature. Unfortunately, the initiative did not successfully nullify the issue.

Hence, in this latest recall, F will replace the high-voltage battery junction box at no expense to its customers. The car manufacturer has confirmed that the previous recall has adequately addressed power loss issues affecting standard-range Mach-E units; hence, this recall targets only extended-range versions.

The recall follows an investigation initiated by the auto safety regulator, assessing whether F adequately addressed the issues during the June 2022 recall of about 49,000 Mach-E vehicles.

Implications

F is already grappling with UAW strikes, with predicted impacts of $120 million being realized in the upcoming quarter. As per industry experts, F is losing $44 million daily. Additionally, cuts to F’s future product investments could come if the UAW deal turns out unfavorable. Further, potential reductions in F's future product investment could follow if the UAW deal proves less favorable.

A challenge no company wants to find itself dealing with is product recalls. Recalls can significantly reshape a company's financial landscape, have far-reaching effects on its market performance and negatively impact its reputation.

Under consumer protection laws, manufacturing and supplying companies are required to shoulder full responsibility for the cost of recalling products and any associated costs. Though insurance may cover some costs for defective product replacement, many product recalls result in lawsuits. Considering the accumulated costs from lost sales, replacing faulty units, government sanctions, and legal proceedings, a large recall can quickly escalate into a daunting, multi-billion-dollar predicament.

For example, F's recall of 169,000 vehicles in the United States to replace faulty rear-view cameras and perform software upgrades would take a $270 million toll on the company's finances.

Large-scale organizations such as F can recover relatively quickly from such short-term financial loss. However, diminishing confidence among shareholders and consumers could lead to more severe long-term consequences, such as a marked drop in stock prices. Hence, it would be prudent for F to take measured steps swiftly toward addressing vehicular recalls and safeguard their reputation.

Despite the second-quarter earnings surpassing expectations, these unforeseen expenses could affect the upcoming quarter earnings.

During the second quarter, F’s revenues rose 11.9% year-over-year to $44.95 billion, and automotive revenues peaked at $42.43 billion, surpassing the $40.38 billion estimate. The net income almost tripled to $1.92 billion, marking an 187.4% year-over-year increase.

The automaker anticipates its full-year adjusted EBIT guidance between $11 billion and $12 billion, while its adjusted free cash flow is projected to come between $6.5 billion and $7 billion. The company anticipates to hit an 8% EBIT target by 2026.

Investors' apprehension arises from multiple aspects of the company's earnings and projections. The EV segment of the business, recently rebranded as Model E, reported a pre-tax loss of $1.08 billion. The firm anticipates losses for this segment could mount to $4.5 billion in 2023, a staggering 50% surge on prior predictions.

Additionally, the company has publicly acknowledged the sluggish uptake of EVs, which has led to a scaling back of their previously ambitious production objectives for EVs. The company now expects to hit an annual production capacity of 600,000 vehicles by 2024 instead of 2023 while being “flexible” about the goal of 2 million vehicles it previously forecast by 2026.

Analysts expect F’s revenue and EPS in the fiscal third quarter (ending September 2023) to be $42.51 billion and $0.46, registering 14.3% and 53.8% year-over-year growths, respectively.

Considering these developments, F’s shares have been facing pressures, sending its stock down to May 2023 levels. Over the past year, the stock declined 5% and 8.2% over the past month to close the last trading session at $11.53.

Institutions hold roughly 54.6% of F shares. Of the 1,765 institutional holders, 797 have decreased their positions in the stock. Moreover, 128 institutions have taken new positions (11,202,366 shares), while 132 have sold positions in the stock (10,742,511 shares).

Bottom Line

F has unveiled a bold scheme to invest billions in the advancement of EVs while also returning capital to its shareholders. This plan is predicated on robust revenue streams from its traditional combustion-engine trucks and SUVs portfolio. Given the increasing costs associated with UAW strikes, contract resolutions, and vehicular recalls, these plans seem to be in considerable peril.

To counteract these losses, the automaker could reduce capital spending, delay EV targets, increase cost-sharing initiatives, and make other alterations to its corporate portfolio.

The company experienced negative free cash flow in 2022 and forecasts a similar scenario for this year owing to lofty capital expenditure commitments.

While the company continues offering its shareholders dividends, its history is somewhat mottled. Given the ongoing difficulties, there is an elevated risk of dividend discontinuation or minimization. This eventuality was seen during the pandemic in 2020 and was resumed at the tail-end of 2021. A previous incident occurred before the Green Financial Crisis, with reinstatement happening three years later. This inconsistency may dissuade shareholders from seeking stability in their dividend returns.

Compounding the issues at F is their escalating debt load, which jumped from $105.06 billion in 2012 to nearly $139 billion in 2022. Simultaneously, the firm increased its cash holdings to boost liquidity.

One factor that could entice investors is the relatively low valuation of F. Its forward non-GAAP Price/Earnings of 5.78x is 59.7% lower than the industry average of 14.33%. Also, its forward Price/Sales multiple of 0.28 is 66% lower than the industry average of 0.83.

However, considering the automaker’s tepid price momentum and mixed profitability, it could be wise to wait for a better entry point in the stock.