How will Spot ETF Start the Next Bull Run of Bitcoin?
Intro
Bitcoin, the largest cryptocurrency by market capitalization, has risen more than 20% in the past month, surpassing the $35,000 mark and reaching a new high in nearly 17 months, thanks largely to expectations that a spot Bitcoin ETF will soon be approved in the U.S. With the SEC saying less and less about rejecting ETFs, delaying its decision time over and over again, and dropping its appeal of the Grayscale ruling, etc. All signs point to the fact that the time for the approval of the Spot Bitcoin ETF is getting closer and closer. In a recently released report, JPMorgan stated that the SEC may soon approve multiple spot bitcoin ETF applications, with approval most likely to occur by January 10, 2024.
The approval of a spot bitcoin ETF is a major milestone event for the crypto industry as a whole. While it’s difficult to determine the final timing of the approval at this point, some of the possible impacts that will result from the approval can be broadly predicted. On the one hand, Bitcoin and the crypto market as a whole are highly price-sensitive to the approval of a spot ETF, as evidenced by the recent volatility in the market; On the other hand, a spot Bitcoin ETF will greatly improve the convenience and compliance of Bitcoin exposure and is expected to bring a large amount of incremental capital to the crypto market, which will be of significant benefit to the long-term development of the industry as a whole.
The Highly Sensitive Crypto Market
The price sensitivity of BTC and the whole crypto market to news related to the U.S. spot Bitcoin ETF has been evidenced in many ways, especially at a time when bearish sentiment has been building for a long time. The main market buzz in recent months has centered around new developments in Bitcoin and its spot ETF. Starting with BlackRock’s filing of the Bitcoin Spot ETF application form in June, every subsequent news story related to the approval of the Bitcoin Spot ETF has clearly reached the secondary market for Bitcoin, all of which underscores the crypto market’s heightened sensitivity to institutional actions. Despite some of the subsequent positive news proven fake, Bitcoin trading activity remains highly active, with BTC currently at around $35k high.
The Evolution and Implications of Gold ETFs
Bitcoin has been dubbed “Digital Gold,” and the connection between Gold and Bitcoin as a store of value is clear. That’s why it’s important to study the history of the Gold ETF’s approval and historical market trends to predict the future of Bitcoin ETFs. A few key points in time and price movements before and after the approval of the Gold ETF are as follows:
- In March 2003, the world’s first Gold ETF, called Physical Gold, was listed in Sydney, Australia, followed by a sharp price rise in gold that continued until the U.S. ETF began trading.
- In October 2004, the SEC approved the StreetTracks Gold Trust (GLD), the first U.S. Gold ETF; the price of gold continued to surge slightly after the approval.
- In November 2004, GLD, the U.S. Gold ETF, was officially listed and traded on the New York Stock Exchange (NYSE). Two months after GLD began trading, the market declined by about 9%, falling below the price at which the ETF was approved. After nearly eight months of consolidation, gold began a rapid upward cycle.
The approval of gold ETFs allowed more traders to invest through ETFs without the need to hold the metal and custodian in the bank, and in the years that followed, gold ETF products triggered a subscription boom around the world, absorbing a large amount of money into the market. It is widely believed that the approval of gold ETFs has directly contributed to a 10-year bull market in gold since then. Of course, it is undeniable that the relatively stable economic environment and monetary easing policies have also contributed to the strong performance of gold.
Drawing on the historical process of gold ETFs, we can make some preliminary predictions about the market trend before and after the approval of the U.S. Bitcoin ETF:
- Stage 1: The U.S. Spot Bitcoin ETF will continue to be anticipated by the market until it is approved, which can be seen as positive.
- Stage 2: The market will still have a small sprint after the official approval of the U.S. Bitcoin Spot ETF.
- Stage 3: Shortly after the U.S. Spot Bitcoin ETF is listed and traded, the top of the rush may be followed by a large drop, even below the price of the ETF prior to its approval, and undergo a period of consolidation to absorb more capital before accelerating upward.
- Stage 4: In the long run, the listing of the U.S. Bitcoin Spot ETF will open the valve for traditional capital to enter the market and become an important catalyst to drive a major bull market in Bitcoin.
The Impact of Spot ETF Approval on BTC Market Size
We examined the distribution of institutional investors in listed companies with Bitcoin exposure and a market capitalization of more than $1 billion. By an incomplete count only, the total market capitalization size of institutional positions in the stocks of these listed companies exceeds $60 billion. Major holders include internationally recognized managers such as Vanguard, BlackRock, and Morgan Stanley. Since these managers themselves already conduct Bitcoin-related business with their clients, we believe that a shift of 10% to 20% of listed company stock positions to direct BTC ETFs as investment exposure is possible, with an estimated AUM size of between $6 billion and $12 billion.
On a more macro level, according to a recent analysis by Galaxy Digital Research, the U.S. wealth management industry is likely the most accessible and immediate market for BTC ETFs, so approved Bitcoin ETFs will receive the most net new accessibility from it, with U.S. traditional broker-dealers ($27 trillion), banks ($11 trillion), and RIAs ($9 trillion) having a total of $48.3 trillion in AUM.
Galaxy has categorized the estimated growth rate of each channel of the industry into Bitcoin Spot ETFs, and if it is assumed that 10% of the available assets in each wealth channel adopt Bitcoin, the average allocation is 1%, or 1‰ of the eventual conversions are realized. The final conclusion is that there will be a cumulative inflow of nearly $80 billion into Bitcoin Spot ETFs over a three-year period.
Matt Hogan, CEO of Bitwise, a leading crypto index fund manager, also recently said that if a spot Bitcoin ETF product could be approved, the overall size could quickly reach the tens of billions of dollars level. He believes that a spot bitcoin ETF could well reach the $5 billion level in the first year of its launch and could attract around $50 billion within five years. The U.S. ETF market currently totals about $7 trillion, and it is estimated that a Bitcoin ETF product could attract assets relative to 1% of its current size, or $70 billion. This compares to the current $20 billion in GBTC (Grayscale Bitcoin Trust), leaving room for about $50 billion.
Therefore, it is reasonable to expect the BTC spot ETF to bring in inflows on the scale of tens of billions of dollars initially through its approval, although the actual rate of inflows will ultimately depend on market conditions at the time of the approval as well as the preferences of institutional and retail investors.
The Impact of Spot ETF Approval on BTC Price
Galaxy Digital, in its recent article Size Sizing the Market for a Bitcoin ETF, made a very illuminating prediction of the impact on the BTC price as a result of ETF fund inflows. However, due to the high time sensitivity of this prediction, as of now the BTC price has increased by at least 30% since the time of the article, and some of the parameters may no longer be applicable, so we have made further data updates and statistical optimizations based on Galaxy’s estimation model.
The total market capitalization of gold is currently approximately 19.74 times the market capitalization of bitcoin in circulation. Based on the assumptions, the inflow of the equivalent amount of dollars has about 7.3 times the impact on the bitcoin market compared to the gold market.
Considering the impact of monthly inflows on the BTC price, we believe that using earlier data would introduce too many outliers (e.g. due to the 2008 subprime mortgage crisis), but timing too close to the present could lead to an overly concentrated trend in the data. So we selected two intervals for analysis: 2016–present and 2020–present (corresponding to BTC’s two most recent halftime years, respectively).
Note: We once used the last 12 years of data from 2012 to the present and came to a final conclusion that was closer to the data from 2020 to the present, but due to the large number of outliers in the dataset, the fit of the curve is also relatively low, and the statistical pattern is not obvious, so we did not expand the analysis.
Both of these fits reflect relatively high R-squared values (0.57 and 0.71) with statistical confidence. Still applying the estimated $14.4 billion in inflows for the first year (Galaxy has given a good estimate of about $1.2 billion per month, or about $8.76 billion adjusted using a 7.3x multiplier) to the historical relationship between gold ETF fund flows and gold price changes, and substituting into each of the above two fit functions, we estimate that the first-month spot ETF’s price on Bitcoin impact is between 2.9% and 3.3%.
Consider the decline in the Gold/Bitcoin market cap multiple due to the increase in the Bitcoin price (which has in fact been the case, 24x in the Galaxy article and currently at 19.74x). You can see that the monthly return gradually decreases from 2.9%–3.3% on Month 0 to 1.68–1.98% on Month 12, culminating in an estimated 27–31% increase in the price of Bitcoin in the first year of the ETF’s approval (using as a starting point a market capitalization of Bitcoin of $673.4bn on October 31st, 2023, which is the 15th birthday of Bitcoin, a day of great significance).
Compared to Galaxy’s estimate of 74% growth in the first year, our result is more conservative and convergent, but would theoretically be more reliable for the following reasons:
1. Our estimates are based on two fits with a higher R-squared, and the better fit of the curve has a relatively high statistical characterization.
2. Our data benchmarks, such as the Bitcoin market capitalization compared to Galaxy’s estimate, have increased by more than 30%, so it is reasonable that there is a convergence in the increase.
3. This estimate is based entirely on capital inflows and has already excluded price fluctuations caused by uncontrollable factors such as short-term market FOMO buying, bitcoin halving, and macro policy interventions.
Possible Starting Time for the Next Bull Market
As can be seen from the recent market trend, the market has now digested some of the favorable expectations. Combining the historical trend of gold ETFs, the timing and historical market performance of Bitcoin halving, and the Fed’s macro policy effects, we have made a rough prediction on the timing of the approval of the spot bitcoin ETF and the start of the crypto bull market:
- In January 2024, the SEC will approve an application for a Bitcoin spot ETF, while at the same time, the Federal Reserve is expected to stop raising interest rates, and the market is no longer expected to do so. These will propel Bitcoin to a round of impulse tests in January, preceded by a possible period of sustained rise in November 2023 as favorable expectations materialize, and a period of pullbacks in December due to the Christmas season, when many Wall Street institutions, hedge funds, and market makers are likely to be on vacation.
- In April 2024, the Bitcoin Spot ETF will begin to be officially traded, and the market will enter a countdown to halving Bitcoin, helping to draw in large amounts of capital.
- In July 2024, the Bitcoin bull market will be officially launched. After a market correction following the halving, along with heightened market expectations for loose monetary policy, Bitcoin will have plenty of momentum to charge ahead.
- In September 2024, the Federal Reserve will begin a cycle of interest rate cuts and monetary easing.
We expect the bull market to kick off around July next year, rather than when the Bitcoin spot ETF officially comes into effect. The market tends to experience a wave of adjustment rather than immediately starting the uptrend 2–3 months after bitcoin halves; in addition, relying solely on the stock of crypto funds cannot support the long-term independent market. The Bitcoin ETF approved this heavy favor on the premise that the economic situation has achieved a certain degree of improvement, which will bring greater market stimulus and absorb more funds outside into the field. It is generally expected that next year, in September, the Federal Reserve will enter the interest rate reduction cycle. In July, the market began to price in on the interest rate reduction, which is expected to be reasonable.
Potential Demand and Long-Term Trends for BTC ETFs
As Bitcoin’s ETF listing process continues to become clearer and institutional participation grows, its role as a powerful financial bulwark in the global landscape becomes more and more apparent. With Bitcoin’s next halving coming in 2024, Bitcoin’s annual inflation rate will be lower than that of gold, making it one of the rarest-value assets. Because the total amount of BTC is constant and halves every four years, it has a high degree of scarcity and reliable stored value, making the current series of devalued fiat currencies such as the Argentine peso, Nigerian naira, and Turkish lira hit record lows in exchange rates with BTC. The approval of a spot ETF will continue to build on the scarcity by giving BTC unprecedented asset compliance and liquidity, further expanding Bitcoin ETFs’ total addressable market (TAM).
It is due to the potentially strong demand that, in the near term, it is expected that other mainstream global and international markets will follow the lead of the U.S. in approving and offering similar Bitcoin or Ethereum spot ETF products to a wider range of investors. Various traditional investment or wealth management organizations will inevitably add a portion of BTC exposure to their investment strategies (e.g. sovereigns, mutuals, closed-end funds, private equity funds, etc.)
Over the long term, the target market for Bitcoin investment products is likely to expand further to all third-party managed assets (AUM of approximately $126 trillion according to McKinsey) and even more broadly to global wealth ($454 trillion according to UBS). Based on these market sizes, using Galaxy’s previous assumptions (10% of funds using bitcoin, with an average allocation of 1%, or a conversion of 1 percent), potential new incremental inflows into bitcoin investment products are expected to be in the range of $125bn to $450bn over a long period of time, which is a hundred billion dollars of capitalization that should not be ignored. When viewed more macroscopically with reference to the overall asset size of gold, a multi-trillion-dollar crypto-finance market is on the horizon.
About DFG
Digital Finance Group (DFG) is a global blockchain and cryptocurrency investment firm founded in 2015 with assets under management of over $1 billion. Through a wide range of sectors within the blockchain ecosystem such as Web 3.0, CeFi, DeFi, NFTs, and the Polkadot ecosystem.
Investments include Circle, Ledger, Coinlist, FV Bank, Astar, ChainSafe, and over 100 more. DFG intends to create value, through analytical research, based on the most impactful and promising global blockchain and Web 3.0 projects that will bring a paradigm shift to the world.
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