The anticipation surrounding the approval of a US-regulated spot Bitcoin ETF is mounting, considering its potential to significantly catalyze the adoption of Bitcoin and its recognition as a viable asset class. As of September 30, 2023, Bitcoin investment products, including Exchange Traded Products (ETPs) and closed-end funds, held about 842k BTC, equivalent to approximately $21.7 billion, according to Charles Yu, a Research Associate at Galaxy.
Prevailing Challenges in Bitcoin Investment
Current Bitcoin investment avenues present a slew of drawbacks for investors, encompassing high fees, low liquidity, and tracking errors. These inefficiencies, coupled with the administrative burden associated with direct Bitcoin ownership such as wallet/private key management and tax reporting, hamper a broader population of investors from engaging in the Bitcoin market.
Spot ETF: A Gateway for Broader Accessibility
A spot ETF is emerging as a promising solution for investors looking to gain direct exposure to Bitcoin without the need for self-custody. This development addresses several existing pain points in the Bitcoin investment landscape.
Firstly, cost efficiency is a notable advantage. Unlike the high fees often associated with hedge funds or closed-end funds, ETFs are generally known for their lower fees. This is a positive aspect for investors seeking more cost-effective investment channels. Moreover, the competitive landscape among the numerous ETF applicants is likely to drive the fees down further, making Bitcoin investments more accessible.
Secondly, the aspect of liquidity and price tracking is significantly improved with a spot ETF. As it is traded on major exchanges, a spot ETF is well-positioned to offer enhanced liquidity and better price tracking as compared to futures-products or other proxies aimed at Bitcoin exposure.
Thirdly, the ease of access is another beneficial feature of a spot ETF. It facilitates Bitcoin exposure through a wider array of channels and platforms, potentially simplifying the onboarding process for both retail and institutional investors.
Lastly, regulatory compliance is a crucial advantage of a spot ETF. By adhering to stringent regulatory compliance around custody setups, surveillance, and bankruptcy protection, a spot ETF could provide a level of security and transparency that current Bitcoin investment products lack. This compliance framework not only establishes a safe investment channel but also builds a foundation of trust and clarity in a market that is often seen as volatile and unpredictable.
Market Acceptance and Accessibility
The formal recognition from regulators and established financial services brands could bolster Bitcoin’s acceptance, addressing the existing regulatory and compliance concerns. This potential validation is expected to attract more investment and development into the crypto industry, fostering a more conducive environment for both retail and institutional investors.
Estimations of Market Inflows Post ETF Approval
As of October 2023, the total assets managed by broker-dealers, banks, and Registered Investment Advisors (RIAs) in the US summed up to $48.3 trillion. Using this figure as a baseline Total Addressable Market (TAM) for analysis, the addressable market size for a US Bitcoin ETF is estimated to be around $14T in the first year post-launch, $26T in the second year, and $39T in the third year.
The projected inflows into Bitcoin ETFs are estimated at $14 billion in the first year, increasing to $27 billion and $39 billion in the subsequent years, assuming a 10% adoption of BTC by total available assets in each wealth channel with an average allocation of 1%.
ETF Impact on Bitcoin Price
Drawing a comparison between Gold and Bitcoin ETFs as of 9/30/23, the analysis anticipates a significant price impact on BTC in the first year post-ETF approval. With a projected estimate of $14.4 billion in inflows, the analysis suggests a +6.2% price impact for BTC in the first month, tapering down to +3.7% by the last month of the first year, culminating in an estimated +74% increase in BTC price.
Beyond US Borders
The potential approval of a Bitcoin ETF is not only poised to influence the US market but is likely to reverberate across global markets, prompting similar ETF offerings and encouraging a broader spectrum of investment vehicles to integrate Bitcoin into their strategies. The ripple effect could see incremental inflows into Bitcoin investment products ranging from about $125 billion to approximately $450 billion over an extended period, as projected by the analysis from Galaxy.
The trajectory of Bitcoin’s market capitalization, which skyrocketed from less than $1 billion to $600 billion over a decade, underscores the growing appetite for Bitcoin investments. The United States, despite being a major capital market, still awaits the approval of a spot-based Bitcoin ETF – a development that could unlock significant inflows, primarily driven by wealth management channels. Coupled with market narratives surrounding the upcoming Bitcoin halving in April 2024 and potential peaking of rates, 2024 could indeed herald a significant year for Bitcoin.
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