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Spot Bitcoin ETF: Market Projections And Expectations

Last Updated January 11, 2024 12:02 PM
Teuta Franjkovic
Last Updated January 11, 2024 12:02 PM

Key Takeaways

  • Landmark decision opens doors for institutional adoption.
  • Uncertainties surround performance and NAV.
  • Long-term growth potential but modest initial influx expected.

In a landmark decision, the United States Securities and Exchange Commission (SEC) has approved the first Bitcoin exchange-traded funds (ETFs), opening up a new chapter in the cryptocurrency landscape.

This move is a significant step towards mainstream adoption of the world’s largest digital asset. It has also sparked optimism within the broader crypto sector.

Landmark Decision Opens Doors for Institutional Adoption

Despite some reservations regarding risks associated with ETFs, the SEC greenlit applications from 11 financial institutions. These include BlackRock, Ark Investments, Fidelity, Invesco, and VanEck. This decision paves the way for institutional investors, who have long been hesitant to embrace cryptocurrencies, to gain exposure to Bitcoin through conventional investment vehicles.

Issuers have indicated that the majority of these products are slated to start trading on Thursday. This sets the stage for intense competition in the market.

Representing a culmination of ten years of development, these ETFs are a transformative development for Bitcoin. They offer investors a way to gain exposure to the world’s most prominent cryptocurrency without the need to directly possess it.

This week, analysts from Standard Chartered projected that the newly approved ETFs could attract between $50 billion to $100 billion in investment in this year alone. Meanwhile, other analysts anticipate that the inflows will amount to around $55 billion over the next five years.

Bitcoin after ETF approval
Credit: Reuters Graphic

As of Thursday afternoon, the market capitalization of Bitcoin exceeded $988 billion, based on data from CoinMarketCap . Additionally, as of December 2022, the total net assets of U.S. exchange-traded funds (ETFs)  were valued at $6.5 trillion, according to information from the Investment Company Institute.

Uncertainties Surround Spot Bitcoin ETF Performance and NAV

One key question revolves around the performance of a spot Bitcoin ETF in comparison to Bitcoin itself and Bitcoin futures.

ProShares’ Global Investment Strategist Simeon Hyman, who oversees the ProShares Bitcoin Strategy ETF (BITO) – the largest bitcoin futures ETF launched in October 2021 – observed  that Bitcoin futures ETFs have generally mirrored Bitcoin’s performance quite closely.

However, he also said :

“The spot market for Bitcoin is still evolving. Unlike the regulated and mature futures market, the spot market’s maturity is yet to be seen. It remains to be seen how effectively they align with each other.”

Another point of interest is whether Bitcoin ETFs will be traded at a value higher or lower than their net asset value (NAV). In this context, NAV refers to the value of the bitcoin held by the ETF. There’s a concern that the agreed-upon process for creating and redeeming spot Bitcoin ETFs might lead to these ETFs trading higher than their NAV.

Matt Hougan, CIO of Bitwise Asset Management, one of the applicants for a Bitcoin ETF, commented :

“The underlying market is very liquid. We have been in the market buying and selling Bitcoin for years. The main issues are, who gets the liquidity, and who wins on expenses.”

Uncertain Investment Surge Looms

The exact amount of new investment that will be drawn to the spot Bitcoin ETFs remains uncertain.

Nevertheless, two significant ETF-related developments in the past two years have notably boosted interest in Bitcoin:

  1. The launch of Bitcoin futures ETFs, beginning in October 2021, played a role in elevating Bitcoin’s value from around $10,000 in October of that year to over $40,000 by January 2022. Notably, the ProShares Bitcoin Strategy ETF (BITO), the largest of its kind, recently surpassed $2 billion in assets under management, as reported by ProShares.
  2. The announcement of Blackrock’s application for a Bitcoin ETF on June 16, 2023, contributed to an increase in bitcoin’s price from approximately $25,000 to $30,000 within just a few days.

According to Reggie Browne ,  GTS co-global head of ETF trading and sales, the combined inflow into these ETFs could be substantial. He estimated  that within 30 days, inflows could reach between $2 billion and $3 billion, potentially attracting $10 billion to $20 billion in new assets within the year.

Long-Term Growth Potential but Modest Initial Influx Expected

Gabor Gurbacs, VanEck’s Director of Digital Assets Strategy, said  a spot ETF could generate “trillions in value” over an extended period. However, he noted that there’s a tendency to overestimate the immediate effects of US Bitcoin ETFs. According to Gurbacs, the initial influx of funds into these ETFs is likely to be relatively modest. It might only to only “a few hundred million dollars”. Gurbacs also pointed out much of this capital would be “mostly recycled” money.

Other analysts believe that the approval of these ETFs will necessitate ETF issuers buying tens of billions of dollars ‘ worth of Bitcoin to meet institutional demand. This could lead to a significant alteration in bitcoin’s supply and demand dynamics.

Some even anticipate a “supply shock,” especially after exchange balances dropped to a five-year low in October. The decrease in bitcoin available on exchanges, coupled with the tendency of holders to store bitcoin in personal wallets (indicating a reluctance to sell), further supports this view.

Potential for Significant Growth Inspired by Gold ETF Precedent

The SPDR Gold Shares ETF (GLD), the first spot gold ETF  in the US, came out in 2004. It provides potentially insightful parallels. GLD attracted $1.9 billion in inflation-adjusted terms within its first four weeks. This figure increased to $4.8 billion by the end of its first year, as per data from crypto exchange Coinbase.

Currently, GLD holds a total of $57.37 billion in assets. This demonstrates the potential growth trajectory for similar financial instruments in the crypto space.

The approval of Bitcoin ETFs could have a profound impact on the crypto market. It could potentially boost liquidity, enhance price stability, and broaden the investor base. As institutional participation grows, Bitcoin’s potential to reshape the global financial landscape could be further realized.

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