What are the predicted impacts of the Bitcoin spot ETF market size?

Author: NYDIG

Compiled by: Wu Says Blockchain

Highlights Overview

• Investors are eagerly anticipating a Bitcoin spot ETF, so let's take a look at what the opportunities and impacts of this product might be.
• Nearly $29 billion has already been invested in existing Bitcoin funds globally, but many Bitcoin funds in the U.S. have flaws that could potentially be addressed by a spot ETF.
• We do not know the ultimate success rate of such a product, but we hope our analysis can provide guidance for investors seeking a framework and more information.

Assessing the Potential Size of a Spot ETF

Since BlackRock unexpectedly submitted its application for a Bitcoin spot ETF on June 15, the price of Bitcoin has risen by over 20%. Given the excitement among investors regarding the potential approval of a spot ETF in the U.S., especially since it has been 10 years since such products were first submitted for registration, we want to explore what this financial product might mean for the investment community and the price of Bitcoin. Approval is not guaranteed, so we encourage investors to weigh their decisions based on the probability of potential fund flows.

Bitcoin Funds Already Have Significant Assets Under Management

First, it is important to understand that while the U.S. has never had a Bitcoin spot ETF, there has already been substantial investment in existing structures, including trusts like the Grayscale Bitcoin Trust (GBTC), U.S.-based futures ETFs, spot ETFs outside the U.S., and private funds. Our analysis shows that the assets under management of these products amount to $28.8 billion, with $27.6 billion invested in spot products. Note: Our measurement does not include private funds that may exist outside the U.S., which are more difficult to integrate.

Optimistically, Existing Options Have Flaws

The optimistic argument for a spot ETF is that, despite the large amount of capital invested in Bitcoin funds, there are several drawbacks to existing options that a spot ETF could alleviate. In addition to the investor protections offered by exchange-traded products, the brand recognition of BlackRock and iShares, familiar buying and selling methods through brokerage firms, and simplified position reporting, risk measurement, and tax reporting, a spot ETF could offer some significant advantages over existing alternatives—better liquidity compared to private funds, lower tracking error compared to trusts/closed-end funds (CEFs), and potentially lower costs (certainly lower than GBTC), although fees have not yet been disclosed.

Finding Analogies in the Gold Market

Considering that Bitcoin is often compared to gold (we prefer to view Bitcoin as an upgraded version of gold), we believe it is helpful to observe the existing supply and holding methods of gold. As of the end of June, the assets under management of global gold ETFs exceeded $210 billion. Nearly half of this, $107.3 billion, is in North America. Surprisingly, global ETFs only hold 1.6% of the total existing gold supply, while central banks (17.1%), bars and coins (20.6%), jewelry (45.8%), and others (14.9%) account for larger shares of gold holdings. Although Bitcoin is not held by central banks (except for El Salvador) and is not used as an input for other products like gold, a larger portion of Bitcoin supply has already been held in various fund formats (4.9%) compared to gold (1.6%). If we only look at the private holdings of the two assets, virtually all Bitcoin is held in a more favorable proportion compared to gold ETFs and bars/coins. The private investment share of gold ETFs is 7.4%, while the share of various Bitcoin funds is 4.9%. Private investment in gold is still primarily held in coins and bars (accounting for 92.6% of private investment).

In absolute dollar terms, these numbers are staggering—investment in gold funds exceeds $210 billion, while investment in Bitcoin funds is only $28.8 billion. The volatility of Bitcoin is about 3.6 times that of gold, meaning that on a volatility-equivalent basis, investors would need 3.6 times less Bitcoin than gold to achieve the same level of risk exposure. Nevertheless, this would still lead to an increase in demand for Bitcoin ETFs of nearly $30 billion.

Banks and Brokers Have Limited Exposure to Bitcoin Futures ETFs

By comparing the types of investors who own gold ETFs and other ETFs (such as oil and volatility), we can better understand where demand for a Bitcoin spot ETF might come from. First, the existing major futures ETF, ProShares Bitcoin Strategy ETF (BITO), has received strong support from investment advisors. If anything, advisors are over-indexed on their Bitcoin ownership compared to gold ETFs. However, a significant opportunity lies with banks and brokers, who own BITO ETFs at a much lower rate than gold ETFs. We believe there are two reasons—fund structure and recommendations. In terms of fund structure, futures-based ETFs are less likely to be owned by these types of investors because the costs of rolling futures are higher than holding spot (we measured a 6% annualized rate for Bitcoin futures prior to BITO's launch). For those who have no way to access the spot market, such as the oil market, banks and brokers have shown a willingness to own futures-based products like USO. We believe the bigger issue is that many banks and brokers do not recommend a strategic allocation to Bitcoin in their clients' portfolios. Therefore, their advisors and internal funds do not consider Bitcoin as an asset class. While a spot ETF may help institutions overcome the barriers to owning futures-based ETFs, it may not affect the strategic allocation aspect. To change this, banks and brokers may need to recognize the nature of Bitcoin's potential to enhance returns and reduce risk (diversification) for portfolios.

Scenario Price Sensitivity

While this is merely for illustrative purposes, we believe it may be helpful for investors to understand how a potential spot ETF could impact Bitcoin prices. These are certainly just scenario analyses, and reality may differ from expectations. These scenarios do not embed any discounting and rely on a 10.0x money multiplier (observed at 11.36x in 2018), where every $1 AUM flowing into the ETF would affect Bitcoin's value (market cap) by $10.

In the worst-case scenario, $1 billion in ETF AUM would be comparable to the existing futures-based BITO ETF. In the best-case scenario, $100 billion would exceed the combined assets under management of GLD and IAU at $85 billion. While we do not know the ultimate success of a spot Bitcoin ETF, these seem to be useful ways to frame the analysis. We encourage readers to make their own assumptions and remind them that the digital asset market is not always rational.

The price of Bitcoin has surged significantly since BlackRock submitted its application. We can reverse the same framework to derive the market-implied ETF AUM based on price movements. This analysis suggests that all price movements since the application submission have been due to speculation about the ETF, overlooking any other potential price influences, such as the recent SEC ruling against Ripple Labs.

Reviewing the Success of GLD ETF

Launched on November 18, 2004, the GLD ETF remains the gold standard for ETF success. Its launch, novelty, subsequent growth, and success are still astonishing nearly 20 years later. Therefore, when we think about the success and growth of a spot Bitcoin ETF, we feel it is necessary to highlight the development path of this product. Its success was not without challenges, as interest in gold waned after the global financial crisis, but this may be helpful for those contemplating how a spot Bitcoin ETF might evolve.

Final Thoughts

It has been 10 years since the first registration application for a spot Bitcoin ETF was submitted, and investors are once again excited about the prospects of existing applications being approved. While we do not know the ultimate success of such a product or whether it will eventually enter the market, we hope our analysis can assist in thinking about the roadmap for the future. A spot ETF is still not guaranteed, so we encourage participants to weigh their decisions based on the likelihood of final approval. If the past processes for Bitcoin ETFs offer any guidance, the road ahead may be quite winding. There may be many ups and downs, and we are committed to analyzing any new information.