What impact will the bitcoin spot ETF market size forecast bring?

Original Author: NYDIG

Original compilation: Wu said blockchain

A look at the quick overview

• For investors, they are looking forward to the Bitcoin spot ETF very much. Let's take a look at what the opportunities and impact of this product will be like.
• Nearly $29 billion has been invested in existing bitcoin funds globally, but many bitcoin funds in the US have flaws that could be addressed with spot ETFs.
• We do not know the eventual success rate of such a product, but we hope the analysis we have done can provide guidance for investors looking for a framework and more information.

Assess the size of a potential spot ETF

The price of bitcoin has risen more than 20 percent since BlackRock unexpectedly filed for a bitcoin spot ETF on June 15. Given investor excitement that the US may finally approve spot ETFs, especially since it has been 10 years since registration statements for such products were first filed, we wanted to explore what this financial product might mean for the investment community and the price of Bitcoin . Approval is not a certainty, so we encourage investors to weight it with probability based on the likelihood of possible fund flows.

Bitcoin Fund already has considerable AUM

The first thing to understand is that while there has never been a bitcoin spot ETF in the US, there has been significant investment in existing structures, including trusts such as the Grayscale Bitcoin Trust (GBTC), futures-based ETFs in the US, Spot-based ETFs and private funds outside the US. Our analysis shows that these products have AUM of US$28.8 billion, of which US$27.6 billion is invested in spot products. Note: Our measurements do not include private funds that may exist outside the US, which are more difficult to aggregate.

The optimistic view is that the existing options are flawed

The bullish argument for spot ETFs is that while there is already a significant amount of money invested in bitcoin funds, there are several drawbacks to existing options for investors that spot ETFs could alleviate. In addition to the investor protection offered by exchange-traded products, the recognition of the BlackRock and iShares brands, the familiar method of buying and selling through securities brokers, and simplified reporting of positions, risk measurement, and tax reporting, spot ETFs are more competitive than existing Alternatives to CEFs may have some significant benefits - better liquidity than private equity funds, lower tracking error than trusts/closed-end funds (CEFs), and possibly lower costs (certainly lower than GBTC low), although the fee has not been made public.

Finding analogies through the gold market

Given that Bitcoin is often compared to gold (and we prefer to think of Bitcoin as an upgrade to gold), we thought it would be helpful to look at the existing supply and holding patterns of gold. As of the end of June, the assets under management of global gold ETFs exceeded US$210 billion. Nearly half of that, $107.3 billion, was in North America. Surprisingly, global ETFs hold only 1.6% of the total gold supply in existence, while central banks (17.1%), bars and coins (20.6%), jewelry (45.8%) and others (14.9%) make up a much larger of gold holdings. Although Bitcoin is not held by central banks (except in El Salvador), nor is it used as an input for other finished products like gold is, a larger portion of Bitcoin's supply has been held by various funds than gold (1.6%) Format holds (4.9%). If we just look at the private holdings of the two assets, basically all of Bitcoin, compared to gold ETFs and gold bars and gold coins, the ratio is more favorable. The share of private investment in gold ETFs was 7.4%, compared with 4.9% for various bitcoin funds. Private investment in gold still holds mostly coins and bars (92.6% of private investment).

The numbers are staggering in absolute dollar terms — over $210 billion invested in gold funds compared to just $28.8 billion invested in bitcoin funds. The volatility of Bitcoin is about 3.6 times that of gold, which means that on a volatility-equivalent basis, investors will need 3.6 times less Bitcoin than gold to obtain the same amount of risk exposure. Still, this would increase demand for bitcoin ETFs by almost $30 billion.

Banks and brokers have less exposure to bitcoin futures ETFs

By comparing the types of investors who own gold ETFs versus other ETFs such as oil and volatility, we can get a better idea of where demand for bitcoin spot ETFs might be coming from. First, the major existing futures ETF, the ProShares Bitcoin Strategy ETF (BITO), already has strong support from investment advisors. If anything, investment advisors are more over-indexed on their bitcoin ownership than gold ETFs. However, the big opportunity comes from the ownership of banks and brokers, whose ownership of BITO ETFs is much lower than that of gold ETFs. We think there are two reasons - fund structure and referrals. In terms of fund structure, futures-based ETFs are less likely to be owned by these investor types because rolling futures is more costly than holding spot (we measured 6% pa for Bitcoin futures before BITO launch) . For investments that don't really have access to the spot market, like the oil market, banks and brokers have shown a willingness to own futures-based products like USO. We think the bigger problem is that many banks and brokers are not recommending a strategic allocation to Bitcoin in their client portfolios. As a result, their advisors and in-house funds have not embraced Bitcoin as an asset class. While a spot ETF may help institutions overcome the hurdle of owning a futures-based ETF, it may not affect the strategic allocation side. To change this, banks and brokers may need to recognize the return-enhancing and risk-reducing (diversification) nature of bitcoin’s ability to bring investment portfolios.

Scenario Price Sensitivity

While for illustrative purposes only, we thought it might be helpful for investors to understand how a potential spot ETF might affect Bitcoin price. These are of course only scenario analyzes and reality may differ from expectations. These scenarios do not embed any discounting and rely on a money multiplier of 10.0x (compared to 11.36x observed in 2018), where every $1 of AUM flowing into the ETF impacts the value (market cap) of Bitcoin by $10.

Worst case, a $1 billion ETF AUM would be comparable to the existing futures-based BITO ETF. At best, $100 billion would exceed the combined AUM of GLD and IAU of $85 billion. While we don't know the ultimate success of spot bitcoin ETFs, these seem to be a useful way to frame the analysis. We encourage readers to make their own assumptions and remind them that digital asset markets are not always rational.

The price of Bitcoin has risen significantly since BlackRock filed its application. We can use the same framework in reverse to obtain market-implied ETF AUM based on price movement. This analysis implies that all price movements since the filing were due to hype over the ETF, ignoring any other possible price impacts, such as the recent SEC ruling against Ripple Labs.

Reflecting on the success of the GLD ETF

Launched on November 18, 2004, the GLD ETF remains the high standard for ETF success to this day. Its release, novelty, subsequent growth and success, even after nearly 20 years, are still amazing. Therefore, when we think about the success and growth of spot bitcoin ETFs, we feel it is necessary to highlight the development path of this product. Its success hasn't come without a hitch, as interest in gold has waned in the wake of the global financial crisis, but it may be helpful for those who are thinking about how a spot bitcoin ETF might fare.

Final Thoughts

It has been 10 years since registration applications were first filed for a spot bitcoin ETF, and investors are once again excited about the prospect of existing applications being approved. While we don't know the ultimate success of such a product, or whether it will ever make it to market, the analysis we've done hopes to help when thinking about the roadmap going forward. Spot ETFs are still not guaranteed, so we encourage participants to weigh their decisions against the likelihood of eventual approval. If the process of bitcoin ETFs in the past is any guide, the road ahead could be quite bumpy. There may be many ups and downs and twists, and we are committed to analyzing any new information.