Opinions on what will happen in the crypto market if the SEC approves a spot bitcoin ETF are mixed.
Some analysts say predictions of a huge influx of investment are overdone.
This week marked the 15th year since the first block, the genesis block, was mined on the Bitcoin blockchain. For more than 10 of those years, industry stalwarts have pleaded with the Securities and Exchange Commission (SEC) to approve a U.S. spot bitcoin exchange-traded fund (ETF), an instrument that’s predicted to open the floodgates to a wave of institutional investment.
So far, the SEC has rejected every application, but that may be about to change. Analysts are predicting that at least one of the more than a dozen current proposals will be approved as early as Friday.
Opinions on what will happen in the crypto market if approval is granted are mixed.
Gabor Gurbacs, the director of digital assets strategy at VanEck, said that while a spot ETF will create “trillions in value” over the long term, people tend to “overestimate the initial impact of U.S. Bitcoin ETFs,” and initial flows will equal only “a few hundred million of (mostly recycled) money.”
Other analysts say approval will require ETF issuers to purchase tens of billions dollars of bitcoin to satisfy the institutional demand, leading to a radical shift in the supply and demand dynamics. Some analysts even predict a “supply shock” after exchange balances fell to a five-year low in October. A lack of bitcoin on exchanges suggests holders are storing it in their personal wallets, a sign they’re less inclined to sell.
Analysis of flows into the SPDR Gold Shares ETF (GLD), the first spot gold ETF in the U.S., which debuted in 2004, is informative. GLD amassed $1.9 billion in inflation-adjusted terms in its first four weeks, with the tally rising to $4.8 billion by the end of the first year, according to crypto exchange Coinbase. The ETF currently has $57.37 billion in total assets.
Going back further in time, Invesco’s QQQ, an ETF that tracks the Nasdaq-100 index of some of the world’s most innovative companies, was launched in March 1999, a year before the dotcom bubble burst. The fund saw inflows of $847 million ($1.6 billion in today’s dollars) in the first 30 days.
And closer to home, the ProShares Bitcoin Strategy ETF (BITO), based on bitcoin futures, amassed around $1.5 billion in inflation-adjusted terms in the 30 days after its introduction in October 2021, when sentiment across crypto asset classes was uber bullish. As of Thursday, the fund held $1.65 billion in total assets.
BITO, which invests in regulated CME futures rather than actual cryptocurrency, is exposed to rollover costs. The fund has, nevertheless, closely tracked bitcoin’s spot price since inception and been a viable option for people looking for exposure to bitcoin without the ownership and storage hassles.
Another consideration is the global economy, with elevated risk-free interest rates worldwide and worsening household finances. That macroeconomic environment plays against a scenario of strong mainstream uptake for spot ETFs.
How will the market react?
Bitcoin has rallied 61% since early October, largely on expectations the SEC will approve one or more of the spot ETF applications. That’s prompted several analysts to forecast a sell-the-news-led pullback once the ETFs go live. They say the price will drop as investors who’d benefited from the run-up sell to lock in their profits once the news is confirmed.
Consider the debut of CME bitcoin futures in December 2017, Coinbase’s listing on Nasdaq in mid-April 2021, and the debut of several futures ETFs, including BITO. On those occasions, bitcoin had been rallying only to crash in the weeks after the events.
For instance, bitcoin surged 15% in the three days before the SEC approved the first futures ETFs. A month later it hit a record high $69,000 and then crashed into a bear market that lasted for more than a year.
CryptoQuant suggested last week that bitcoin could slump to as low as $32,000 because the amount of unrealized profits in the market is at a level that historically precedes a so-called price correction, often considered a drop of 10% in crypto markets. Bitcoin rallied 160% last year and has gained almost 4% this month.
CryptoQuant is not alone in predicting a decline. QCP Capital, a Singapore-based crypto trading firm, said on Telegram last month that initial demand for the ETFs could be lower than expected, setting the stage for a classic sell-the-news scenario.
Investors concerned about a replay of what followed the launches of CME futures and ProShares’ BITO may want to note that both came when the market, having rallied by several hundred percent in 12 months, looked ripe for a correction.
This time round, the expected spot ETF launch comes ahead of the Bitcoin blockchain’s quadrennial mining-reward halving, which has previously marked the beginning of meteoric price rallies. It also follows this week’s brief price slide to $41,000 in a sell-off that liquidated $400 million in leverage bets and wiped out $2 billion in futures open interest.
Recycled cash or fresh flows?
The difference between earlier sell-the-news events and this one is that a spot bitcoin ETF involves actual bitcoin, removing supply from the market. The CME’s launch of futures prompted price declines because it allowed traders to synthetically short the cryptocurrency following a ferocious bull market that was led by 2017’s unsustainable ICO mania.
Another aspect of a spot bitcoin ETF is that institutional investors such as the typically conservative pension funds and insurance funds will gain a way to add exposure to native bitcoin, as opposed to an ETF derivative or bitcoin proxy shares like Coinbase (COIN) or MicroStrategy (MSTR).
There are currently 35 gold ETFs in the U.S., with total assets under management standing at $118.70 billion. A recent report by financial services firm NYDIG drew parallels between them and a potential bitcoin ETF.
“Given Bitcoin’s roughly 3.6 times higher volatility compared to gold, investors would need approximately 3.6 times less Bitcoin than dollar-denominated gold to achieve an equivalent level of risk exposure,” the report said. “This would still translate to an additional demand of nearly $30 billion for a Bitcoin ETF.”
As the cryptocurrency market continues to evolve, the potential approval of a Bitcoin exchange-traded fund (ETF) has been a topic of great interest and speculation. A Bitcoin ETF would allow investors to gain exposure to Bitcoin through traditional investment channels, potentially opening up the market to a wider audience and bringing new levels of legitimacy to the cryptocurrency space. If a Bitcoin ETF is approved, several implications could arise, impacting both the cryptocurrency market and traditional investment landscapes.
The Potential Impact of a Bitcoin ETF Approval
If a Bitcoin ETF is approved, it could bring about significant changes to the cryptocurrency market and traditional investment spaces. Here are some potential outcomes that may arise:
Increased Accessibility: With a Bitcoin ETF, investors will have the opportunity to gain exposure to Bitcoin through traditional investment platforms, such as brokerage accounts and retirement funds. This increased accessibility could lead to a surge in demand for Bitcoin and contribute to its mainstream adoption.
Institutional Involvement: The approval of a Bitcoin ETF could pave the way for institutional investors, such as hedge funds, pension funds, and asset managers, to enter the cryptocurrency market. Institutional involvement could bring substantial capital into the market and lead to increased liquidity and stability for Bitcoin and other cryptocurrencies.
Market Volatility: The introduction of a Bitcoin ETF could also result in heightened market volatility. As seen with other asset classes, the approval of an ETF has historically led to increased trading activity and price fluctuations. While this volatility may present opportunities for traders, it could also pose risks for less experienced investors.
Regulatory Scrutiny: The approval of a Bitcoin ETF would subject the cryptocurrency market to heightened regulatory scrutiny. Regulatory bodies, such as the Securities and Exchange Commission (SEC), would closely monitor the operations of the ETF and its impact on the market. Increased regulation could bring about more transparent and secure trading practices, but it may also introduce hurdles for market participants.
Market Diversification: For traditional investors seeking diversification in their portfolios, a Bitcoin ETF could offer a new avenue for exposure to alternative assets. The addition of Bitcoin to investment portfolios could help spread risk and potentially enhance overall returns, especially in times of market volatility.
Benefits and Practical Tips for Investors
With the potential approval of a Bitcoin ETF on the horizon, investors should consider how they can prepare for the changes and potential opportunities that may arise. Here are some benefits and practical tips to keep in mind:
Diversification: A Bitcoin ETF could provide investors with an additional means of diversifying their portfolios. By incorporating Bitcoin into their investment strategies, individuals may be able to mitigate risks associated with traditional asset classes and capitalize on the growth potential of cryptocurrencies.
Risk Management: Given the potential for increased market volatility following the approval of a Bitcoin ETF, investors should assess their risk tolerance and adjust their investment strategies accordingly. Diversifying across different asset classes and employing risk management techniques can help mitigate potential downsides.
Education and Research: As the cryptocurrency market continues to evolve, it’s essential for investors to stay informed and educated about the intricacies of Bitcoin and ETFs. Conducting thorough research, seeking expert insights, and staying abreast of regulatory developments can empower investors to make well-informed decisions.
Case Studies and Firsthand Experiences
To gain a clearer understanding of the potential impact of a Bitcoin ETF approval, it’s helpful to look at case studies and firsthand experiences from other asset classes. When ETFs based on gold and other commodities were introduced, they brought about significant shifts in market dynamics, trading volumes, and investor behavior. Similarly, the approval of a Bitcoin ETF could lead to unforeseen outcomes, making it crucial for investors to learn from historical precedents and adapt their investment strategies accordingly.
In conclusion, the potential approval of a Bitcoin ETF could significantly impact the cryptocurrency market and traditional investment landscapes. While it presents opportunities for increased accessibility, institutional involvement, and portfolio diversification, investors should also be mindful of potential market volatility and regulatory scrutiny. By staying informed, diversifying their portfolios, and managing risks effectively, investors can prepare for the potential outcomes of a Bitcoin ETF approval and position themselves for success in the evolving cryptocurrency market.