Original author: NYDIG
Original compilation: Wu Shuo Blockchain
A quick look at what to watch
For investors, they are very much looking forward to the Bitcoin spot ETF. Let’s take a look at what the opportunities and impact of this product will be.
Nearly $29 billion has been invested in existing Bitcoin funds globally, but many Bitcoin funds in the United States have flaws that may be addressed through spot ETFs.
We dont know the ultimate success rate of such a product, but we hope the analysis weve done can provide guidance for investors looking for a framework and more information.
Assessing the size of potential spot ETFs
Since BlackRock unexpectedly filed an application for a Bitcoin spot ETF on June 15, the price of Bitcoin has risen by more than 20%. Given the excitement among investors that the U.S. may finally approve spot ETFs, especially since its been 10 years since such a product first filed a registration statement, we wanted to explore what this financial product could mean for the investment community and the price of Bitcoin . Approval is not certain, so investors are encouraged to weight the probability based on the likelihood of possible fund flows.
Bitcoin funds already have considerable assets under management
The first thing to understand is that while there has never been a Bitcoin spot ETF in the United States, there has been a lot of investment put into existing structures, including trusts such as the Grayscale Bitcoin Trust (GBTC), U.S. futures-based ETFs, Spot-based ETFs and private funds outside the United States. Our analysis shows that these products have $28.8 billion in AUM, of which $27.6 billion is invested in spot products. Note: Our measure does not capture private funds that may exist outside the United States, which are more difficult to integrate.
Optimistically, existing options are flawed
The optimistic argument for spot ETFs is that although there is already a lot of money invested in Bitcoin funds, investors existing options have several disadvantages that spot ETFs can alleviate. In addition to the investor protection offered by exchange-traded products, the recognition of the BlackRock and iShares brands, familiar buying and selling methods through a securities broker, and simplified position reporting, risk measurement and tax reporting, spot ETFs offer many advantages compared to existing Alternatives may offer some significant benefits - better liquidity than private equity funds, lower tracking error than trusts/closed-end funds (CEFs), and potentially lower costs (certainly lower costs than trusts/closed-end funds (CEFs)). GBTC low), although the fees have not yet been disclosed.
Finding analogies through the gold market
Given that Bitcoin is often compared to gold (we prefer to think of Bitcoin as an upgraded version of gold), we thought it would be helpful to look at the existing gold supply and holding pattern. As of the end of June, global gold ETF assets under management 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%) hold a much larger share of gold holdings. Although Bitcoin is not held by central banks (with the exception of El Salvador) or used as an input into other finished products like gold, a larger portion of the Bitcoin supply is already held by various funds compared to gold (1.6%) Format holds (4.9%). If we just look at private holdings of both assets, basically all of Bitcoin, the ratio is more favorable compared to gold ETFs and gold bars and gold coins. The share of private investment in gold ETFs is 7.4%, compared with 4.9% for various Bitcoin funds. Private investment in gold remains primarily held in gold coins and bars (92.6% of private investment).
In sheer dollar terms, the numbers are staggering—more than $210 billion is invested in gold funds, compared to just $28.8 billion in Bitcoin funds. Bitcoin is approximately 3.6 times more volatile than gold, which means that on a volatility-equivalent basis, investors would need 3.6 times less Bitcoin than gold to gain the same amount of risk exposure. Still, this would result in an increase in demand for Bitcoin ETFs of nearly $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 better understand where demand for a Bitcoin spot ETF may come from. First, the existing major futures ETF, the ProShares Bitcoin Strategy ETF (BITO), already has strong support from investment advisors. If anything, investment advisors are over-indexed in their Bitcoin ownership than gold ETFs. However, the big opportunity comes from ownership by banks and brokers, whose ownership of BITO ETFs is much lower than that of gold ETFs. We believe there are two reasons - fund structure and recommendations. In terms of fund structure, futures-based ETFs are unlikely to be owned by these investor types because rolling futures costs more than holding spot (we measured a 6% annualized rate for Bitcoin futures before BITO was released) . For investments that dont actually have access to the physical market, such as the oil market, banks and brokers have shown a willingness to own futures-based products such as USO. We believe the bigger issue is that many banks and brokers are not recommending strategic allocations to Bitcoin in client portfolios. As a result, their advisors and internal funds do not consider Bitcoin as an asset class. While spot ETFs may help institutions overcome the hurdles of owning futures-based ETFs, it may not impact the strategic allocation aspect. To change this, banks and brokers may need to recognize the return-enhancing and risk-reducing (diversification) nature that Bitcoin can bring to investment portfolios.
Scenario price sensitivity
While this is for illustrative purposes only, we thought it might be helpful for investors to understand how a potential spot ETF might impact Bitcoin prices. These are of course just scenario analyses, and reality may differ from expectations. These scenarios do not embed any discount and rely on a money multiplier of 10.0x (11.36x was observed in 2018), with each $1 of AUM flowing into the ETF impacting Bitcoins value (market cap) by $10.
Worst case scenario, a $1 billion ETF AUM would be comparable to the existing futures-based BITO ETF. In the best case scenario, $100 billion would exceed GLD and IAUs combined AUM of $85 billion. While we dont know the ultimate success of spot Bitcoin ETFs, these appear to be useful ways 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 movements. This analysis implies that all price movements since the filing were due to hype around the ETF, ignoring any other possible price effects, such as the recent SEC ruling against Ripple Labs.
Looking back at the success of the GLD ETF
The GLD ETF, released on November 18, 2004, still sets the high standard for ETF success. Its launch, novelty, subsequent growth and success are still amazing even nearly 20 years later. Therefore, when we think about the success and growth of spot Bitcoin ETFs, we feel it is important to highlight the path forward for this product. Its success hasnt been smooth sailing, as interest in gold waned in the wake of the global financial crisis, but it could be helpful for those thinking about how a spot Bitcoin ETF might develop.
final thoughts
It’s been 10 years since a registration application was first submitted for a spot Bitcoin ETF, and investors are once again excited about the prospect of existing applications being approved. While we dont know the ultimate success of such a product, or if it will ever make it to market, the analysis weve done will hopefully be helpful when thinking about future roadmaps. There are still no guarantees for spot ETFs, so participants are encouraged to weigh their decisions against the likelihood of final approval. If the past Bitcoin ETF process is any guide, the road ahead could be very winding. There may be many ups and downs, and we are committed to analyzing any new information.
