Bitcoin is often labeled as “digital gold” and has become an increasingly attractive asset for investors to diversify their portfolios. For investors, there are many ways to gain exposure to Bitcoin, but until now they have been unable to acquire it through a U.S. spot exchange-traded fund, which is considered the “Holy Grail” for access to any asset.
That could change in the coming months though, as analysts believe applications from respected financial institutions including Grayscale and BlackRock are looking increasingly likely to be accepted by the U.S. Securities and Exchange Commission. The SEC has, until now, rejected 33 spot Bitcoin ETF applications, beginning with the first-ever application from the Winklevoss twins almost a decade ago.
However, with Grayscale recently securing a court victory over the SEC that vacated a previous denial of its application, and the 2021 approval of ProShare’s Bitcoin futures ETF, it’s clear that the mood is changing.
Industry analyst James Seyffart now estimates there’s a 90% chance that the first Bitcoin spot ETF will be approved by January, and the anticipation of that occurring has helped to push the price of BTC up more than 20% in October alone.
“It’s increasingly regarded as a matter of ‘when’ rather than ‘if’ a Bitcoin ETF might gain approval in the near future and that possibility is more or less priced into the market,” said Andrey Stoychev, Project Manager at Nexo. “However, should official confirmation emerge, particularly with the iShares application, it could trigger additional upward movement for BTC.”
Why so much fuss?
A Bitcoin spot ETF is eagerly anticipated because the U.S. capital market is by far the biggest on the planet, accounting for as much as 40% of the world’s fixed income assets and equity market cap, according to the U.S. Securities Industry and Financial Markets Association.
What’s more, U.S.-based ETFs represent 7% of equity and fixed income in that country, compared to just 2% in Asia-Pacific and 4% in Europe.
All told, the U.S. ETF market is valued at around $7 trillion, while the number of assets managed by U.S.-based banks, brokers, asset management firms and RIAs are said to number almost $50 trillion. With Bitcoin’s current market capitalization sitting at just over $715 billion, even a minuscule migration of those assets could help boost the value of the world’s top cryptocurrency.
Adding to the excitement is that the U.S. is currently ranked fourth in the world in terms of crypto adoption, according to Chainalaysis, and many believe this enthusiasm will be mirrored by U.S. investors.
Spot ETFs also provide advantages such as lower transaction costs, fewer tracking errors, greater liquidity and less complexity versus futures ETFs, proxy stocks, private funds, and other investment vehicles. They also resolve questions around custody of assets.
To sum it up, a U.S. spot Bitcoin ETF means it becomes a much more legitimate asset to many investors, who won’t have to worry about issues relating to compliance. According to Zé Atalaya, Geo Expansion & Token/Chain Integration Manager at Ramp Network, it will ensure Bitcoin is seen as a viable investment asset to countless new investors.
“When Bitcoin spot ETFs are approved, and it’s only a matter of time now, a surge in price can be anticipated,” Atalaya said. “This development confers legitimacy upon Bitcoin’s growth trajectory and will engender confidence among ordinary investors.”
A tsunami of liquidity
An influx of new investor money into Bitcoin is almost inevitable with the approval of the first spot ETFs. At present, just 12% of U.S. financial advisors currently recommend Bitcoin as an addition to their client’s portfolios. However, that number is likely to rise to 77% once the first spot Bitcoin ETF is approved.
Atalaya explained that there’s a big difference between spot and futures ETFs. The former invests directly into the underlying asset, whereas the latter simply invests in derivatives contracts based on the asset’s price.
“Consequently, the advent of a spot Bitcoin ETFs is poised to augment liquidity, fostering more stable prices and facilitating smoother price discovery in the Bitcoin market,” he predicted.
He also indicated that the entire cryptocurrency industry will likely benefit from such a development.
“It will mark the dawn of ETFs for a wider array of crypto tokens, thereby significantly amplifying their integration into more conventional investing frameworks,” Atalaya added.
How high can Bitcoin go?
Any prediction on the price impact of the first spot Bitcoin ETFs is extremely difficult given the exceptional volatility displayed by crypto assets, but for guidance we can consider the performance of gold, which is often said to be one of the best analogies to Bitcoin, given that both are viewed as a store of value.
Gold is similar to Bitcoin in many ways, with both assets having a limited supply. Prior to 2004, gold was also tricky for many investors to access. But that changed with the launch of the first spot gold ETF, the SPDR Gold Trust, in that year. Within just three days of its launch, the SPDR Gold Trust amassed over $1 billion in assets, and today it has risen to around $55 billion. In that time, the price of physical gold has increased more than four times its 2004 value.
Of course, gold isn’t a perfect analogy to Bitcoin. The price of gold is a lot less volatile and it was harder to access pre-ETF than Bitcoin is today. But there’s every reason to believe that the Bitcoin market will be given an enormous jolt with the launch of its first ETF, just as gold was.
Tim Shan, COO at Dexalot, said much will depend on the level of interest that traditional, non-crypto savvy institutional investors show in Bitcoin.
“An approval of a Bitcoin ETF should certainly cause crypto to rally in the short term, because the ETF will initially be seeded by managers who will need to buy BTC on the open market,” Shan said. “However, I’m more interested to see how successful they will be in attracting outside capital from institutional investors. That’s the ultimate test to determine if we get a prolonged bull market.”
It’s almost a given that the first Bitcoin spot ETF will have an immediate positive impact on the asset’s price, but the bigger question is what will happen after those immediate gains.
While most experts tend to shy away from making specific predictions, Nexo’s Stoychev believes that, based on current trends, an ETF approval could push BTC to the $45,000 mark, and, after an inevitable pullback, perhaps settle at around $40,00.
After that, a lot will depend on the exact timing, as Bitcoin traditionally always gets a boost from the so-called “halvening”, which is when the amount of Bitcoin mining rewards are halved, meaning the asset becomes more scarce.
Stoychev pointed out that the next halvening is expected to occur next year, and explained that if BTC is able to carry its momentum from the ETF forward, big things can happen by the time it comes around.
“A Bitcoin ETF approval in December or January would set the stage perfectly for a bull run in 2024,” he said.
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