If a Bitcoin ETF Is Approved, Here’s What May Happen

This week marked the 15th year since the first block, the genesis block, was mined on the Bitcoin blockchain. For as long as 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.”

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