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"In this episode of the Bankless podcast, hosts David and Ryan, along with guest Alex Thorne, discussed the potential impact of a Bitcoin ETF. Alex Thorne is the Research Director at Galaxy Digital, and he shared his insights on Bitcoin ETFs, particularly focusing on the interest in spot Bitcoin ETFs and their potential market impact.
Hosts: David & Ryan, Bankless Podcast
Speaker: Alex Thorn, Research Director at Galaxy Digital
Bidirectional Impact of Spot Bitcoin ETF and Traditional Investments
Alex pointed out that the total assets under management in the U.S. wealth management industry are approximately $48.3 trillion, excluding self-directed accounts such as Individual Retirement Accounts (IRAs) or self-directed brokerage accounts. The wealth management industry is divided into three main categories: brokerage firms (approximately $27 trillion), banks (around $11.9 trillion), and registered investment advisors (RIAs) (about $9.3 trillion).
Alex noted that a spot Bitcoin ETF would provide a new investment channel for the wealth management industry, which cannot currently offer direct Bitcoin investments to clients due to compliance and approval process restrictions. Many banks and brokerage firms do not allow their wealth management advisors to invest client funds in Bitcoin trust products or cash-settled Bitcoin futures ETFs because these products are considered too risky or unsuitable. Alex believes that the launch of a spot Bitcoin ETF would enable restricted wealth management advisors to offer Bitcoin investments to clients, opening a new avenue for capital inflow into the Bitcoin market.
Alex explained that wealth management advisors cannot simply purchase Bitcoin on cryptocurrency exchanges like Kraken because it involves issues related to sub-accounts, regulations, custody, and integrated investment management tools. The advantage of a spot Bitcoin ETF is that it can integrate with existing investment management tools and backend operational systems, making Bitcoin investments as easy to manage as other investment products.
Alex stated that even if not all $48 trillion flows into the Bitcoin market, the total market capitalization of Bitcoin is less than $1 trillion, so even a small portion of the funds inflowing could have a significant impact on Bitcoin's price.
Alex mentioned that they anticipate a potential inflow of $1.44 billion in the first year after the launch of the spot Bitcoin ETF, based on their analysis of the wealth management industry. They further predict that the inflow in the second year could increase to $2.65 billion as market access expands. Alex emphasized that these inflows are considered net new funds, meaning they would not have entered the Bitcoin market without the ETF, and these predictions are based on an analysis of wealth management channels.
The hosts raised the possibility that investor behavior might not be as evenly distributed and rational as spreadsheet models suggest. If Bitcoin's price rises, investors might experience FOMO, even though extreme Bitcoin supporters consider it a long-term holding asset, which could lead to more volatile actual capital inflows. Alex explained that wealth management advisors may not trade as frequently as individual investors and tend to focus on long-term planning rather than short-term market reactions.
Alex mentioned that they like to compare Bitcoin to gold because both are scarce assets and have similarities in investment instruments. After the approval of gold ETFs, the gold market experienced a long and significant bull market in the following decade. They anticipate that an equivalent amount of investment into Bitcoin could have an impact on Bitcoin's price eight times that of gold.
Alex emphasized that these predictions are extremely bullish, and their calculations are based on simple estimations. They are also aware that the rise in gold prices in the mid-2000s was influenced not only by increased accessibility but also by macroeconomic events such as the financial crisis.
Alex noted that ETF inflows do not happen immediately but gradually increase. In their analysis, as the Bitcoin market grows, the monthly impact multiplier gradually decreases because Bitcoin's share in investment tools increases with the growth of the market's total value.
Alex stressed that their analysis is a defensible way to consider this issue but is by no means an exact guarantee. They predict that if other analyses' inflow forecasts are correct, Bitcoin's price could rise by approximately 75% one year after the ETF's launch.
Potential Market Dynamics in the Future
Alex and the hosts discussed potential reactions in the market to expected capital injections, particularly in the case of rising prices, which could lead to anticipatory buying behavior, ""front-running future demand.""
Regarding the impact of front-running on demand, Alex mentioned that it's a complex issue. On one hand, if Bitcoin's price rises, some investors may choose to wait for a price drop, believing that it's too high. On the other hand, as Bitcoin's volatility decreases and the market size increases, investors can actually allocate more funds to Bitcoin.
Alex pointed out that they use the Sharpe ratio and risk-adjusted measures to determine the allocation in their analysis. If the Bitcoin market becomes larger and less volatile, from a risk-adjusted perspective, more funds can be allocated to Bitcoin. Additionally, some very large capital entities, such as sovereign wealth funds or central banks, may only enter the Bitcoin market when it matures, volatility decreases, and liquidity increases.
Alex emphasized that while their analysis is based on existing demand and the current inability of the wealth management industry to access Bitcoin, actual capital inflows could be influenced by market expectations and other macroeconomic events.
The hosts mentioned that once a Bitcoin ETF is approved, it will trigger a series of marketing and educational efforts to attract investors' attention and gain market share, which will help legitimize and institutionalize Bitcoin.
Alex agreed with this and added that similar marketing excitement has occurred during previous ETF launches. Alex believes that if a Bitcoin ETF is approved, it would be a recognition of Bitcoin's maturity and satisfaction with regulatory, custody, and transfer issues by regulatory authorities.
Potential Risks and Challenges
Alex mentioned that the approval and launch of a Bitcoin ETF could lead to a ""buy the rumor, sell the news"" market reaction, where some investors might buy Bitcoin in anticipation of the ETF approval and then sell it after the actual launch, affecting the ETF's capital inflow.
He emphasized that even if the market is optimistic about a Bitcoin ETF, the speed of capital inflow might be slower than expected. Because even the most optimistic platforms may take several months to launch an ETF, including the risk approval process.
Alex also mentioned that regulatory issues could affect the inflow of a Bitcoin ETF. While Bitcoin may not be the primary focus of regulatory authorities in the cryptocurrency ecosystem, other regulatory issues, such as FinCEN regulations related to financial crime enforcement networks for all cryptocurrencies, could impact the entire crypto market.
He pointed out that all companies applying for a Bitcoin ETF have updated their S1 documents to include risk disclosures related to mining, especially the electricity usage associated with mining, which could lead to regulatory changes.
Alex mentioned that public figures like U.S. Senator Elizabeth Warren may hold negative views on self-custodied cryptocurrencies, which is unfavorable for Bitcoin and the entire cryptocurrency market.
Compared to spot Bitcoin, futures ETFs may not be a good investment tool for long-term holders due to rollover costs and decay. Wealth management advisors tend to favor long-term investments, which could affect their interest in Bitcoin ETFs." |
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Post time 8-11-2023 12:18:59
