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Edited by Samiksha at 26-12-2023 01:06 PM
Approval of a U.S. spot Bitcoin ETF will be one of the most impactful catalysts for the adoption of Bitcoin (and cryptocurrencies as an asset class).
Why Bitcoin ETFs Matter:
The significant impact of a Bitcoin spot ETF is driven by two main factors. Firstly, it expands opportunities for various investors, making it easier for more people to participate in the Bitcoin market. Secondly, by gaining approval from official regulatory bodies and the support of reputable financial service brands, it enhances Bitcoin's legitimacy and mainstream acceptance.
Expanding Retail and Institutional Influence:
Currently, the range of funds available for Bitcoin investment is limited and primarily driven by wealth advisors or products offered through institutional platforms. ETFs (Exchange-Traded Funds) are a more regulated product that opens up investment opportunities for a broader range of investors. ETFs make it possible for a wider spectrum of investors, including those who don't rely on wealth management institutions but buy directly through brokerages or RIAs, without the need to purchase actual Bitcoin.
Diversifying Access through Different Channels:
Without approved solutions like spot ETFs for Bitcoin investment, financial advisors/custodians can't consider Bitcoin in their wealth management strategies. The wealth management sector manages significant assets but often cannot directly access Bitcoin investment through traditional channels. With an approved spot ETF, financial advisors can offer guidance on Bitcoin investments to their wealth management clients.
Greater Wealth Opportunities:
While approximately 62% of U.S. wealth is held by the Baby Boomer generation and older (59 years and above), only 8% of adults over 50 have invested in cryptocurrency. In contrast, over 25% of adults aged 18 to 49 have entered the cryptocurrency market. By introducing Bitcoin ETF products from well-known, trusted brands, it's expected to attract more older and affluent individuals who have not yet ventured into this field.
Estimating Inflows from Bitcoin ETF Approval:
Considering the accessibility factors mentioned above, the U.S. wealth management industry is likely to be the most potentially significant market that could access Bitcoin through approved ETFs. As of October 2023, total assets under management by brokers ($27 trillion), banks ($11 trillion), and RIAs ($9 trillion) reached $48.3 trillion.
With channels gradually opening up, the access cycle for Bitcoin ETFs across these segmented markets may continue for several years. RIAs, often composed of independent registered investment advisors, may have a faster access rate compared to advisors affiliated with banks and brokerages, potentially capturing a larger market share in the initial stages. As for bank and brokerage channels, we assume their growth rates to be slower, with only 25% of advisors providing Bitcoin ETF products in the first year, gradually increasing to 75% by the third year.
Based on these assumptions, we can estimate the potential market size for a U.S. Bitcoin ETF in the first year to be around $14 trillion, rising to approximately $26 trillion in the second year, and reaching $39 trillion by the third year.
Further Estimating Bitcoin ETF Inflows:
If we assume that 10% of total assets under management in each wealth management channel will be allocated to Bitcoin, with an average allocation of 1%, we can anticipate that the Bitcoin ETF will attract around $14 billion in inflows in the first year (approximately $1.2 billion per month, or, using an adjustment factor of 8.8 times, roughly equivalent to $10.5 billion). This can be applied to the historical relationship between inflows into gold ETFs and gold price changes. We estimate that the first month's impact on Bitcoin's price will increase by 6.2%.
Assuming that inflows remain constant, but the Bitcoin/Gold market value ratio changes due to Bitcoin price increases, leading to monthly adjustment multipliers, we can see the monthly return rate gradually decreasing from +6.2% in the first month to +3.7% in the final month of the first year. According to this model, it's predicted that Bitcoin's price will rise by 74% within the first year of the approved ETF (with Bitcoin's price on September 30, 2023, as the base of $26,920).
Broader Financial Impact of ETF on the Bitcoin Market:
The analysis above estimates the potential capital inflows from U.S. Bitcoin ETF products, but the second-order effects of Bitcoin ETF approval may have a more significant impact on Bitcoin demand.
In the short term, it can be expected that other international markets will follow the U.S. in approving and offering similar Bitcoin ETF products to a broader range of investors. Besides ETFs, various other investment tools may include Bitcoin in their investment strategies, including mutual funds, closed-end funds, and hedge funds, encompassing different investment goals and strategies. For instance, Bitcoin may receive more attention in alternative funds (e.g., currencies, commodities, and other alternatives) and thematic funds (e.g., disruptive technology, ESG, and social impact).
Looking at it from a longer-term perspective, the market potential of Bitcoin investment products could further expand into all third-party asset management sectors (estimated at around $126 trillion in assets under management, according to McKinsey |
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Post time 31-10-2023 12:45:31
