Bitcoin, the pioneering digital currency challenging the traditional financial system, is making a significant move toward mainstream acceptance through the introduction of an exchange-traded fund (ETF) designed to mirror its price. However, the question remains: will this endeavor prove to be lucrative?
The largest cryptocurrency globally surged by 28% in October, as investors anticipate that regulatory approval for a bitcoin ETF in the United States is imminent. Such approval is expected to ignite a fresh surge in demand.
The potential financial influx that this ETF could attract, though, remains uncertain.
Well, providing a precise prediction is challenging, given the wide array of forecasts offered by market participants, spanning from an initial valuation of $3 billion on its debut to potentially reaching $55 billion within a five-year period.
Dave Mazza, the Chief Strategy Officer at ETF provider Roundhill Investments, drew a parallel to the transformation seen in the gold market when spot ETFs received approval. He anticipates that the initial introduction of spot bitcoin ETFs will trigger a substantial surge in demand, similar to the launches of the first-ever gold ETF in the U.S. back in 2006 or the bitcoin futures ETF in 2021.
Prominent players in the investment world, including industry giants like BlackRock and Fidelity, as well as companies specialized in cryptocurrency like Grayscale, have submitted requests for spot bitcoin ETFs. The chair of the U.S. Securities and Exchange Commission disclosed that they are currently reviewing eight to ten applications for new spot bitcoin offerings, though specific decision timelines were not provided.
On the flip side, skeptics within the traditional investment community, who have long been cautious about cryptocurrency, maintain their reservations and express their reluctance to embrace these new investment instruments.
George Gagliardi, an investment advisor at Coromandel Wealth Management in Lexington, Massachusetts, expressed strong opposition to these so-called investments, asserting that none of his clients’ funds will be allocated to them. He holds the belief that cryptocurrencies lack any inherent intrinsic value.
Nonetheless, the anticipation of an ETF providing direct exposure to Bitcoin has lifted the cryptocurrency’s price, which reached $35,198 last week, marking its highest level since May 2022.
When it comes to estimating the potential demand for a bitcoin ETF, investors and analysts employ a wide range of metrics, including comparisons to the size of the gold ETF market and existing product demand. These approaches yield varying conclusions. Additionally, the cryptocurrency market is characterized by opacity, with price fluctuations primarily driven by investor sentiment.
NYDIG, a U.S. crypto firm, projects demand for a spot bitcoin ETF at approximately $30 billion. Their calculation involves a comparison between the sizes of the gold and bitcoin ETFs, adjusting for their relative volatility – $210 billion for gold and $28.8 billion for bitcoin, respectively.
Todd Sohn, an ETF strategist at Strategas Securities, noted the rarity of a brand-new asset class entering the ETF market, which complicates the precise assessment of potential demand.
Existing bitcoin ETFs, linked to futures prices, do not perfectly track bitcoin price movements, and the expenses associated with rolling over futures contracts can erode returns. This has led many investors to view them as less desirable investment vehicles.
Steven McClurg, the investment chief at Valkyrie Funds, which has applied for a spot bitcoin ETF, suggests one way to gauge demand is to consider the size of the Grayscale Bitcoin Trust (GBTC), an open-ended private trust that directly holds bitcoin. He believes that the current market capitalization of GBTC, which is $3.2 billion, likely represents the initial demand for a spot bitcoin product.
HALF OF FUNDS VANISH WITHIN 24 MONTHS
Certain proponents suggest that financial advisors, pension funds, and other asset managers, collectively estimated at approximately $46.5 trillion according to Boston Consulting Group, could represent a substantial source of demand for a spot bitcoin ETF.
Matthew Sigel, the head of digital assets research at VanEck, which has a pending spot bitcoin ETF awaiting SEC approval, remarked, “If BlackRock enters the market, then a portion of financial advisors and wirehouses are likely to include these funds on their platforms.”
BlackRock has refrained from commenting on its forthcoming spot bitcoin ETF, confirming only that it is awaiting final SEC approval.
Matthew Hougan, the CEO of crypto firm Bitwise Investments, stated during an industry panel earlier in the month that he anticipates spot bitcoin ETFs will amass $55 billion within their initial five years. His prediction draws from observing the progression of demand in smaller markets with existing spot bitcoin ETFs, such as Canada.
Nevertheless, regardless of the eventual level of demand, it’s improbable that all asset managers competing for a share of the market will maintain their offerings, as asserted by Steve Sosnick, the Chief Strategist at Interactive Brokers. He added, “Will all of them succeed? Certainly not. Those with the most effective marketing strategies will thrive, but half will have disappeared within two years.”
Report by Suzanne McGee; Edited by Ira Iosebashvili, Michelle Price, and Pravin Char