The transformational impact a spot Bitcoin ETF will have on the asset class

Mainstream investment giants such as BlackRock and Fidelity, as well as crypto-focused firms like Grayscale, have filed applications for spot bitcoin ETFs. The chair of the U.S. Securities and Exchange Commission stated a few weeks ago that the agency will be reviewing eight to ten applications for new spot Bitcoin products but did not specify when decisions would be made. By year’s end, there is a good chance that an exchange-traded fund (ETF) focused on the spot market for Bitcoin will be prepared to list. 

BlackRock alone controls an unimaginably vast amount of wealth, with an unprecedented $9 trillion in assets under management and 70 offices spread across 30 countries. Combining other asset managers such as VanEck and Fidelity, trillions of dollars of untapped wealth would be able to gain exposure to Bitcoin in a simple way. When the largest asset managers in the world express interest in a particular asset or asset class, investors worldwide pay attention. A spot ETF enables regular investors, such as retirement funds and hedge funds, to obtain regulated exposure to Bitcoin through brokers and investment accounts that they already use and are familiar with. 

When an ETF is listed, investors would be able to trade shares of the spot Bitcoin ETFs on stock exchanges such as the Nasdaq rather than cryptocurrency exchanges. Many financial advisors and investors held-off from investing in this asset class due to the reluctance in onboarding to cryptocurrency exchanges and the complications pertaining to managing digital wallets along with the associated complications regarding tax and security. Whilst ETF linked to futures exist, many investors prefer access to a spot product as it holds the underlying asset directly, moreover, investors also prefer access to a spot product rather than a futures linked product due to costs around futures rolling and tax implications which typically arise with derivative products. 

The head of research at Galaxy Digital, a digital asset management company, Alex Thorn, estimates that inflows into Bitcoin ETFs could surpass USD $14 billion during the first year, with $26 billion and $35 billion flowing in subsequent years after the product’s approval. Correlating these inflows to Gold ETFs and adjusting for Gold vs Bitcoin’s market capitalisation; we could see a potential 74% appreciation in the price of Bitcoin during the first year of the product’s approval. 

Domestically, total Australian superannuation assets are ~A$3.5 trillion, and according to the ATO, SMSFs alone have a balance of A$868 billion. Taking a conservative 0.5% allocation to Bitcoin from SMSFs alone would account to AUD $4.3 billion in flows. 

Due to Bitcoin’s limited supply, this influx of new capital could significantly push up demand and apply pressure to Bitcoin’s price. According to blockchain analytics firm Glassnode, more than 68% of existing Bitcoin has been dormant for over a year which shows a persistent bias for holding the cryptocurrency for long-term gains. 

The end of October 2023 marked the 15-year anniversary of the release of the Bitcoin whitepaper, and as Bitcoin continues to gain acceptance as a non-sovereign, decentralised, store of value; many people liken it to gold. The first exchange traded Gold ETF was Australian – launched in March 2003 by ETF Securities; shortly after, State Street launched GLD (the first gold ETF in the US). For the first time in history, access to gold markets was made transparent, cheaper and simpler for institutions and retail alike; and these ETF products attracted billions of dollars. We believe that investor demand for Bitcoin has the potential to multiply with the approval of spot Bitcoin ETFs within the US, similarly to the impact that gold ETFs have had on the gold market, as illustrated in the chart below.