The Bitcoin ETF playbook: How could the approval and launch play out?

The Release of the Spot Bitcoin ETF in the US: A Balanced Perspective

The release of a Spot Bitcoin ETF in the U.S. has been a focal point of anticipation within the crypto space. This anticipation peaked in November, a month characterized by significant expectation for regulatory developments, especially concerning the approval of Spot Bitcoin ETFs. This anticipation drove heightened institutional interest and was marked by a notable spike in CME Bitcoin futures volume​​.

The market's bullish trend during this period was largely attributed to the optimism surrounding the potential approval of Spot Bitcoin ETFs. Major financial entities like Invesco and BlackRock influenced market movements through their filings, and a Bloomberg analysis suggested a 90% chance of Spot BTC ETF approval by January 10th. This optimism was further bolstered by the SEC's inaction following a court order regarding Grayscale’s Bitcoin ETF application, suggesting a possible shift in the SEC's stance​​.

Investors should approach the Spot Bitcoin ETF with realistic expectations. Unlike traditional assets, Bitcoin's inherent volatility and regulatory uncertainties present unique challenges. The ETF is expected to provide easier access to Bitcoin for both retail and institutional investors, potentially increasing liquidity and validation of Bitcoin as a legitimate asset class. However, the regulatory landscape and market reactions could lead to fluctuating outcomes.

This development invites a thorough analysis of realistic expectations, comparisons with past ETF launches like the Gold ETF, and projections about its potential impact on the Bitcoin market.

Drawing Parallels: The Gold ETF Launch

When the first Gold ETF was announced, the price of gold peaked and then corrected till the official launch date. The launch of the first Gold ETF had a transformative impact on the gold market. When the first spot gold ETFs were introduced in 2004, they marked a significant moment in financial history, making gold investment more accessible to a broader range of investors. This accessibility led to a substantial appreciation in gold prices. Over the following decade, gold's value soared from approximately $270 per ounce to $1,000 per ounce, signifying a significant 19% annualized return​​.

Comparing this with the potential of a Bitcoin Spot ETF, there are similar expectations of market transformation. A Bitcoin ETF would make Bitcoin investment more accessible, potentially attracting a wider range of investors, both retail and institutional. This increased accessibility could lead to a substantial influx of capital into the Bitcoin market, driving up demand and, consequently, its price. For instance, Galaxy Digital estimates a 74% increase in the price of Bitcoin within a year of the ETF launch​​. If Bitcoin were to mimic gold's post-ETF trajectory, a significant appreciation in its value could be expected. However, it's important to note that Bitcoin's inherent volatility and different market dynamics make direct comparisons with gold somewhat speculative.

Timeframe: Launch to Approval

The time frame between the launch and approval of an ETF can vary significantly depending on the asset class and regulatory environment. In the case of traditional assets like gold, the process may take a few years from conception to launch. However, for a Bitcoin ETF, particularly in the United States, this timeline could be longer due to the complexities and evolving regulatory landscape surrounding cryptocurrencies.

Regarding the expected time between launch and approval of a Bitcoin ETF, it remains uncertain. The U.S. Securities and Exchange Commission (SEC) has been cautious in approving cryptocurrency-related investment products, indicating that the launch process might take an extended period.

Potential Capital Inflow and Timeframe

As for the potential capital inflow into a Bitcoin ETF, it's estimated to be substantial. Analysis from sources like Galaxy Digital projects inflows of $14 billion into a Bitcoin ETF in the first year, escalating to $27 billion in the second year and $39 billion by the third year. This estimation considers the likelihood of Bitcoin being adopted by 10% of total available assets in each wealth channel with an average allocation of 1%. The timeframe for this capital inflow is projected to span over several years, starting from the ETF's launch​​.

Number of Bitcoin ETFs Expected

As of October 2023, the U.S. Securities and Exchange Commission (SEC) had between eight to ten filings for possible Bitcoin ETF products under consideration. This development has sparked significant interest in the market, particularly regarding the potential for a Spot Bitcoin ETF, which would allow investors direct exposure to Bitcoin via an exchange-listed product. To date, the SEC has only approved ETFs tied to Bitcoin futures contracts, not spot Bitcoin​​.

The timing for the approval of these ETFs varies, as they have different filing dates. For instance, Cathie Wood's ARK Invest application is at the forefront, with the SEC's 240-day comment period for this application expiring on January 10, 2024, at which point regulators must either approve or reject it​​. Other major financial firms with pending applications include BlackRock, Bitwise, WisdomTree, Fidelity, and Invesco, indicating a strong and diverse interest in Bitcoin funds within the U.S. market​​.

The Permanent Dollar-Cost Averaging (DCA) Effect

The potential arrival of a Bitcoin ETF could mark a significant turning point in cryptocurrency investment, mirroring the transformative impact seen in U.S. equities through ETFs. With these products, institutions could offer Bitcoin exposure to a global audience, leading to a permanent dollar-cost averaging (DCA) effect. This effect, seen in U.S. equities, results from consistent, regular investments over time, smoothing out the volatility and potentially leading to more stable growth.

In the medium and long term, this could have a profoundly bullish effect on Bitcoin's price. As institutions offer these products, and more investors engage in regular Bitcoin investments through ETFs, there would be a sustained increase in demand. This demand, coupled with the limited supply nature of Bitcoin, could drive up its price significantly. The broadening of Bitcoin's investor base, including more institutional and retail participants, would further solidify its position in investment portfolios, potentially leading to greater price stability and growth over time.

Conclusion

In conclusion, the potential release of a Spot Bitcoin ETF in the U.S. represents a watershed moment in the evolution of cryptocurrency investment. Drawing parallels from the Gold ETF launch, we can anticipate significant capital inflows and a transformative impact on the Bitcoin market. The timeframe from launch to approval is uncertain, reflecting the unique challenges and regulatory landscape of cryptocurrencies.

However, once in place, a Spot Bitcoin ETF could introduce a permanent dollar-cost averaging effect, similar to what has been observed in U.S. equities. This development promises not only to broaden the investor base but also to potentially usher in a period of sustained, bullish growth for Bitcoin in the medium to long term. The alignment of institutional offerings with global investor interest could mark the beginning of a new era in digital asset investment.