There has been extensive debate about whether the launch of a spot Bitcoin exchange-traded fund (ETF) will lead to a price correction after the initial excitement from investors subsides. While some arguments hold merit, they overlook the broader perspective. The approval of a spot Bitcoin ETF will be a game-changer in various aspects, including volatility, correlation with traditional finance assets and market liquidity.
Arbitrage desks and the ETF providers have likely created a buffer to support the initial demand and prevent market front-running. Nevertheless, whether it takes a few hours or several months, this buffer will eventually deplete. When examining a longer time frame—months instead of days—the price of Bitcoin is determined by the balance between immediate demand and the supply of coins at a specific price level.
Bitcoin is validated, boomers enter the market, and issuers compete for dominance
The initial question to consider is why someone would wait until Bitcoin’s price surpasses its all-time high to start investing. Most individuals are either lazy or cautious, meaning they are hesitant to open an exchange account or invest in anything that hasn’t received their broker’s endorsement. Even if Grayscale offers Bitcoin-backed trust funds, there is little incentive for traditional investment brokers to offer such products.
It’s important to note that the median retirement savings for North Americans under 34 is $17,600, while those between 35 and 64 have accumulated a substantial $142,100, according to Vanguard. This data suggests that millennials and Generation Z are not the ones who will propel Bitcoin’s price to $100,000 and beyond. In essence, the first reason the spot Bitcoin ETF is crucial lies in the minimal effort required for baby boomers to invest.
More significantly, by offering products where the asset manager retains the management fee, the incentives for providing the product increase significantly. This means that sales teams at BlackRock, Fidelity, Ark Invest, Bitwise, VanEck, and other issuers will be fully engaged in attracting both internal and external clients. Other funds managed by these multi-trillion-dollar asset managers may also be encouraged to invest in Bitcoin’s newly launched ETF.
Historically, the ETF industry has witnessed a concentration of assets among the top two issuers. For example, SPDR Gold Trust (GLD) and iShares Gold Trust (IAU) represent over 85% of the industry’s assets under management. Additionally, the market leader State Street’s GLD has an expense ratio of 0.4%, which is considerably higher than most competitors. This data underscores the importance of gaining an early advantage in terms of ETF holdings.
Bitcoin receives regulatory clearance and the spot ETF eases concerns for investment advisors
Regarding regulation, there has never been a definitive statement from the U.S. Securities and Exchange Commission (SEC) regarding the legitimacy of Bitcoin, let alone from legislators. In fact, U.S. Senator Elizabeth Warren announced on Dec. 11 that five more Senators have agreed to cosponsor one of her bills aimed at cracking down on the illicit use of cryptocurrencies for money laundering and terrorism financing. In this regard, the support of BlackRock and Fidelity legitimizes the asset class.
While the SEC’s decision to limit spot Bitcoin ETFs to cash-only creation and redemption may not be the ideal tax solution for investors, it dismisses regulatory concerns, as every Bitcoin held by these funds must be acquired from intermediaries pre-approved by the SEC. Essentially, the approval of the spot ETF significantly reduces regulatory risk.
This difference also benefits investment advisers, as it spares potential investors from dealing with Bitcoin transactions. Investors themselves often prefer instruments that do not require specific tax regulations, making the ETF a much simpler option compared to direct cryptocurrency investment.
These changes may initially appear uneventful, with the impact of a Bitcoin spot ETF approval not necessarily occurring in the first few hours or days. However, when these five favorable trends gain full momentum, it’s not likely that Bitcoin will trade below $100,000 again—it’s only a matter of time.
