Using gold as a mirror, how will Bitcoin ETFs drive the next crypto bull run?

Authors: Feng & Carol, DFG

Introduction

Bitcoin, the largest cryptocurrency by market capitalization, has been growing rapidly recently, rising nearly 25% over the past month, breaking through the $35,000 mark, hitting a new 17-month high, largely due to expectations that the Bitcoin spot ETF will soon be approved in the United States. The SEC has been rejecting ETFs less and less, delaying its decision time and time again, and the SEC has dropped appealing the Grayscale ruling, etc… By all indications, the time for the passage of spot bitcoin ETFs seems to be getting closer. JPMorgan Chase & Co. said in a recent report that the SEC may soon approve multiple spot Bitcoin ETF applications, most likely before January 10, 2024.

The approval of the US spot Bitcoin ETF is a significant milestone for the entire crypto industry. Although it is difficult to determine the final approval time, some of the possible impacts of the approval of the Bitcoin spot ETF can be roughly predicted. On the one hand, Bitcoin and the entire crypto market are highly price sensitive to the passage of spot ETFs, as evidenced by recent market fluctuations. On the other hand, Bitcoin spot ETFs will greatly improve the convenience and compliance of Bitcoin exposure, which is expected to bring a large amount of incremental capital to the crypto market, which will be of great benefit to the long-term development of the industry as a whole. Our views are elaborated on below.

Highly sensitive crypto market

The BTC market and the crypto market as a whole have been shown to be sensitive to news about the US Bitcoin spot ETF, especially at a time when bear market sentiment has been pent up for a long time. The main market buzz in recent months has revolved around new developments in Bitcoin and its spot ETFs. Since BlackRock submitted the Bitcoin spot ETF application form in June, every subsequent news about the passage of the Bitcoin spot ETF has clearly reached Bitcoin’s secondary trading market, which highlights the high sensitivity of the crypto market to institutional action. Despite the fact that some of the positive news has been turned out to be fake, Bitcoin trading activity is still highly active, and BTC is currently hovering at a high level of around $35k.

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Bitcoin price trends and major events in the past six months / Data source: TradingView

The history and implications of gold-backed ETFs

Bitcoin is known as “digital gold”, and the connection between gold and Bitcoin as a store of value is obvious. For this reason, it is of great significance to study the passage history and historical market trend of gold ETFs to predict the future market of Bitcoin ETFs. Several key time points and price movements before and after the passage of gold ETFs are as follows:

• In March 2003, the world’s first gold ETF called Physical Gold was listed in Sydney, Australia, and after that, gold saw a sharp rise and continued until US ETFs began trading.
• In October 2004, the SEC approved the first gold ETF in the United States, StreetTracks Gold Trust (GLD); Gold prices continued to sprint slightly after the approval was approved.
• In November 2004, the U.S. gold ETF GLD was officially listed on the New York Stock Exchange (NYSE). The market fell about 9% in the two months after GLD began trading, at one point falling below the price at which the ETF passed. After almost 8 months of consolidation, gold has only begun to enter a high-speed upward cycle.

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The market trend of spot gold before and after the listing of ETFs / Source: macrotrends.net

By allowing more traders to invest through ETFs without the need to keep metals and custody in banks, gold ETF products sparked a global subscription boom in the following years, becoming a mainstream gold investment tool, attracting a large amount of money into the market. It is widely believed that the passage of gold ETFs has directly contributed to the 10-year bull market for gold since then. Of course, on the other hand, gold’s strong performance also needs to be attributed to the relatively stable economic environment and monetary easing.

Drawing on the historical history of gold ETFs, we can make some preliminary predictions about the market trend of Bitcoin ETFs before and after approval:

• Phase 1: Pending the approval of the US Bitcoin spot ETF, there will be continued market expectations that could be seen as positive
• Phase 2: After the US Bitcoin spot ETF is officially approved, there will still be a small sprint in the market
• Phase 3: Shortly after the US Bitcoin spot ETF is listed for trading, it may fall significantly after peaking, or even fall below the price before the ETF passed, and go through a period of consolidation to absorb more money before accelerating its rise.
• Phase 4: In the long term, the listing of the U.S. BITCOIN spot ETF will open the valve for traditional funds to enter the market, becoming an important catalyst for the Bitcoin bull market.

Spot ETFs through the impact of the BTC market size

We looked at the distribution of institutional investors to publicly traded companies with exposure to Bitcoin and a market capitalization of more than $1 billion. The total market value of institutional holdings in the stocks of these listed companies exceeds $60 billion. Major holders include internationally renowned asset management companies such as Vanguard, BlackRock and Morgan Stanley. Since these asset managers themselves already have Bitcoin-related business with their clients, we believe it is possible for 10% to 20% of listed companies’ equity positions to shift to direct BTC ETFs as investment exposure, with an estimated AUM size of between $6 billion and $12 billion.

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Major public companies with Bitcoin exposure / Source: Yahoo Finance

On a more macro level, according to a recent analysis by Galaxy Digital Research, the U.S. wealth management industry is likely to be the most accessible and direct market for BTC ETFs, so approved Bitcoin ETFs will get the most net new accessibility from them, with $48.3 trillion in assets under management by traditional broker-dealers ($27 trillion), banks ($11 trillion), and RIAs ($9 trillion) in the U.S. as of October 2023.

Galaxy classifies the growth rate of Bitcoin spot ETFs entering the industry by channel, assuming that 10% of the available assets in each wealth channel are in Bitcoin, with an average allocation of 1%, that is, the final conversion of 1‰ is achieved. The final conclusion is that nearly $80 billion will accumulate into Bitcoin spot ETFs over a three-year period.

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Estimated BTC ETF market size and inflows for the first three years / Source: Galaxy Digital Research

Matt Hogan, CEO of Bitwise, a well-known crypto index fund management company, also recently said that if spot bitcoin ETF products can be approved, the overall size could soon reach tens of billions of dollars. He believes that the spot bitcoin ETF can reach the level of $5 billion in the first year of its launch, and could attract about $50 billion in funds within five years. The U.S. ETF market currently has a total size of about $7 trillion, and it estimates that Bitcoin ETF products could attract 1% of the current size, or $70 billion. At present, GBTC (Grayscale Bitcoin Trust) has $20 billion, and there is room for about $50 billion.

Therefore, the initial inflow of BTC spot ETFs in the tens of billions of dollars is reasonable, but the actual inflow rate will depend on the market conditions at the time of the ETF’s adoption and the preferences of institutional and retail investors.

The impact of the approval of a spot ETF on the price of BTC

In its recently published article Size Sizing the Market for a Bitcoin ETF, Galaxy Digital provides a very revealing estimate of the impact of ETF inflows on the price of BTC. However, due to the high time-sensitivity of this prediction, the BTC price has increased by at least 30% compared to the time of writing, and some parameters may no longer be applicable, so we have made further data updates and statistical optimizations based on the Galaxy estimation model.

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Gold and BTC Market Size Comparison / Data: World Gold Council, buybitcoinworldwide

The total market capitalization of gold is currently about 19.74 times the circulating market capitalization of Bitcoin. According to the assumptions, the impact of inflows into the equivalent of US dollars on the Bitcoin market is about 7.3 times compared to the gold market.

Given the impact of monthly inflows on BTC prices, we believe that using early time data would bring in too much Outlier data (e.g., due to the 2008 subprime mortgage crisis), but timing too close to the current could lead to overly concentrated data trends. Therefore, we selected two intervals from 2016 to the present and 2020 to the present (corresponding to the last two halving years of BTC, respectively) for analysis.

Note: We used the data of the past 12 years from 2012 to the present, and came to a final conclusion that was relatively close to the data from 2020 to the present, but due to the large number of Outlier data in the dataset, the fit of the curve is relatively low, and the statistical law is not obvious, so we will not do the analysis.

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Gold ETF flows vs. price changes since 2016 / Data: World Gold Council

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Gold ETF flows and price changes since 2020 / Data: World Gold Council

Both of these fits exhibit relatively high R-squared values (0.57 and 0.71) with statistical confidence. We still apply the estimated inflow of $14.4 billion in the first year (Galaxy has already given a good estimate of about $1.2 billion per month, about $8.76 billion adjusted for using a 7.3x multiplier) to the historical relationship between gold ETF fund flows and changes in gold prices, respectively, into the above two fitting functions, and we estimate that the impact of spot ETFs on the price of Bitcoin in the first month is between 2.9%~3.3%.

Taking into account the decrease in the gold/bitcoin market cap multiplier due to the rise in the price of bitcoin (in fact it is already the case, 24x in the Galaxy article, currently 19.74x). It can be seen that the monthly return gradually decreased from 2.9%~3.3% in Month 0 to 1.68~1.98% in Month 12, and finally the Bitcoin price increased by an estimated 27~31% in the first year of the ETF’s approval (using the Bitcoin market cap of $673.4bn USD on October 31, 2023 as a starting point, which is Bitcoin’s 15th birthday, a commemorative day).

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Estimate the impact of inflows on the BTC price in the first year

Adjusted Funds Inflow = (ETF Average Monthly Inflow Estimate) * (Gold /BTC Multiplier)

Data: World Gold Council, Galaxy Research

Compared to Galaxy’s projected first-year growth rate of 74%, our results are more conservative and convergent, but theoretically more reliable for the following reasons:

1. Our estimate is based on a higher fit of two R-squares, and the curve has a better fit and a relatively high statistical characteristic.

2. Our data benchmarks, such as Bitcoin’s market cap, have increased by more than 30% compared to Galaxy’s estimates, so it makes sense to see a decrease in the increase.

3. This estimate is entirely based on capital inflows, and has excluded price fluctuations caused by uncontrollable factors such as short-term market FOMO buying, Bitcoin halving, and macro policy intervention.

The likely start time of the next bull run

It can be seen from the recent market trend that the market has digested some of the positive expectations. Based on the historical trend of gold ETFs, the timing of the Bitcoin halving and historical market performance, and the effect of the Federal Reserve’s macro policy, we make a rough prediction of the approval time of the Bitcoin spot ETF and the start time of the crypto bull market:

• In January 2024, the U.S. SEC will approve the application for a Bitcoin spot ETF while the Fed is expected to stop raising interest rates or the market is no longer expecting a rate hike. These will push Bitcoin to a rally test in January, followed by a period of sustained rally in November 2023 due to the realization of positive expectations, and a period of volatility or correction in December due to the likely holiday season for many Wall Street institutions, hedge funds, and market makers during the Christmas season.
• In April 2024, the Bitcoin spot ETF will begin to be officially listed and traded, and the market will enter the countdown to the Bitcoin halving, which will help attract a lot of money.
• In July 2024, the Bitcoin bull market officially launched. After the market correction after the halving, and the market’s expectations for loose monetary policy have increased, Bitcoin will have a lot of momentum to sprint.
• In September 2024, the Fed began a cycle of interest rate cuts and monetary easing.

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We expect the bull market to kick-start around July next year, not when the US spot ETF officially goes live. The main considerations are: 2-3 months after the Bitcoin halving, the market tends to experience a wave of correction rather than an immediate upswing; In addition, relying only on the stock funds in the currency circle cannot support the long-term independent market, and the approval of the Bitcoin ETF needs to bring greater market stimulus and attract more funds from outside the circle under the premise that the economic situation has improved to a certain extent. The Fed is widely expected to enter a rate cut cycle in September next year, and it is reasonable for the market to start meeting rate cut expectations around July.

Potential demand and long-term trends for BTC ETFs

As the listing process of ETFs continues to become clearer and institutional participation continues to increase, its role as a powerful financial fortress in the global landscape is becoming more and more apparent. With Bitcoin’s next halving coming in 2024, Bitcoin’s annual inflation rate will be lower than gold’s, making it one of the most scarce value assets. Because the total amount of BTC is constant and halved every 4 years, it has a high degree of scarcity and reliable store of value, so that a series of depreciating fiat currencies such as the Argentine peso, the Nigerian naira, and the Turkish lira have hit a record low exchange rate with BTC. Spot ETFs will continue to give BTC unprecedented asset compliance and liquidity on top of scarcity, further expanding the overall addressable market size (TAM) of Bitcoin ETFs.

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Current aggregates and inflation for Bitcoin and gold / Data: World Gold Council, US Geological Survey

It is precisely because of the potentially strong demand that other global and international mainstream markets are expected to follow the lead of the United States in the near term by approving and offering similar Bitcoin or Ethereum spot ETF products to a wider range of investors. Various traditional investment or wealth managers will inevitably add some exposure to Bitcoin in their investment strategies (e.g., sovereign, mutual, closed-end funds, private funds, etc.).

In the longer term, the target market for Bitcoin investment products is likely to further expand to all third-party managed assets (AUM is around $126 trillion according to McKinsey) and even more broadly to global wealth ($454 trillion according to UBS). Based on these market sizes, if the assumptions before Galaxy remain unchanged (10% of funds are in Bitcoin, with an average allocation of 1%, or 1‰ conversion), it is expected that the potential new inflow of Bitcoin investment products will be between $125 billion and $450 billion over a long period of time, which is a 100 billion capital scale that cannot be ignored. If we look at the overall asset scale of gold more macroscopically, a trillion-level crypto financial market is coming.