Galaxy Digital Research Report: Once the spot BTC ETF is launched, it is expected to leverage the trillion-dollar market

Source: Galaxy Digital

Compilation: BitpushNews Mary Liu

The approval of a U.S.-regulated spot BTC ETF will be one of the most impactful catalysts for BTC adoption (and the adoption of cryptocurrencies as an asset class).

Significance of Spot BTC ETFs

Why Spot BTC ETFs are a Better Solution than Current Investment Vehicles

As of September 30, 2023, the number of BTC held by BTC investment products, including ETPs and closed-end funds, totaled 842,000 (approximately $21.7 billion).

These BTC investment products have significant drawbacks for investors – in addition to high fees, low liquidity, and tracking error, these products are inaccessible to a broad group of investors who represent a significant portion of their wealth. Alternative investment options (e.g., equities, HFs, futures ETFs) that increase BTC indirect exposure suffer from similar inefficiencies. Many investors are reluctant to take on the burdens that come with holding BTC directly, such as wallet/private key management as well as self-custody and tax reporting.

Spot ETFs may be suitable for any investor looking to invest directly BTC without having to own and manage BTC through self-custody, and spot ETFs offer a number of advantages over current BTC investment products and options, such as:

Increase efficiency with fees, liquidity, and price tracking. **While fees are not yet listed for BTC ETF applicants, ETFs typically offer lower fees compared to hedge funds or closed-end funds, and a large number of ETF applicants may be committed to keeping fees low to remain competitive. A spot ETF will also provide enhanced liquidity as it is traded on major exchanges and can track prices better for BTC exposure than futures products or agents. ***Convenient. **Spot ETFs allow investors to gain BTC exposure through a wider range of channels and platforms, including established providers that investors are already familiar with. It provides an easier onboarding path for retail and institutional investors than direct ownership, which requires a level of self-education to onboard and is more expensive to administer. Regulatory compliance. **Spot ETFs may meet stricter compliance requirements set by regulators in terms of custody setup, monitoring, and bankruptcy protection than existing BTC investment products. In addition, ETFs can provide market participants with greater price transparency and discovery, which may help reduce BTC market volatility.

Why Spot BTC ETFs Matter

The two main factors that make spot BTC ETFs particularly influential for BTC market adoption are: (i) expanding accessibility across wealth sectors, and (ii) gaining greater acceptance through formal recognition by regulators and trusted financial services brands:

Accessibility

Expand the reach of retail and institutions. **There is a limited range of BTC investment funds currently available, including products that are primarily driven by wealth advisors or offered through institutional platforms. ETFs are a more directly regulated product that can increase investment opportunities for more investors, including retail + wealthy individuals. ETFs can be used by a wider range of clients, including directly through brokerage firms or RIAs (direct purchase of spot BTC is prohibited), rather than relying on wealth managers. Allocation through more investment channels. **Without an approved BTC investment solution like a spot ETF, a financial advisor/trustee cannot consider BTC in their wealth management strategy. Wealth management departments have large amounts of capital and do not have direct access to BTC investments through traditional channels – with approved spot ETFs, financial advisors can begin to guide their wealth clients through investment BTC. Bigger opportunities for wealth. **Baby boomers and earlier (over 59) hold 62% of U.S. wealth, but only 8% of adults over 50 have invested in cryptocurrency, compared to more than 25% of adults aged 18-49 (according to the Federal Reserve’s Pew Research Center). Offering BTC ETF products through familiar, trusted brands may help attract more senior, affluent people who have not yet joined.

Acceptance

• **Official endorsement/legitimacy from a trusted brand. **A large number of well-known financial brands have submitted BTC ETF applications – Formal recognition/verification of these mainstream companies can improve people’s perception of the legitimacy of BTC/cryptocurrencies as an asset class and can attract more acceptance and adoption. Data from Pew Research shows that of the 88% of Americans who have heard of cryptocurrency, 75% are not confident in the current way of investing, trading, or using cryptocurrency. • Addressing regulatory and compliance issues; Regulatory clarity will attract more investment and development. **As a regulated investment product with a more comprehensive risk disclosure, the SEC’s approval of ETFs can alleviate many of investors’ safety and compliance concerns. It will also provide market participants with long-demanded regulatory clarity on crypto industry operations. A more developed regulatory framework will attract more investment and development, improving the competitiveness of the U.S. crypto industry.
• **BTC Portfolio strengths/acceptance as an asset class. **BTC can offer the benefits of diversification and higher returns in a portfolio, no matter how it is matched. To help guide investment management decisions, more retail investors and financial advisors have turned more to model portfolios and automated solutions that increasingly use ETFs and incorporate alternative asset classes to provide investors with more risk-optimized returns. A longer track record can support the use of BTC in a portfolio in more investment strategies.

Estimate the inflows from spot BTC ETF approvals

Given the accessibility reasons mentioned above, the U.S. wealth management industry is probably the most accessible and straightforward market, and derives the most net new accessibility from approved BTC ETFs. As of October 2023, broker-dealers ($27 trillion), banks ($11 trillion), and RIAs ($9 trillion) have a total of $48.3 trillion in assets under management.

We benchmark the $48.3 trillion TAM of selected U.S. wealth management aggregators in our analysis (excluding the family office channel that manages approximately $2 trillion), although the addressable market size of the BTC ETF and the indirect scope/impact of BTC ETF approval may extend far beyond the U.S. wealth management channel (e.g., international, retail, other investment products and other channels) and have the potential to attract additional capital into BTC spot markets and investment products.

The access cycle for BTC ETFs across these segments is likely to last for years as access opens up. The RIA channel is predominantly made up of independent registered investment advisors of a complex nature and has the potential to allow access earlier than advisors affiliated with banks and broker-dealers, and therefore has a larger share of initial access in our analysis. For the bank and broker-dealer channels, each individual platform will decide when to unlock access to BTC ETF products for its advisors – with certain exceptions, financial advisors affiliated with banks and b/d cannot offer/recommend specific investment products unless approved by the platform. Platforms may have specific requirements before providing access to new investment products (e.g., a track record of > 1 year or AUM exceeding a certain amount, general suitability issues, etc.) that will affect the access cycle.

We assume that the RIA channel will grow from 50% in year 1 and increase to 100% in year 3. For the broker-dealer and banking channels, we assume a slower rate of growth, starting at 25% in year 1 and growing steadily to 75% in year 3. **Based on these assumptions, we estimate the addressable market size of the U.S. spot BTC ETF to be approximately $14 trillion in year 1, $26 trillion in year 2, and $39 trillion in year 3. **

BTC ETF Inflow Estimates: Based on these market size estimates, if we assume that 10% of the total assets available in each wealth channel are BTC, with an average allocation of 1%, we estimate that inflows into BTC ETFs will reach $14 billion in the first year after ETF launch, $27 billion by the second year, and $39 billion by the third year of launch. Of course, if BTC spot ETF approval is delayed or denied, our analysis will change due to time and access restrictions. Alternatively, our estimates may be overly aggressive if the price underperformance or any other factor causes the use or adoption of BTC ETFs to be lower than expected. On the other hand, we believe we are conservative in our assumptions about access, exposure and allocation, so inflows are likely to be higher than expected.

Potential impact on BTCUSD

According to the World Gold Council, as of 30 September 2023, global gold-backed ETFs held a total of about 3,282t (approximately US$198 billion in assets under management), accounting for about 1.7% of the gold supply.

As of September 30, 2023, the BTC held in investment products, including ETPs and closed-end funds, totaled 842,000 BTC (approximately $21.7 billion in assets under management), accounting for 4.3% of the total issuance.

The market capitalization of gold is estimated to be about 24 times higher than that of BTC, while the supply in investment vehicles is 36% smaller, so we assume that the impact of USD equivalent inflows on the BTC market is about 8.8 times greater than that of the gold market.

If we apply the estimate of the $14.4 billion inflow in the first year (about $1.2 billion per month, or about $10.5 billion adjusted using the 8.8x multiplier) to the historical relationship between gold ETF flows and changes in the gold price, we expect the price impact on BTC to increase by 6.2% in the first month.

Keeping the inflows constant, but adjusting the multiplier downward each month based on the change in the gold/BTC market cap ratio due to the increase in the price of BTC, we can see a gradual decline in the monthly return from +6.2% in the first month to +3.7% in the last month of ETF approval, BTC is expected to rise by 74% (starting from the BTC price of $26,920 on September 30, 2023).

The broader financial impact of ETFs on the BTC market

The above analysis estimates the potential inflows of BTC ETF products in the United States. However, the second-order effect of BTC ETF approval is likely to have a greater impact on BTC demand.

In the near term, we expect other global/international markets to follow the lead of the US in approving and offering similar BTC ETF products to a wider range of investors. In addition to ETF products, a variety of other investment vehicles may also add BTC to their strategies (e.g., mutual funds, closed-end funds, and private equity funds, among others) – spanning investment objectives and strategies. For example, BTC exposure can be increased through alternative funds (e.g., currencies, commodities, and other alternatives) and thematic funds (e.g., disruptive technologies, ESG, and social impact).

In the long term, the addressable market for BTC investment products is likely to expand further to all third-party assets under management (AUM is around $126 trillion according to McKinsey) and even more broadly to the global wealth sector (AUM at $454 trillion according to UBS). Some believe that as BTC is monetized, it will systematically reduce the monetary premium applied to other assets such as real estate or precious metals, greatly expanding the TAM of BTC.

Based on these market sizes, and keeping our adopt/allocation assumptions unchanged (BTC adopted by 10% of funds with an average distribution of 1%), we estimate that the potential new incremental capital size for BTC investment products will be around $125 billion to $450 billion over a long period of time.

Summary & Conclusion

For a decade, companies have been seeking to list spot BTC ETFs. In that time, the BTC’s market capitalization has risen from less than $1 billion to $600 billion today (up to $1.27 trillion in 2021). Ownership and usage of BTC around the world has increased dramatically, with the emergence of many different types of wallets, cryptocurrency-native exchanges and custodians, and traditional market access tools. But the U.S., the world’s largest capital market, still lacks BTC most effective market access tool – spot ETFs. Expectations for ETFs to be approved soon are rising, and our analysis suggests that these products could see significant inflows, largely driven by wealth management channels that currently do not have access to safe and efficient BTC exposure at scale.

Money inflows from ETFs, market narratives about the upcoming BTC halving (April 2024), and the likelihood that the Fed’s rate hikes have peaked or will peak anytime soon, all suggest that 2024 could be a big year for BTC.