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In this episode of the Bankless Podcast, hosts David and Ryan join guest Alex Thorne to discuss the potential impact of a Bitcoin ETF. Alex Thorne, head of research at Galaxy Digital, shares his thoughts on Bitcoin ETFs, specifically regarding the interest and possible market impact of a spot Bitcoin ETF.
Hosts: David Ryan, Bankless Podcast
Speaker: Alex Thorn, Head of Research, Galaxy Digital
Original title: Bitcoin ETFs: Bullish or Bearish? 》
Air Date: November 2
The two-way impact of spot Bitcoin ETFs and traditional investments
Alex pointed out that the total assets of the U.S. wealth management industry are approximately $48.3 trillion, a figure that does not include individual self-managed accounts such as individual retirement accounts (PRAs) or self-managed brokerage accounts. The wealth management industry is divided into three main categories: broker-dealers (approximately $27 trillion), banks (approximately $11.9 trillion), and registered investment advisers (RIAs) (approximately $9.3 trillion).
Alex pointed out that spot Bitcoin ETFs will provide a new investment channel for those in the wealth management industry who are currently unable to directly purchase Bitcoin. While individual investors can purchase Bitcoin directly on cryptocurrency exchanges such as Kraken, many wealth managers are unable to offer clients direct investment in Bitcoin or other cryptocurrencies due to compliance and approval processes.
Alex explained that many banks and broker-dealers do not allow their wealth management advisors to invest client funds in Bitcoin trust products or cash-settled Bitcoin futures ETFs because these products are considered too risky or inappropriate. Alex believes that the launch of spot Bitcoin ETFs will enable restricted wealth management advisors to offer Bitcoin investments to their clients, thereby opening up a new channel for capital to flow into the Bitcoin market.
Alex noted that wealth management advisors cannot simply buy Bitcoin on a cryptocurrency exchange such as Kraken because of the issues involved with sub-accounts, custody, custody and integrated investment management tools. The advantage of spot Bitcoin ETF is that it can be integrated into existing investment management tools and back-end operating systems, making Bitcoin investment as easy to manage as other investment products.
Alex said that although the entire $48 trillion will not flow into the Bitcoin market, the total market value of the Bitcoin market is less than $1 trillion, and even a small inflow of funds could have a significant impact on the price of Bitcoin.
Alex mentioned that they expect the spot Bitcoin ETF could bring in $1.44 billion in inflows in the first year, based on analysis of the wealth management industry. They further forecast that inflows could increase to $2.65 billion in the second year as market access increases. Alex emphasized that these inflows are considered net new funds, that is, funds that would not flow into the Bitcoin market without ETFs, and that these forecasts are based on analysis by wealth management channels.
The host suggested that investor behavior may not be as uniform and rational as the spreadsheet model. If the price of Bitcoin rises, investors may be very FOMO. Even extreme Bitcoin supporters believe that Bitcoin is a long-term holding asset. This could cause actual inflows to be more volatile than forecast. Wealth management advisors may not trade as frequently as individual investors, Alex explains, preferring long-term planning over short-term market reactions.
Alex mentioned that they like to compare Bitcoin to gold because both are scarce assets and have similarities in terms of investment vehicles. After the gold ETF was approved, the gold market experienced a long and significant bull run over the next decade. They estimate that the same amount invested in Bitcoin would have an impact on the price of Bitcoin that is 8 times greater than the price of gold.
Alex emphasized that this forecast is extremely bullish and that their calculations are based on simple estimates. They also realize that the rise in gold prices in the mid-2000s was not just due to greater accessibility, but was also influenced by macroeconomic events, such as the financial crisis.
Alex mentioned that inflows into ETFs do not happen immediately but gradually. In their analysis, as the Bitcoin market grows, the impact multiplier decreases each month as the share of Bitcoin in investment vehicles increases with the total market capitalization.
Alex stresses that their analysis is a defensible way to think about the issue, but is by no means a sure guarantee. They predict that if the inflow forecasts in other analysis are correct, the price of Bitcoin could increase by approximately 75% in a year from the launch of the ETF.
Possible market dynamics in the future
Alex and the host discuss how the markets response to an anticipated infusion of capital, particularly if prices rise, could lead to forward-looking buying behavior that overdrafts future demand.
Regarding the impact of forward buying on demand, Alex said it was a complex issue. On the one hand, if the price of Bitcoin rises, it may cause some investors to think that the price is too high and choose to wait for the price to fall; on the other hand, as the volatility of Bitcoin decreases and the market size increases, investors can actually allocate more More funds to Bitcoin.
Alex mentioned that they used Sharpe ratios and risk adjustments in their analysis to determine investment proportions. If the Bitcoin market becomes larger and less volatile, then from a risk-adjusted perspective, more funds can be allocated to Bitcoin. In addition, there are some very large capitals, such as sovereign wealth funds or central banks, which may not participate until the Bitcoin market matures, volatility decreases, and liquidity increases.
Alex emphasized that while their analysis is based on existing demand and the wealth management industry’s lack of access to Bitcoin, actual capital inflows may be affected by market expectations and other macroeconomic events.
The host mentioned that once the Bitcoin ETF is approved, a series of marketing and educational activities will be triggered. These are all designed to attract investors attention and occupy market share, which will help improve the legitimacy and legitimacy of Bitcoin. Level of institutionalization.
Alex agrees, adding that there has been a similar wave of promotion during previous ETF launches. Alex believes that if the Bitcoin ETF is approved, it will be a recognition of Bitcoin’s maturity and demonstrate the regulator’s satisfaction with the supervision, custody and transfer issues of the cryptocurrency.
Potential risks and challenges
Alex mentioned that the approval and launch of the Bitcoin ETF may cause a buy the rumor, sell the fact reaction in the market, and some investors may buy Bitcoin in advance in anticipation of the ETF approval, but after the actual launch Sell, thereby affecting the inflow of funds into the ETF.
He emphasized that even if the market is optimistic about Bitcoin ETFs, the pace of inflows may be slower than expected. Because even the most optimistic platforms can take months to launch an ETF, which also needs to go through a risk approval process.
Alex also mentioned that regulatory issues could impact Bitcoin ETF inflows. While Bitcoin may not be the primary focus of regulators in the cryptocurrency ecosystem, other regulatory issues, such as Financial Crimes Enforcement Network (FinCEN)-related regulations for all cryptocurrencies, may impact the overall crypto market.
He noted that all companies applying for Bitcoin ETFs have updated their S1 filings to add disclosures about the risks of mining, specifically that mining’s use of electricity could cause a political backlash that could lead to regulatory changes.
Alex mentioned that politicians like U.S. Senator Elizabeth Warren may have a negative attitude towards self-custody cryptocurrencies, which would be detrimental to Bitcoin and the entire cryptocurrency market.
Compared to spot Bitcoin, futures ETFs are not great investment vehicles for long-term holders due to roll costs and decay. Wealth management advisors prefer long-term investing, which could impact their interest in Bitcoin ETFs.
How Bitcoin ETFs Impact Ethereum ETFs
Alex and the host believe that if a Bitcoin spot ETF is approved, there is a possibility that an Ethereum ETF may also be approved in the coming months. While an Ethereum ETF is less likely than a Bitcoin ETF, approval of an Ethereum ETF may be accelerated once a Bitcoin ETF is approved.
Regarding the market impact of Bitcoin and Ethereum ETFs, Alex believes that although their analysis mainly compares Bitcoin to gold, from an accessibility perspective, the impact of Bitcoin ETFs on the market also applies to Ethereum . Currently, many advisors do not have access to spot Bitcoin or spot Ethereum, so an ETF would greatly increase the accessibility of these assets.
Alex mentioned that the investment community’s view of Ethereum still lags behind that of Bitcoin. Bitcoin is widely viewed as “digital gold,” while Ethereum is viewed more as a risk asset or technology investment. As a result, Bitcoin and Ethereum ETFs may appeal to different types of investors.
Alex believes that Ethereum is often viewed as an investment in technological innovation rather than just a pure digital commodity. If an Ethereum ETF is approved, it could have a significant impact on the price of Ethereum. Because Ethereum has a lower market cap and less legitimacy than Bitcoin in traditional financial circles, an ETF could have an amplifying effect on its price.
One of the unique features of Ethereum is its staking feature, which has been likened to Internet bonds. If there were an Ethereum ETF in the future and included staking functionality, this could provide investors with additional returns, increasing its appeal.
Although both Bitcoin and Ethereum are tokens that fuel their networks and both have relative scarcity, their roles and impacts in the eyes of investors are different. Bitcoin’s scarcity is predictable, while Ethereum is viewed more as a technology platform.
Alex mentioned that he agreed with Bloomberg Intelligence analysts Eric Balchunas and James Seyffart, who have in-depth knowledge of the timeline for the legal and regulatory approval process for a Bitcoin ETF. Alex believes that the most likely time for Ethereum ETF approval is January 10, 2023 or earlier.
