author | Charles Yu
compile | Colin Wu
Original link:
https://www.galaxy.com/insights/research/sizing-the-market-for-a-bitcoin-etf/
Approval of a U.S.-regulated spot Bitcoin ETF would be the most impactful catalyst for Bitcoin (and cryptocurrency as an asset class) adoption.
The significance of Bitcoin ETF
Why Bitcoin ETFs Are Better Than Current Investment Vehicles
As of September 30, 2023, the number of BTC held by Bitcoin investment products (including ETPs and closed-end funds) reached 842,000 (approximately US$21.7 billion).
These Bitcoin investment products have significant disadvantages for investors – in addition to high fees, low liquidity, and tracking error, these products are inaccessible to the broad investor base that represents the majority of wealth. Alternative investment options that add indirect exposure to Bitcoin (e.g., stocks, hedge funds, futures ETFs) have similar tracking efficiency issues. Many investors prefer not to own Bitcoin directly to avoid the administrative burden that comes with owning Bitcoin directly, which involves managing wallets/private keys under self-custody and filing taxes.
Spot ETFs may be suitable for any investor who wishes to invest directly in Bitcoin but do not wish to own and manage Bitcoin through self-custody, offering numerous advantages over current Bitcoin investment products and options, such as:
● Improve efficiency with fee, liquidity and price tracking. Although Bitcoin ETF applicants have not yet listed fees, ETFs typically offer lower fees than hedge funds or closed-end funds, and a large number of ETF applicants may strive to keep fees low to be competitive. A spot ETF will also provide greater liquidity since it trades on a major exchange and can track prices better than futures products or proxies to gain exposure to Bitcoin.
● Convenience. Spot ETFs can give investors exposure to Bitcoin through a wider range of channels and platforms, including established providers that investors are already familiar with. It provides retail and institutional investors with an easier entry path than direct ownership, which requires a degree of self-education to get started and has higher management costs.
● Regulatory compliance. Compared with existing Bitcoin investment products, spot ETFs may meet regulatory agencies' more stringent compliance requirements for custody setup, monitoring and bankruptcy protection. Additionally, ETFs may provide greater price transparency and discovery capabilities to market participants, which may help reduce Bitcoin’s market volatility.
Why Bitcoin ETFs are so important
Two main factors that have been particularly influential for Bitcoin spot ETFs on Bitcoin market adoption are: (i) expanded accessibility across wealth segments, and (ii) greater formal recognition through regulators and trusted financial services brands. Great acceptance:
accessibility
● Provide greater coverage for both retail and institutions. The range of BTC investment funds currently available is limited and includes products that are primarily driven by wealth advisors or offered through institutional platforms. ETFs are a more straightforward regulated product that will increase access to a larger investor base (including retail + wealthy individuals). ETFs can be accessed by a wider range of clients, including directly at a broker or at an RIA (Registered Investment Advisor), rather than relying on wealth managers.
● Allocate through more investment channels. Without an approved Bitcoin investment solution like a spot ETF, financial advisors/fiduciaries cannot consider Bitcoin in their wealth management strategies. The scale of capital held by the wealth management sector is huge, but direct access to Bitcoin investments has not been available through traditional channels - through approved spot ETFs, financial advisors can begin to guide their wealth clients to invest in Bitcoin.
● Greater wealth opportunities. Baby boomers and before (age 59+) hold 62% of U.S. wealth, but only 8% of adults over 50 are invested in cryptocurrencies, compared to 25% of adults 18-49 Above (Federal Reserve, Pew Research Center). Providing Bitcoin ETF product offerings through a familiar, trusted brand may help attract an older, wealthier demographic that has not yet joined.
Acceptance
● Formal recognition/legitimacy from a trusted brand. A large number of well-known financial brand names have submitted applications for Bitcoin ETFs – formal recognition/validation by these mainstream companies could improve perceptions about the legitimacy of Bitcoin/cryptocurrency as an asset class and attract greater acceptance and adoption. According to Pew Research, of those 88% of Americans who have heard of cryptocurrencies, 75% are not confident in the way they currently invest, trade, or use cryptocurrencies.
● Address regulatory and compliance issues; regulatory clarity will attract more investment and development. As a regulated investment product with more comprehensive risk disclosures, SEC approval of an ETF can alleviate many of investors' safety and compliance concerns. This would also provide long-requested regulatory clarity to market participants operating in the crypto industry. A better regulatory framework will attract more investment and development, making the U.S. crypto industry more competitive.
● BTC portfolio strengths/acceptance as an asset class. Bitcoin can provide diversification benefits and higher returns in an investment portfolio, regardless of which part of the portfolio the funds are allocated from. To help guide investment management decisions, more retail investors and financial advisors have begun turning more to model portfolios and automated solutions, which increasingly use ETFs and incorporate alternative asset classes to provide investment insights. Provide a more optimized risk return. A longer track record could support the use of Bitcoin in a portfolio across more investment strategies.
Estimating inflows from Bitcoin ETF approval
For the accessibility reasons mentioned above, the U.S. wealth management industry is likely to be the most accessible and immediate market and will receive the most new net accessibility from approved Bitcoin ETFs. By October 2023, assets under management by broker-dealers ($27 trillion), banks ($11 trillion), and RIAs ($9 trillion) totaled $48.3 trillion.
We apply $48.3 trillion to selected U.S. wealth management aggregators as a baseline TAM in our analysis (excluding the family office channel that manages ~$2 trillion), despite the addressable market for Bitcoin ETFs and Bitcoin ETF approval The indirect impact may extend well beyond U.S. wealth management channels (e.g., international, retail, other investment products, and other channels) and may attract additional capital inflows into Bitcoin spot markets and investment products.
(Note: Although we applied TAM-style analysis to estimate inflows into Bitcoin ETFs, we acknowledge that flows into Bitcoin ETFs may also drive new net inflows rather than just shifts from existing allocations — —Thus, applying percentage capture assumptions to an estimated TAM number does not fully reflect our view of how Bitcoin ETFs will be adopted, as it does not capture this new demand.)
The admission cycle for Bitcoin ETFs across these market segments is likely to continue for several years as channels open up for admission. The RIA channel, which primarily consists of independent registered investment advisors of a complex nature, is likely to be granted access earlier than bank- and broker-dealer-affiliated advisors, and thus has a larger share of initial accessibility in our analysis. For bank and broker-dealer channels, each independent platform will decide when to unlock access to Bitcoin ETF products for its advisors - with some exceptions, financial advisors affiliated with banks and b/d cannot offer/recommend specific investments Products unless approved by the Platform. Platforms may have specific requirements before providing access to new investment products (e.g. track record > 1 year or AUM above a certain amount, general suitability issues, etc.) which will impact the access cycle.
We assume that the RIA channel will start at 50% in the first year and increase to 100% by the third year. For the broker and bank channels, we assume a starting rate of 25% in the first year and a steady increase to 75% in the third year. Based on these assumptions, we estimate the addressable market size for U.S. Bitcoin ETFs to be approximately $14 trillion in the first year after launch, approximately $26 trillion in year 2, and approximately $39 trillion in year 3.
Bitcoin ETF inflow estimates: Based on these market size estimates, if we assume that BTC is adopted by 10% of available assets in each wealth channel, with an average allocation of 1%, we estimate that in the first year after the ETF launch, Bitcoin Inflows into the cryptocurrency ETF were $14 billion, rising to $27 billion in the second year and $39 billion in the third year after launch. Of course, if approval of the Bitcoin Spot ETF is delayed or denied, our analysis will be affected by time and access restrictions. Alternatively, our estimates may be too aggressive if poor price performance or any other factors cause access or adoption of the Bitcoin ETF to be lower than expected. On the other hand, we believe our assumptions about access, exposure, and distribution are conservative, so inflows may also be higher than expected.
Potential impact on BTCUSD
As of September 30, 2023, according to data from the World Gold Council, global gold ETFs held a total of approximately 3,282 tons (asset management scale of approximately US$198 billion), accounting for approximately 1.7% of gold supply.
As of September 30, 2023, Bitcoin in investment products (including ETPs and closed-end funds) totaled 842k BTC (asset management scale of approximately US$21.7 billion), accounting for 4.3% of the total issuance.
Considering that gold’s market capitalization is estimated to be approximately 24 times greater and that the supply in investment vehicles is 36% smaller than that of Bitcoin, we assume that inflows equivalent to gold would have an impact on the Bitcoin market of approximately 8.8 times.
If we apply our first-year inflow estimate of $14.4 billion (approximately $1.2 billion per month or approximately $10.5 billion adjusted using our 8.8x multiple) to the historical relationship of gold ETF flows to gold price movements , we estimate Bitcoin’s first-month price impact to be +6.2%.
If we keep inflows constant but adjust the multiplier from the BTC/gold market cap ratio each month based on BTC price increases, we could see a gradual decline from +6.2% in the first month to + in the last month of the first year 3.7%, resulting in an estimated +74% increase in Bitcoin in the first year of ETF approval (using a September 30, 2023 Bitcoin price of $26,920 as a starting point).
ETF’s broader financial impact on Bitcoin market
The above analysis estimates potential inflows into U.S. Bitcoin ETF products. However, the second-order effects of Bitcoin ETF approval may have a larger impact on BTC demand.
In the short term, we expect other global/international markets to follow the U.S.'s lead and approve and make similar Bitcoin ETF products available to a wider range of investors. In addition to ETF products, other investment vehicles are likely to add Bitcoin to their strategies (such as mutual funds, closed-end and private equity funds, etc.) - across investment objectives and strategies. Examples include alternative funds (currencies, commodities and other alternatives) and thematic funds (disruptive technologies, ESG and social impact) that can add Bitcoin exposure.
In the long term, the market available for Bitcoin investment products is likely to expand further to all third-party managed assets (approximately $126 trillion in assets under management, according to McKinsey) and even more broadly to global wealth (according to Swiss According to Silver’s data, assets under management are US$454 trillion). Some believe that as Bitcoin monetizes, it will systematically reduce the monetary premium applied to other assets, such as real estate or precious metals, thereby greatly expanding Bitcoin's TAM.
Based on these market sizes, and holding our adoption/distribution assumptions constant (BTC is adopted by 10% of funds, with an average allocation of 1%), we estimate potential new inflows into Bitcoin investment products over an extended period Roughly between $125 billion and $450 billion.
Summary and conclusion
Applicants have been seeking to list a spot Bitcoin ETF for a decade. During this time, Bitcoin's market capitalization has risen from less than $1 billion to $600 billion today (and peaked at $1.27 trillion in 2021). Global ownership and use of Bitcoin has risen dramatically during this time, with many different types of wallets, crypto-native exchanges and custodians, as well as traditional market access vehicles around the world. But the world’s largest capital market, the United States, still lacks Bitcoin’s most effective market access tool — a spot-based ETF. Expectations are rising that ETFs will soon be approved, and our analysis suggests these products are likely to see significant inflows, driven primarily by wealth management channels that currently do not have access to safe and efficient Bitcoin exposure at scale.
Inflows from ETFs, the market narrative around the upcoming Bitcoin halving (April 2024), and the possibility that interest rates have or will peak in the near term, all suggest that 2024 could be a big year for Bitcoin .
