Using gold as a reference, how will Bitcoin ETF drive the next wave of crypto bull market?

Gold as a Benchmark How a Bitcoin ETF Could Trigger the Next Surge in the Crypto Bull Market

Author: Feng & Carol, DFG

Introduction

The largest cryptocurrency by market capitalization, Bitcoin, has been developing rapidly recently, with a cumulative increase of nearly 25% in the past month, breaking the $35,000 mark and reaching a new high in nearly 17 months. This is mainly due to the expectation of the approval of Bitcoin spot ETF in the United States. The reasons for the rejection of the ETF by the SEC are decreasing, with multiple delays in decision-making time and the SEC’s abandonment of the appeal against the Grayscale ruling, among other signs. All these indications suggest that the time for the approval of the Bitcoin spot ETF seems to be getting closer. In a recent report, JPMorgan stated that the SEC may soon approve multiple applications for Bitcoin spot ETFs, with the most likely approval time being before January 10, 2024.

The approval of a Bitcoin spot ETF in the United States is a major milestone event for the entire crypto industry. Although the exact approval time is difficult to determine at present, we can make a rough prediction of some potential impacts that the approval of a Bitcoin spot ETF can bring. On the one hand, Bitcoin and the entire crypto market are highly sensitive to the approval of a spot ETF, as recent market fluctuations have demonstrated. On the other hand, a Bitcoin spot ETF will greatly improve the convenience and compliance of Bitcoin exposure, and is expected to bring a large amount of incremental capital to the crypto market, which will have a significant impact on the long-term development of the industry. Our points of view will be elaborated in the following sections.

Highly Sensitive Crypto Market

The BTC market and the entire crypto market have already provided considerable evidence of the price sensitivity to news related to Bitcoin spot ETFs in the United States, especially in the current situation where bearish sentiments have been accumulating for a long time. In the past few months, the main market focus has revolved around new developments regarding Bitcoin and its spot ETF. Starting from BlackRock’s submission of a Bitcoin spot ETF application in June, every subsequent news regarding the approval of a Bitcoin spot ETF has obviously spread to Bitcoin’s secondary trading market, highlighting the high sensitivity of the crypto market to institutional actions. Although some of the subsequent positive news has been confirmed to be false, Bitcoin trading activity remains highly active, with BTC currently fluctuating around $35k.

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

The Development Journey and Lessons from Gold ETFs

Bitcoin is known as “digital gold,” and the connection between gold and Bitcoin as store-of-value assets is evident. Therefore, studying the development process and historical price trends of gold ETFs is of great significance in predicting the future market trends of Bitcoin ETFs. The key timeline and price trends before and after the approval of gold ETFs are as follows:

• In March 2003, the world’s first gold ETF, named Physical Gold, was listed in Sydney, Australia. After that, gold experienced a sharp rise, which continued until the US ETF started trading.
• In October 2004, the SEC approved the first gold ETF in the US, StreetTracks Gold Trust (GLD), and the price of gold continued to climb slightly after approval.
• In November 2004, the US gold ETF GLD officially began trading on the New York Stock Exchange (NYSE). Two months after GLD started trading, the market dropped by about 9%, falling below the price at which the ETF was approved. After almost 8 months of consolidation, gold started its rapid upward cycle.

Price trend of physical gold before and after ETF listing / Source: macrotrends.net

The approval of gold ETFs allowed more traders to invest through ETFs without the need to hold physical metal and have it stored in banks. In the following years, gold ETF products sparked a frenzy of subscriptions worldwide and became mainstream gold investment tools, attracting a large amount of capital. It is widely believed that the approval of gold ETFs directly drove the major bull market in gold over the next 10 years. Of course, the strong performance of gold can also be attributed to a relatively stable economic environment and loose monetary policies.

By learning from the historical process of gold ETFs, we can make some preliminary predictions about the price trend before and after the approval of Bitcoin ETFs:

• Phase 1: Before the approval of the Bitcoin spot ETF in the US, the market will have sustained expectations, which can be seen as a positive factor.
• Phase 2: After the official approval of the Bitcoin spot ETF in the US, the market may still experience a slight surge.
• Phase 3: Shortly after the listing and trading of the Bitcoin spot ETF in the US, there may be a significant drop after reaching a peak, even falling below the price prior to the approval of the ETF, followed by a period of consolidation to attract more funds, and then an acceleration in the upward trend.
• Phase 4: In the long term, the listing of the Bitcoin spot ETF in the US will open the gate for traditional funds to enter, becoming an important catalyst for driving a major bull market in Bitcoin.

The impact of spot ETF approval on the BTC market size

We have examined the distribution of institutional investors in publicly listed companies with Bitcoin exposure and a market value exceeding $1 billion. With only incomplete statistics, the total market value of institutional holdings in these listed company stocks exceeds $60 billion. Major holders include internationally renowned asset management companies such as Vanguard, BlackRock, and Morgan Stanley. Since these asset management institutions themselves have been involved in Bitcoin-related businesses, we believe it is possible for 10% to 20% of the stocks of listed companies to shift their positions to directly holding BTC ETFs as investment exposures, with an estimated AUM scale ranging from $6 billion to $12 billion.

Major listed companies with Bitcoin exposure / Source: Yahoo Finance

From a more macro perspective, according to recent analysis by Galaxy Digital Research, the US wealth management industry may be the most accessible and direct market for a BTC ETF, meaning that an approved Bitcoin ETF would have the most net new accessibility from this market. As of October 2023, the total assets under management for US traditional self-operated brokers ($27 trillion), banks ($11 trillion), and RIAs ($9 trillion) add up to $48.3 trillion.

Galaxy has estimated the growth rate for various channels in the industry entering the Bitcoin spot ETF. If we assume that 10% of the available assets in each wealth channel adopt Bitcoin, with an average allocation of 1%, that amounts to a final conversion rate of 1‰. The ultimate conclusion is that nearly $80 billion will flow into Bitcoin spot ETFs within three years.

Estimated market size and fund flow of BTC ETF in the first three years / Source: Galaxy Digital Research

Matt Hougan, CEO of the well-known crypto index fund management company Bitwise, recently stated that if a Bitcoin spot ETF product is approved, the overall scale could quickly reach several tens of billions of dollars. He believes that in the first year of the Bitcoin spot ETF launch, it could easily reach $5 billion, and within five years, it could attract around $50 billion. The total size of the US ETF market is currently around $7 trillion, and it is estimated that the Bitcoin ETF product may attract 1% of the existing assets, which is $700 billion. Currently, GBTC (Grayscale Bitcoin Trust) already has $20 billion, leaving approximately $50 billion of available space.

Therefore, it is reasonable to expect the initial influx of BTC spot ETFs to be in the billions of dollars. However, the actual rate of fund inflow will depend on the market conditions at the time the ETF is approved, as well as the preferences of institutional and retail investors.

Impact of Spot ETF Approval on BTC Price

In a recent article titled “Sizing the Market for a Bitcoin ETF,” Galaxy Digital provides insightful estimates of the impact of ETF fund inflows on BTC prices. However, since these predictions are highly time-sensitive and BTC prices have increased by at least 30% since the article was written, some parameters may no longer be applicable. Therefore, we have updated and optimized the data based on the Galaxy estimation model.

Gold and BTC market size comparison / Data: World Gold Council, buybitcoinworldwide

The total market value of gold is currently about 19.74 times that of the circulating market value of Bitcoin. Assuming that the inflow of equivalent US dollars compared to the gold market has an impact approximately 7.3 times greater on the Bitcoin market.

Considering the impact of monthly fund inflows on the price of BTC, we believe that using early time data will introduce too many outlier data (such as those affected by the 2008 financial crisis), but data too close to the present may result in an overly concentrated data trend. Therefore, we have selected two intervals for analysis: from 2016 to the present and from 2020 to the present (corresponding to the two most recent halving periods of BTC).

Note: We once used data from the past 12 years, from 2012 to the present, and obtained a conclusion that was closest to the data from 2020 to the present. However, due to the presence of many outlier data in the data set and relatively low curve fitting, the statistical regularities were not obvious, so we did not conduct an in-depth analysis.

Comparison of gold ETF fund flows and price changes since 2016 / Data: World Gold Council

Comparison of gold ETF fund flows and price changes since 2020 / Data: World Gold Council

Both of the above fits reflect relatively high R-squared values (0.57 and 0.71), indicating statistical confidence. We still apply the estimated inflow of $14.4 billion in the first year (Galaxy has provided a good estimate, about $1.2 billion per month, adjusted by a multiplier of 7.3 to approximately $8.76 billion) to the historical relationship between gold ETF fund flows and gold price changes. We substitute this estimation into the above two fitting functions, and we estimate that the price impact of Bitcoin by the first month’s spot ETF is between 2.9% to 3.3%.

Taking into account the decrease in the gold/Bitcoin market value multiplier caused by the rise in Bitcoin prices (which is already the case, according to the Galaxy article, it is 24x, but currently it is 19.74x). It can be seen that the monthly rate of return gradually decreases from 2.9% to 3.3% in Month 0 to 1.68% to 1.98% in Month 12. Ultimately, the price of Bitcoin is estimated to increase by 27% to 31% in the first year of ETF approval (using October 31, 2023, with a Bitcoin market value of $673.4 billion as the starting point, which is Bitcoin’s 15th birthday, a meaningful day).

Estimated adjusted inflow of funds in the first year and its impact on BTC price = (Estimated average monthly inflow of ETF) * (Gold / BTC multiplier) Data: World Gold Council, Galaxy Research

Compared to Galaxy’s estimated 74% growth rate in the first year, our result is more conservative and convergent, but theoretically more reliable. Here are the reasons:

1. Our estimate is based on a higher R-squared fit on the curve, with better fit characteristics and relatively higher statistical features.

2. Our data benchmark, such as the increase in Bitcoin market value compared to Galaxy’s estimate, has already exceeded 30%, so it is reasonable for the growth rate to decrease.

3. This estimate is completely based on fund inflows and excludes price fluctuations caused by uncontrollable factors such as short-term market FOMO buying, Bitcoin halving, and macro policies.

Possible start time for the next bull market

From recent market trends, it can be seen that the market has already digested some positive expectations. Combining the historical trend of gold ETFs, Bitcoin halving time, historical market performance, and the macro policy effects of the Federal Reserve, we made a rough prediction of the approval time for Bitcoin spot ETFs and the start time of the crypto bull market:

• In January 2024, the U.S. SEC will approve the application for Bitcoin spot ETF, while the Federal Reserve is expected to stop raising interest rates or the market no longer expects rate hikes. These factors will push Bitcoin to test higher prices in January. Before that, there may be a continuous rise in November 2023 due to the realization of positive expectations, followed by a period of oscillation or correction in December, because many Wall Street institutions, hedge funds, and market makers may take holidays during the Christmas period.
• In April 2024, Bitcoin spot ETF officially starts trading and the market enters the countdown to Bitcoin halving, which will help absorb a large amount of capital.
• In July 2024, the Bitcoin bull market officially starts. After the halving adjustment, combined with the market’s expectations of loose monetary policies, Bitcoin will have a lot of momentum for a sprint.
• In September 2024, the Federal Reserve starts a rate-cutting cycle and implements loose monetary policies.

We expect the bull market to start around July next year, rather than when the U.S. spot ETF officially takes effect. The main consideration is that the market often experiences a wave of adjustment in the 2-3 months after Bitcoin halving, rather than immediately starting an upward trend. Additionally, relying solely on the capital in the cryptocurrency circle cannot sustain a long-term independent market trend. The approval of Bitcoin ETF, which is a heavyweight positive news, will bring greater market stimulus and attract more outside capital only when the economic situation improves. The market generally expects the Federal Reserve to enter a rate-cutting cycle in September next year, so it is reasonable to start realizing the rate-cut expectations around July.

The Potential Demand and Long-Term Trend of BTC ETF

With the continuous clarification of the listing process of Bitcoin ETFs and increasing institutional participation, its role as a powerful financial fortress in the global landscape is becoming increasingly evident. With the upcoming halving of Bitcoin in 2024, the annual inflation rate of Bitcoin will be lower than that of gold, making it one of the most scarce assets. Because the total supply of BTC is constant and halves every 4 years, it has a high degree of scarcity and reliable store of value, which has led to historical lows in exchange rates between depreciating fiat currencies such as the Argentine peso, Nigerian naira, Turkish lira, and BTC. Spot ETFs will continue to provide BTC with unprecedented asset compliance and liquidity on top of scarcity, further expanding the overall potential market size (TAM) of Bitcoin ETFs.

Current total supply and inflation of Bitcoin and gold / Data: World Gold Council, US Geological Survey

Due to the potential strong demand, it is expected that other global and international mainstream markets will follow the United States in the short term, approving and providing similar Bitcoin or Ethereum spot ETF products to a wider range of investors. Various traditional investment or wealth management institutions will inevitably increase their exposure to Bitcoin in their investment strategies (such as sovereign, mutual, closed-end funds, and private equity funds).

In the long run, the target market for Bitcoin investment products may further expand to include all third-party managed assets (with AUM of approximately $126 trillion according to McKinsey’s data), and even more broadly to the global wealth (with data of $454 trillion according to UBS). Based on these market sizes, if we assume that Galaxy’s previous assumptions remain unchanged (10% of funds adopt Bitcoin, with an average allocation of 1%, i.e., a conversion of 1‰), it is expected that the potential inflow of new Bitcoin investment products will be between $125 billion and $450 billion for a long period of time. This is a capital scale in the hundreds of billions that cannot be ignored. If we look at the overall asset size of gold, a crypto financial market worth trillions is on the horizon.

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