Why Bitcoin Spot ETF Could Be A Potential Trillion Dollar Market — BitKan Insights
The approval of a U.S.-regulated spot Bitcoin ETF will be one of the most influential catalysts for Bitcoin adoption (and cryptocurrency as an asset class)
Why a Spot Bitcoin ETF is a Better Solution than Current Investment Products
As of 30 September 2023, Bitcoin investment products (including ETPs and closed-end funds) held a total of 842,000 BTC (approximately $21.7 billion).
These bitcoin investment products have significant drawbacks for investors — in addition to high fees, low liquidity, and tracking error, they are inaccessible to the broader investor community, which represents a significant portion of wealth. Alternative investment options that add indirect exposure to Bitcoin (e.g., stock, HF, futures ETFs) suffer from similar inefficiencies. Many investors are unwilling to take on the burdens associated with holding Bitcoin directly, such as wallet/private key management as well as self-custody and tax reporting.
Spot ETFs may be suitable for any investor wishing to invest in Bitcoin directly without the need to own and manage Bitcoin through self-custody, and offer a number of advantages over current Bitcoin investment products and options, such as:
- Increased efficiency through fees, liquidity, and price tracking. While Bitcoin ETF applicants have not yet listed fees, ETFs typically offer lower fees compared to hedge funds or closed-end funds, and a large number of ETF applicants may aim to keep fees low to remain competitive. A spot ETF will also provide enhanced liquidity because it trades on major exchanges and can better track prices for bitcoin exposure than futures products or proxies.
- Convenience: A spot ETF would allow investors to gain bitcoin exposure through a wider range of channels and platforms, including established providers with which investors are already familiar. It provides retail and institutional investors with an easier path to entry than direct ownership, which requires a certain level of self-education to get on board and is more expensive to manage.
- Regulatory Compliance: Spot ETFs may meet more stringent compliance requirements set by regulators in terms of custody setup, monitoring, and insolvency protection than existing bitcoin investment products. In addition, ETFs may provide market participants with greater price transparency and discovery capabilities, which may help to reduce bitcoin’s market volatility.
Why Spot Bitcoin ETFs Matter
The two main factors that make Spot Bitcoin ETFs particularly influential for adoption in the Bitcoin market are (i) expanding accessibility across all wealth segments, and (ii) gaining greater acceptance through formal recognition by regulators and trusted financial services brands:
Accessibility
- Expanded retail and institutional reach. 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 access to a wider range of investors (including retail + affluent individuals).ETFs can be utilised by a wider range of clients, including directly through brokers or RIAs (which are prohibited from directly purchasing spot Bitcoin), instead of not relying on wealth management organisations.
- Distribution through a wider range of investment channels. Without an approved Bitcoin investment solution like a spot ETF, financial advisors/fiduciaries cannot consider Bitcoin in their wealth management strategies. Wealth management departments have large amounts of capital and are unable to access Bitcoin investments directly through traditional channels — through approved spot ETFs, financial advisors can begin to guide their wealth clients to invest in Bitcoin.
- Greater Wealth Opportunity. Baby Boomers and earlier (59+) hold 62% of U.S. wealth, but only 8% of adults over 50 have invested in cryptocurrencies, compared to more than 25% of adults 18–49 (Federal Reserve Pew Research Centre data). Offering a Bitcoin ETF product through a familiar, trusted brand may help attract an older, affluent demographic that is not yet on board.
Acceptance
- Formal recognition/legitimacy from trusted brands. A large number of well-known financial brands have submitted applications for Bitcoin ETFs — formal endorsement/validation from these mainstream companies could increase perceptions of the legitimacy of Bitcoin/cryptocurrency as an asset class and could attract greater acceptance and adoption. data from Pew Research reveals that of the 88% of Americans who have heard of cryptocurrencies, 75% are interested in current ways of investing in, trading, or using cryptocurrencies are not confident.
- 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 could alleviate many of investors’ security and compliance concerns. It will also provide market participants with the regulatory clarity that has long been required to operate in the crypto industry. A more developed regulatory framework will attract more investment and growth, increasing the competitiveness of the U.S. crypto industry.
- BTC Portfolio Benefits/Acceptance as an Asset Class. Bitcoin can provide diversification benefits and higher returns in an investment portfolio, no matter how it is paired. 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-optimised returns. A longer track record could support the use of Bitcoin in portfolios in a wider range of investment strategies.
Estimating Inflows from Spot Bitcoin ETF Approval
Considering the reasons for accessibility mentioned above, the U.S. wealth management industry is likely the most accessible and immediate market and receives the most net new accessibility from approved Bitcoin 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.
The $48.3 trillion of selected U.S. wealth management aggregators is used as the baseline TAM in our analysis (excluding the family office channel, which manages approximately $2 trillion), although the potential market size of the Bitcoin ETFs and the indirect reach/impact of the approval of the Bitcoin ETFs could extend well beyond the U.S. wealth management channel (e.g., international, retail, other investment products, and other channels) and potentially attract additional capital flows into the bitcoin spot market and investment products.
The access cycle for the Bitcoin ETF across these segments could continue for several years as the channel opens up access.The RIA channel, which is largely comprised of independent registered investment advisers of a sophisticated nature, is likely to allow access earlier than bank and broker-dealer-affiliated advisers, and therefore has a greater share of initial access in our analysis. For the bank and broker-dealer channels, each individual platform will determine when to unlock access to bitcoin ETF products for its advisors-with certain exceptions, bank- and b/d-affiliated financial advisors are not able to offer/recommend specific investment products) unless approved by the platform. Platforms may have specific requirements (e.g., track record > 1 year or AUM above a certain dollar amount, general suitability issues, etc.) before providing access to new investment products, which will impact the access cycle.
Analysis shows that the may RIA channel will grow from 50% in year 1 and increase to 100% in year 3. For the broker-dealer and bank channels, and a slower growth rate, starting at 25% in Year 1 and steadily increasing to 75% in Year 3. Based on these assumptions, the potential market size of a U.S. spot Bitcoin ETF is estimated to be approximately $14 trillion in year 1, $26 trillion in year 2, and $39 trillion in year 3 after launch.
The Financial Impact of ETFs on the Bitcoin Market
In the near term, other global/international markets may follow the lead of the U.S. in approving and offering similar bitcoin ETF products to a broader range of investors. In addition to ETF products, a variety of other investment vehicles may also add bitcoin to their strategies (e.g., mutual funds, closed-end funds, private equity funds, etc.) — across investment objectives and strategies. For example, bitcoin exposure can be added through alternative funds (e.g., currencies, commodities, and other alternatives) and thematic funds (e.g., disruptive technologies, ESG, and social impact).
In the longer term, the potential market for Bitcoin investment products could expand further into all third-party managed assets (approximately $126 trillion in assets under management according to McKinsey) and even more broadly into the global wealth space ($454 trillion in assets under management according to UBS). Some believe that as Bitcoin is monetised, 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 (Bitcoin is adopted by 10% of funds with an average distribution of 1%), the size of the potential new incremental capital for Bitcoin investment products is estimated to be approximately $125 billion to $450 billion over a long period of time.
Conclusion
For the past decade, companies have sought to list spot Bitcoin ETFs, and in that time, Bitcoin’s market capitalisation has risen from less than $1 billion to $600 billion today (and as much as $1.27 trillion in 2021). Ownership and use of bitcoin around the world has increased dramatically, with the emergence of many different types of wallets, cryptocurrency-native exchanges and custodians, as well as traditional market-access vehicles. But the world’s largest capital market, the U.S., still lacks Bitcoin’s most effective market access vehicle-spot ETFs.
Expectations are rising that ETFs will soon be approved, and these products could see significant inflows of capital, driven largely by wealth management channels that currently do not have large-scale access to safe and efficient Bitcoin exposures.1 The U.S. is the largest capital market in the world, and the U.S. is the largest capital market in the world.
Inflows from ETFs, market narratives regarding the upcoming halving of Bitcoin (April 2024), and the likelihood that Fed rate hikes have peaked or will peak in the near term suggest that 2024 could be a big year for Bitcoin.
Source: PA News
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