The price of bitcoin has been a tear lately, not just since the fake news unleashed animal spirits last Monday, but really since mid-June when the entire ETF craze was reignited. If investors rewind back to June 15th when BlackRock filed its prospectus for the iShares Bitcoin Trust, which then resulted numerous fast follower filings, the market was in a very different state than it is in today. In June, ahead of the filings, the crypto industry was reeling in the wake of regulatory enforcement actions, with the SEC filing lawsuits against two industry stalwarts, Coinbase and Binance. The price of bitcoin, which had been buoyed by the regional banking crisis in 1Q, had fallen from over $30K in April to under $26K on June 14th. It was very clearly the prospect of a spot bitcoin ETF, which emerged on June 15th, was responsible for the complete reversal in price momentum for bitcoin (even if it took a few days to catch on).
With that context in mind, we thought it might be for useful investors to reverse engineer what the market-based expectations might be for the size of a spot ETF. There has been plenty of analysis put forth by analysts and market pundits already. We would classify most of the analysis (including our own) as either top down (total addressable approach) or comparative (looking at other ETF launches or similar assets). But regardless of whether you think the demand for a spot ETF is de minimis or half a trillion dollars, the stark reality is no one knows. This would be a novel product for an asset and technology still early in its lifecycle. Strong assertions to the contrary, certainty around sizing, runs counter to that. Instead, we propose to do the opposite: let price appreciation tell us what the market thinks the AUM will be. Comparing that measure to existing products, assets, or prior fund launches might give us as sense as to whether the market has under or overshot expectations.
There are some important caveats, however. This analysis, like all analysis, suffers from imprecision in the measurement of variables, some of them critically important, like the money multiplier (bitcoin’s market cap impact compared to dollar flows). But there are important observations we can add to the conversation too – ones that don’t appear to have filtered their way into the public discourse. We hope some of these points help bolster the analysis and discussion.
While we, like many in the industry, are in the camp that approval of a spot ETF is more likely than not, we acknowledge that an approval is not an inevitability, and some probability needs to be assigned to a disapproval. Whether one thinks that’s 5% or 50%, one’s ETF AUM assumption and therefore price impact needs to be weighted by that probability. This is an expected value exercise and some probability of a denial, and therefore zero spot ETF AUM, should come into play.
While we have long argued for a strategic allocation to bitcoin for its ability to reduce risk (low to no correlation to other asset classes) and enhance returns (high risk adjusted returns) for investor portfolios, the honest reality is that most wealth management and advisory platforms haven’t come to the same conclusion. As a result, model portfolios that managers and advisors tend to utilize for their clients don’t have allocations carved out for bitcoin. Some forward-looking enough platforms have made allocations to bitcoin, but it is still far from commonplace. While the action to “get off zero” represents the opportunity for the industry and any spot ETFs, the mere presence of a spot ETF still must contend with this allocation hurdle.
For investors who have wished to gain access to bitcoin, alternatives have existed for as long as Bitcoin has. An analysis for the size of a spot bitcoin ETF therefore must incorporate the idea of investors who wish to buy bitcoin but for whom existing options (private funds, futures-based ETF, retail exchanges, or spot acquisition and custody through an entity like NYDIG) were insufficient. We agree that a spot ETF can be superior to many existing investment options (futures-based ETFs with roll costs, effectively closed-end trusts with high tracking error introduced by premiums/discounts to NAV, protections of securities laws, liquidity, and potentially costs), but sizing analysis should take this into consideration. Also, to what degree the ETF is cannibalistic to existing options presents a challenge. Remember, we are looking to determine the incremental benefit to bitcoin, not merely switching from one pot to another.
Investors should keep in mind this potential product would be listed on securities exchanges in the US. While nothing precludes investors outside of the US from investing in securities traded in the US, additional steps would be required those outside the US gain access to a spot ETF (access to a US brokerage account). Additionally, spot ETFs and ETPs already exist in many other geographies.
The final caveat that comes to mind (we sure there are more) is reflexivity between price and spot ETF AUM. Price momentum is a huge factor in crypto investing; price appreciation tends to drive further price appreciation and vice versa. On the reflexivity aspect, the potential for a spot ETF drives prices up, which then drives up potential AUM (demand for spot), which therefore drives up spot prices further. Understanding this reflexivity loop, therefore, is a vital part of market sizing. Said slightly differently, if a spot ETF were to launch during the correction of 2022, its AUM, especially in the early days, might be very different than now launching, where the cycle seems to be underway.
Assuming all the price appreciation since the appearance of the ETF filings was due to expectations ahead of the launch (an oversimplification we are certain), the change in bitcoin’s market cap over that time, $180B, implies nearly $18B in AUM for spot ETFs (based on a 10x money multiplier). This exercise gets increasingly complex when accounting for timing of flows, but the exercise is still instructive enough to add value without being too prescriptive.
Whether or not one thinks that is aggressive or conservative, depends on one’s view on ultimate adoption of spot ETFs. To give that number some context, we compared the implied AUM against some other notable measures list below. The $18B AUM figure already surpasses some important historical comparisons, like the Year 1 inflows into SPDR Gold Shares ETF (GLD) of $5.3B (in 2023 dollars). It is notably lower, however, than all US based spot gold ETFs at $92.7B in AUM. If the launch of GLD in 2004 is an indication, its AUM grew at a +80% CAGR from its first year to its 5th year. Spot bitcoin ETFs may take a similar path, but that is far from knowable at this point. It is our observation, however, that $18B is a sizeable expectation, and may play a factor for those with shorter investment time horizons. This also assumes 100% probability of approval, so if investors wish to add there own probabilities (say 50%), that number should go up (double in the case of 50% probability).
So, what are the next important steps in an ETF listing? This week, the DC Court of Appeals issued a mandate in the case of between Grayscale and the SEC, which as expected said little (it was 1 sentence), only that it “constituted a formal mandate of the court.” As an aside, for some reason the industry thought this was coming Friday, which again demonstrates the collective inability to either read critically (it was 3 sentences) or do basic arithmetic. What comes next in this case, however, is unclear. Grayscale's lawyers have submitted comment letters here and here that we believe are worth reading. We only know the court has ordered the SEC to vacate its prior disapproval order. The ball is most assuredly in the SEC’s court, and we await any news from the agency on the matter.
As for the other ETFs in process, including BlackRock, Fidelity, ARK 21Shares, and Invesco Galaxy, this week ended the public comment period on the exchange applications to trade and list these ETFs. The next deadline is November 8th, which is the end of the comment rebuttal submission period. While approval or denial can happen any time, it is possible the SEC waits until after this deadline has passed before any decision is rendered.
The other important deadline is the November 17th, which is the deadline for Congress to pass an appropriations bill before a government shut down. We saw the SEC take numerous actions (delaying all spot bitcoin ETF decisions) ahead of the potential shutdown on Oct 1. It is possible that the agency does the same (render an approval or denial as the ARK 21Shares application has no more decision delays available) ahead of November 17th. But given that the House finally has a Speaker now, passing a spending bill ahead of the deadline is increasingly likely. In the off chance a shutdown does occur, we think there is very little possibility a final decision is rendered (SEC’s operating plans during a shutdown are here) during a closure. The agency still could do nothing ahead of November 17th as the final deadline for ARK 21Shares is not until January 10th, and there are no other deadlines before that time. That might be the only certainty in this entire process of sizing and timing – a final decision will be rendered by January 10th.
Bitcoin continued its pre-ETF decision tear, rising 18.3% over the past week. On a year-to-date basis, bitcoin has now more than doubled, rising 105.7%. This comes as other “risk -on” assets, equities, continue to struggle. The S&P 500 fell 3.3% and Nasdaq Composite declined 4.5%. Bonds rallied in the risk-off environment, with investment grade corporate bonds up 1.6%, high yield corporate bonds up 0.9%, and long term US Treasuries up 2.4%. Gold continues to be a bright spot in this tumultuous geopolitical moment, rallying 1.0%. Oil declined 6.9%.
Postmortem on the Lightning Replacement Cycling Attack - Bitcoin Magazine
Nov 1 - FOMC interest rate decision
Nov 8 - End of rebuttal period for many ETF applications
Nov 14 - October CPI reading
Nov 17 - US federal budget deadline
Jan 10 - Final ETF decision deadline for the first bitcoin ETF, ARK 21Shares
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