Bitcoin, the original crypto rebel, is racing into the heart of the financial establishment with an exchange-traded fund that tracks its price. But will it strike gold?
The world’s largest cryptocurrency soared 28% in October, with investors betting that U.S. regulators will greenlight a spot bitcoin ETF, unleashing a new wave of demand.
But how much money could such a fund attract?
Well, it’s hard to say, given the wide range of estimates from market participants, from $3 billion on day one to $55 billion over five years.
“The analogy I’m looking at is gold,” said Dave Mazza, chief strategy officer at ETF provider Roundhill Investments, adding that the gold market has been transformed by the approval of spot ETFs.
He said he expected the first spot bitcoin ETFs to see a “wave of buying,” similar to the launch of the first gold ETF in the U.S. in 2006 or the bitcoin futures ETF in 2021.
Mainstream investment giants such as BlackRock (NYSE:BLK) and Fidelity, as well as crypto-focused firms such as Grayscale, have filed applications for spot bitcoin ETFs. The U.S. Securities and Exchange Commission will review eight to 10 applications for new spot bitcoin products, its chairman said on Thursday, without giving details on the timing of decisions.
Countering the ETF optimists are traditional investors, long wary of crypto, who say they won’t be swayed by new investment vehicles.
“Not a penny of my clients’ money will find its way into these misbegotten so-called investments,” said George Gagliardi, an investment adviser at Coromandel Wealth Management in Lexington, Massachusetts, who believes cryptocurrencies “have no underlying intrinsic value.”
Still, the prospect of an ETF giving investors direct exposure to bitcoin has boosted the cryptocurrency’s price, which hit $35,198 last week, its highest level since May 2022.
The metrics investors and analysts use to estimate demand for an ETF, from the size of the gold ETF market to demand for existing products, vary almost as much as their conclusions. Bitcoin markets are also opaque, with price movements largely driven by investor sentiment.
US crypto firm NYDIG estimates demand for a spot bitcoin ETF at around $30 billion. Its calculation compares the size of gold and bitcoin ETFs – $210 billion and $28.8 billion, respectively – and adjusts for their relative volatility.
“It’s rare that a brand new asset class comes to the ETF market,” said Todd Sohn, ETF strategist at Strategas Securities. “That makes it hard to figure out exactly how much demand will materialize.”
Existing bitcoin ETFs, which are tied to the price of futures contracts, don’t accurately track price movements, and the cost of rolling over futures contracts can eat into returns, making them a less desirable vehicle for many investors.
Steven McClurg, chief investment officer at Valkyrie Funds, which has filed for a spot bitcoin ETF, believes a starting point for gauging demand is the size of the Grayscale Bitcoin Trust (GBTC), an open-ended private trust that directly owns bitcoin.
“If you look at the current market cap of GBTC – $3.2 billion – that’s probably day one demand” for a spot bitcoin product, he said.
HALF OF FUNDS ‘GONE IN TWO YEARS’
Some proponents say financial advisers, pension funds and other money managers – a pool of capital estimated by Boston Consulting Group to total about $46.5 trillion – could be a significant source of demand for a spot bitcoin ETF.
If BlackRock comes to market, then a certain percentage of wirehouses and financial advisers will add their fund to platforms,” said Matthew Sigel, head of digital asset research at VanEck, which has a spot bitcoin ETF awaiting SEC approval.
BlackRock declined to comment on its pending spot bitcoin ETF other than to confirm that it is still awaiting final SEC approval.
Matthew Hougan, CEO of crypto firm Bitwise Investments, said in an industry panel earlier this month that he expects spot bitcoin ETFs to attract $55 billion in their first five years. His prediction is based on how demand has developed in smaller markets where spot bitcoin ETFs already exist, such as Canada.
However large the demand turns out to be, it is unlikely to sustain offerings from all the asset managers vying for a piece of the action, said Steve Sosnick, chief strategist at Interactive Brokers (NASDAQ:IBKR).
“Are they all going to be successful? Of course not,” he added. “The ones with the best marketing will be successful, but half of them will be gone within two years.”
