Here’s what might happen if a Bitcoin ETF gets approved

After 10 years of failed applications, the U.S. Securities and Exchange Commission (SEC) is about to approve the first spot Bitcoin ETF in the United States.

• Opinions vary on what would happen to the cryptocurrency market if the SEC approves a spot Bitcoin ETF.

• Some analysts say predictions of a massive influx of investment are overdone.

This week marks 15 years since the first block on the Bitcoin blockchain was mined, and for more than a decade, industry stalwarts have been pleading with the Securities and Exchange Commission (SEC) to approve a U.S. spot Bitcoin exchange-traded fund (ETF), a vehicle that would have opened the floodgates for a wave of institutional investment.

So far, the SEC has rejected all of the applications, but that may be about to change. Analysts predict that at least one of the more than a dozen proposals currently under review will be approved as early as Friday.

Opinions vary as to what will happen to the crypto market if it is approved.

Gabor Gurbacs, director of digital asset strategy at VanEck, said that while spot ETFs will create “trillions of dollars of value” in the long run, people tend to “overestimate the initial impact of a U.S. Bitcoin ETF,” and that initial flows will only amount to “a few hundred million (mostly recycled) dollars.”

Other analysts say approval would require ETF issuers to buy tens of billions of dollars of Bitcoin to meet institutional demand, leading to a fundamental shift in supply and demand dynamics. Some analysts even predicted a "supply shock" after exchange balances fell to a five-year low in October. The lack of Bitcoin on exchanges suggests that holders are storing it in personal wallets, which suggests they are less willing to sell.

The SPDR Gold Shares ETF (GLD) is the first spot gold ETF in the U.S., launched in 2004, and provides a rich analysis of fund inflows. According to data from cryptocurrency exchange Coinbase, GLD accumulated $1.9 billion (adjusted for inflation) in its first four weeks, a figure that grew to $4.8 billion by the end of its first year. The ETF currently has total assets of $57.37 billion.

Going back even further, Invesco's QQQ, an ETF that tracks the Nasdaq 100 index of some of the world's most innovative companies, launched in March 1999, a year before the dot-com bubble burst. In its first 30 days, the fund saw inflows of $847 million ($1.6 billion in today's dollars).

Closer to home, the Bitcoin futures-based ProShares Bitcoin Strategy ETF (BITO) amassed about $1.5 billion in inflation-adjusted value within 30 days of its launch in October 2021, when sentiment across the crypto asset class was extremely positive. As of Thursday, the fund held $1.65 billion in total assets.

BITO invests in regulated CME futures rather than actual cryptocurrencies and is therefore exposed to the risk of rollover costs. Nevertheless, the fund has closely tracked the spot price of Bitcoin since its inception and is a viable option for those who want exposure to Bitcoin without the hassles of ownership and storage.

Another consideration is the global economy, with rising global risk-free interest rates and deteriorating household financial conditions. This macroeconomic environment is in stark contrast to the strong growth of the mainstream spot ETF market.

How will the market react?

Bitcoin has risen 61% since the beginning of October, largely on expectations that the SEC will approve one or more spot ETF applications. This has prompted several analysts to predict that the sell-off news will trigger a pullback once the ETFs go live. Once the news is confirmed, they say, prices will fall as investors who benefited from the rally sell to lock in profits.

Consider the debut of CME Bitcoin futures in December 2017, Coinbase’s listing on Nasdaq in mid-April 2021, and the debuts of multiple futures ETFs, including BITO. In those cases, Bitcoin was rallying but then crashed within weeks of the event.

For example, Bitcoin surged 15% in the three days before the SEC approved the first futures ETFs. A month later, it hit an all-time high of $69,000 before falling into a bear market that lasted more than a year.

CryptoQuant said last week that bitcoin could fall to $32,000 because the amount of unrealized profits in the market is at levels that have historically preceded a so-called price correction, which in crypto markets is generally considered a 10% drop. Bitcoin rose 160% last year and is up nearly 4% this month.

CryptoQuant isn’t the only firm predicting a slide. QCP Capital, a Singapore-based cryptocurrency trading firm, said on Telegram last month that initial demand for the ETF could be lower than expected, setting the stage for a classic sell-on-the-news scenario.

Investors who fear a repeat of what happened after the launch of CME futures and ProShares BITO might want to note that both occurred when the market was up hundreds of percent in a 12-month period and looked ripe for a correction.

This time, the expected launch of the spot ETF comes ahead of the bitcoin blockchain’s quadrennial mining reward halving, which previously marked the start of a rapid price rally following a brief drop to $41,000 this week, with the sell-off unwinding $400 million in leveraged bets and wiping out $2 billion in futures open interest.

Recycling funds or new capital inflow?

The difference between the earlier sell-off news events and this one is that spot bitcoin ETFs involve actual bitcoin, removing supply from the market. The launch of futures by CME caused the price to fall because it allowed traders to synthetically short cryptocurrencies after a ferocious bull run led by an unsustainable ICO frenzy in 2017.

Another aspect of a spot Bitcoin ETF is that, unlike ETF derivatives or Bitcoin proxy stocks like Coinbase (COIN) or MicroStrategy (MSTR), institutional investors (such as typically conservative pension funds and insurance funds) would be given a way to increase exposure to native Bitcoin.

There are currently 35 gold ETFs in the U.S., with a total of $118.7 billion in assets under management. A recent report from financial services firm NYDIG compared them to potential Bitcoin ETFs.

“Given that Bitcoin is approximately 3.6 times more volatile than gold, investors would need approximately 3.6 times less Bitcoin than gold denominated in U.S. dollars to achieve the same level of exposure,” the report said. “This still implies additional demand for a Bitcoin ETF of nearly $30 billion.”