Estimating the price impact of spot Bitcoin ETFs after listing

A few days ago, investment institution Galaxy Digital produced a research report titled "Market Size of Bitcoin ETFs"[1]. In the report, researchers estimated the incremental funds that spot Bitcoin ETF products would bring to the Bitcoin market once they were approved, as well as the possible impact of such incremental funds.

Below, Jiaolian will extract the key points and share them with readers, and also provide another rough estimation method as a comparison.

It is estimated that Bitcoin ETF products may inject incremental funds through three wealth management channels: first, brokers, about $27.1 trillion; second, banks, about $11.9 trillion; third, investment advisors (RIA), about $9.3 trillion.

In this way, the total addressable market (TAM) is approximately $27.1 + $11.9 + $9.3 = $48.3 trillion. Note that this excludes the $2 trillion family office market and only considers the US market.

Next, the report assumes that the BTC ETF has an allocation ratio of one thousandth in all markets (10% acceptance, 1% allocation, multiplied by one thousandth). Based on this, it is estimated that the expected inflow of funds after the BTC ETF is listed is US$14.4 billion in the first year, US$26.5 billion in the second year, and US$38.6 billion in the third year.

Then we need to estimate the impact of these capital inflows on the price of BTC. The method used in the report is to refer to gold/gold ETF. After introducing the methods and results of the report, Jiaolian will give another estimation method.

First, pull out the data for gold and BTC. The following figure shows the data as of September 30, 2023.

The market value of gold is 24 times that of BTC. The amount of gold held by gold ETFs is less than the estimated amount of BTC spot held by BTC ETFs. The former is only 36% of the latter. Therefore, it can be estimated that the price impact of the same scale of capital inflow on BTC is 24 x 36% = 8 times that of gold. The report then pulled out the data related to gold ETFs and gold prices, performed a data fitting, and finally concluded that the impact of BTC ETF on BTC prices in the first year of listing was 74.1%.

In Jiaolian’s opinion, the algorithm in the report ignores the most important point, which is the difference between the S2F of gold and the S2F of Bitcoin, that is, the factor of asset increment. The asset increment is an internal factor. The capital increment is only an external factor.

Internal factors determine external factors. External factors work through internal factors. Ignoring internal factors and focusing only on external factors is putting the cart before the horse.

Here is another estimation method given by Jiaolian. Of course, this estimation method is rough and only provides a heuristic meaning.

First, let us assume that after the BTC ETF is listed, the increase in BTC production has been issued at the rate after the halving in early 2024. This rate is 3.125 BTC per block.

Secondly, let us assume that the funds outside the ETF and the existing BTC are always in balance. In this way, the incremental funds of the ETF will only interact with the incremental BTC. Then, its equilibrium price can be easily calculated by a simple formula:

The incremental funds in the first year are $14.4 billion, divided by the BTC output in the first year 3.125 x 6 x 24 x 365 = 164,250 BTC, and the equilibrium price is about $85,000/BTC.

The incremental funds in the second year are $26.5 billion, which is divided by the BTC output in the second year, which is still 164,250 BTC, and the result is $160,000/BTC.

The incremental funds in the third year are $38.6 billion, which is still divided by 162,450 BTC, resulting in $235,000/BTC.

Of course, due to the reflexive effect of the market, the stock will be activated at any time with price fluctuations. These will break the above-mentioned assumption of stock equilibrium, making the actual development of the market full of fluctuations and twists and turns, and will never develop linearly as expected.

Finally, the report estimates that in the long term, the passage of the spot BTC ETF is expected to bring an incremental amount of $126 billion (McKinsey estimate) to $454 billion (UBS estimate). Since it is unclear how long this "long term" is, the report does not estimate how much the final price impact will be.

We can simply use the estimate in the previous report to make a quick estimate: the 14.4 billion increase in the first year caused a 74% impact, and the 20-fold increase in the long term caused an impact of 1.74 x 20 - 1 = 33.8x. 30,000 dollars at the current price x 33.8 = about 1 million dollars/BTC.

Finally, I would like to emphasize that these numerical calculations are only for inspiration and are absolutely not certain. Do not use them as any investment basis or advice. Market volatility is extremely risky, so it is better to be safe than sorry. Shortcuts are often the fastest way to bankruptcy. Thinking for yourself, judging for yourself, and taking responsibility for yourself are the right way.