Bitcoin serves as the non-sovereign reserve currency in the digital realm, offering a unique and cost-effective means of diversifying well-balanced investment portfolios to enhance overall risk-adjusted returns. Nevertheless, despite various avenues for exposure to the pinnacle asset of cryptocurrencies, there has been a notable absence—the much sought-after U.S. spot bitcoin ETF.
The journey toward establishing a U.S. spot bitcoin ETF has been lengthy and challenging, marked by the SEC rejecting all 33 applications from over a dozen applicants since the Winklevoss twins initially sought approval more than a decade ago. However, recent developments, from BlackRock, boasting $9 trillion in assets under management (AUM) and a stellar application track record, entering the scene in June, to Grayscale's legal victory against the SEC, overturning a prior application denial, along with approvals for leveraged bitcoin futures ETFs and Ethereum futures ETFs, suggest that we are now closer than ever before.
Prominent industry analysts currently estimate a 90% chance of approval by early January. Grayscale's discount to net-asset value (NAV) has narrowed from 45% at the beginning of the year to 13%, indicating a higher market-implied likelihood of approval/conversion. Bitcoin has surged by an impressive 110% year-to-date, partially attributed to hopes for a spot ETF.
So, why is a U.S. spot bitcoin ETF such a game-changer?
The significance lies in the sheer size of the U.S. capital markets. SIFMA, for instance, reports that the U.S. accounts for 40% of the total global fixed income assets and equity market capitalization. Furthermore, ETFs in the U.S. represent a larger share of total assets compared to other regions, comprising 7% of equity and fixed income assets, versus 4% in Europe and 2% in Asia-Pacific.
This translates to a colossal $7.0 trillion U.S. ETF market, dwarfing Europe's $1.5 trillion and Asia-Pacific's $1.0 trillion markets. To put it differently, the assets managed by broker-dealers, banks, and registered investment advisors (RIAs) in the U.S. add up to nearly $50 trillion, meaning that even a small portion of these assets migrating to a spot bitcoin ETF could have a significant impact. With high crypto adoption in the U.S. ranked fourth in Chainalysis's Global Crypto Adoption Index, the prospects for adoption translating into investment look promising.
Another compelling reason for the significance of a U.S. spot bitcoin ETF is its advantages over other trading vehicles, increasing the likelihood of broader adoption. Compared to spot, futures, proxy stocks, OTC-traded trusts, and private funds, ETFs offer a unique combination of favorable fees/transaction costs, liquidity, tracking accuracy, and operational simplicity. They also eliminate the need to navigate complex custody issues.
While several bitcoin futures ETFs have been available since late 2021, they come with disadvantages like tracking error, tax inefficiency, and roll costs, leading to potential long-term underperformance. This makes them more suitable for short-term trading rather than a buy-and-hold strategy that leverages bitcoin's portfolio benefits.
In essence, a U.S. spot bitcoin ETF bestows legitimacy upon bitcoin, eliminates regulatory uncertainty, endorses crypto as an asset class, and ensures robust oversight and investor protection—all within a convenient and familiar investment vehicle. If a reputable player like BlackRock were to enter the market, given its strong reputation among advisors and extensive distribution, it could encourage investment managers and advisors to embrace bitcoin.
Currently, only 12% of financial advisors recommend bitcoin to clients, according to the Digital Asset Council of Financial Professionals, but a substantial 77% plan to do so once a U.S. spot bitcoin ETF becomes available.
Although predictions regarding inflows and their impact on prices in a new asset class are notoriously challenging, the introduction of a spot ETF and its impact on the gold market provides a useful analogy. Before the launch of the first spot ETF for gold, the SPDR Gold Trust (GLD), by State Street Global Advisors in late 2004, it was challenging for investors to access gold. However, the SPDR Gold Trust quickly amassed $1 billion in assets within three days, setting a record at the time, and currently holds about $55 billion. Overall, gold ETFs now hold over 3,200 tonnes of gold, worth approximately $200 billion, representing 1.5% of the gold supply. While not a perfect comparison—accessing gold was more difficult before the introduction of an ETF than acquiring bitcoin today, and bitcoin is significantly more volatile than gold, requiring less exposure for potential returns—the price of gold has increased over fourfold since the first spot gold ETF was launched.
Additionally, bitcoin may have a more substantial price impact for each new net investment dollar it attracts compared to gold, as bitcoin's market capitalization is only 27% of gold's in 2004. A spot ETF transformed the gold market, and it could have a similar effect on bitcoin.
Certainly, there remains considerable uncertainty about ultimate approval, the AUM that spot ETF products might accumulate, and their impact on prices. Short-term inflows may fall short of expectations, influenced by factors such as subdued sentiment compared to previous bull markets, price surges in anticipation of approval, or the lukewarm reception of ether futures ETFs.
Nonetheless, given the size of the U.S. market, the advantages of a spot ETF product, and the transformative impact of spot ETFs on gold, the world could be on the brink of a truly game-changing moment for bitcoin and digital assets as a whole.
