A US-based Spot Bitcoin ETF: What It Is and Why It Matters (Written at a 10th Grade Reading Level)
It finally happened!
The SEC approved 11 spot Bitcoin Exchange Traded Funds (ETFs), to go live on US exchanges as soon as today.
The ETFs will come from: Bitwise, Grayscale, Hashdex, BlackRock, Valkyrie, BZX, Invesco, VanEck, WisdomTree, Fidelity and Franklin.
So what does a 'spot Bitcoin ETF' actually do?
A spot Bitcoin ETF allows investors to buy Bitcoin via the stock market.
Folks buy a share in the Bitcoin ETF → the fund then buys Bitcoin with that money.
Same goes for cashing out - if/when investors sell their ETF shares, the fund will sell the equivalent dollar value in Bitcoin.
Cool...but why does any of that matter, when Bitcoin has been available to buy on crypto exchanges for more than a decade?
You know that question your parents used to ask you:
"If all of your friends jumped off a cliff, would you follow them?"
(To which, the only correct answer is: "Yuh. I'm ride or die, mom.")
Well, the deep-pocketed 'big dogs' of the financial world (think: asset management firms, sovereign wealth funds, retirement funds, etc.) share that same sentiment.
If enough institutions start putting money into an asset, the rest of them tend to follow.
But Bitcoin has been publicly available for purchase for a hot minute, so why didn't this 'lemming march' start waaay earlier?
It's a combination of the following:
Not enough big/reputable names from the traditional financial world have entered the crypto space to kickstart the trend.
Buying/storing crypto natively via a crypto exchange and self custody wallet poses a lot of risk if you don't know what you're doing.
These funds all have guidelines on what they will/won't invest in, and many of them will only invest in US listed stocks, ruling out direct BTC buys.
With multiple US-based Bitcoin ETFs being launched by big name firms from the traditional financial world (which will each buy/store Bitcoin on investors' behalf):
All of these problems are solved.
That's neat...but all this still feels like an overreach - why all the maddened excitement over stock listings?
You know that zen/blacked out state that Will Ferrel's character enters during the debate scene of Old School?
Brace yourselves. We're about to go to a similar place...
*Inhale*
Having a spot Bitcoin ETF live on US stock exchanges means a whole new type of money can now enter the crypto space (by proxy of the stock market).
Big money. Like, stupid big money (think: funds that collectively manage tens of trillions of dollars).
There's that...plus:
A lot of these asset managers are looking for places to 'park' their client's money, for years at a time.
Meaning large chunks of Bitcoin's supply will be consumed and not made available again for a hot minute.
And sure, there's a total supply of 21 million Bitcoin, 19M of which has already been released and currently hovers around $1 TRILLION of total market value...
Which means the $50B to $100B of estimated investment that these ETFs will see in 2024 won't reeeeally do much to move the price...right?
What can a purchase of 5-10% of the total supply, sensibly do over a year?
Let's dig in to some numbers...
Sure, Bitcoin has a hard cap of 21M coins - but it's estimated that 6M+ of them have been lost over the years, which means we're dealing with a total supply closer to 15M.
Which is a factor...
But it still doesn't put enough of a dent in the supply to warrant the wild predictions of a $100k-$200k (ETF assisted) BTC price in the next 12-18 months.
What brings those predictions into a bit more of a potential reality is this:
As of this writing, there's roughly 1.88 million Bitcoin available to buy on crypto exchanges around the world (or $87.38B worth).
Or another way to put it is:
While the total supply of Bitcoin is worth close to $1 trillion ($905B to be exact), the current known purchasable supply is only $87.38B.
Which opens to the possibility of this estimated $50B to $100B of ETF investment, to trigger the following scenario (or something like it):
ETFs buy up most/all the available BTC → Bitcoin becomes near-impossible to purchase for a period of time...
Prices go way up to meet demand → which entices holders to sell...
Bitcoin is available to buy again, but still in limited quantities and at a much higher price.
And to top it all off...
These ETFs are coming at a point in time that may well create the 'perfect storm' of reduced supply and increased in demand.
Supply reduction:
In April 2024, the new Bitcoin being created/put onto the market each day will be cut in half, from 6.25 BTC released every 10 mins, to 3.12 BTC.
Increased demand:
The Federal Reserve has announced its plans to cut interest rates multiple times in 2024.
Rate cuts = cheaper loans/lines of credit = easier access to capital for investors and more disposable income for every day folks = more money flowing through the economy...
Some of which will end up in Bitcoin and Bitcoin ETFs, increasing overall demand.
*Exhale*
Ok, but there's one GIANT hole in this theory...
The investing world has had access to Bitcoin 'trusts,' and even spot Bitcoin ETFs via foreign stock exchanges, for a while now.
So the demand that US-based BTC ETFs will bring is being way over stated here, right?
Honestly, maybe. This is all just hopeful estimation and the demand from traditional finance might not show up like the market expects it to.
That said...
Just because something has been accessible elsewhere in the past, doesn't mean we should discount its effect, now that it has landed stateside.
Remember:
Many of these asset managers can't/won't/rarely invest much outside of the US, and when they do, they'll only do so when there's a general 'consensus' from their peers.
I.e. They want to be able to tell their clients "look, everyone else is doing it - a small 0.5-3% allocation is probably wise, depending on your risk appetite."
As for Bitcoin 'trusts'...
They can't have the same lasting impact on Bitcoin's price as 'spot ETFs,' cause they work a little differently:
A trust buys a single lump sum of Bitcoin, once (say 1000 Bitcoin) → it creates, say, one share for every Bitcoin (1000 shares) → those shares are traded.
This means the supply/demand shock to Bitcoin is a one-off. Whereas it's a constant with ETFs, as they buy/sell Bitcoin every time a share is purchased/sold.
As for why more asset managers don't buy-in to 'trusts' as much as they might 'spot ETFs'?
Trusts aren't as liquid, meaning they don't have as many buyers/sellers, making them hard to buy-in and sell out of quickly, and in large amounts.
Ok, that's it. We're done.
Let's never utter the words 'spot Bitcoin ETF,' ever again.
...or at the very least, not until next week.