The price of bitcoin has been a tear lately, not just since the fake news unleashed animal spirits last Monday, but really since mid-June when the entire ETF craze was reignited. If investors rewind back to June 15th when BlackRock filed its prospectus for the iShares Bitcoin Trust, which then resulted numerous fast follower filings, the market was in a very different state than it is in today. In June, ahead of the filings, the crypto industry was reeling in the wake of regulatory enforcement actions, with the SEC filing lawsuits against two industry stalwarts, Coinbase and Binance. The price of bitcoin, which had been buoyed by the regional banking crisis in 1Q, had fallen from over $30K in April to under $26K on June 14th. It was very clearly the prospect of a spot bitcoin ETF, which emerged on June 15th, was responsible for the complete reversal in price momentum for bitcoin (even if it took a few days to catch on).
With that context in mind, we thought it might be for useful investors to reverse engineer what the market-based expectations might be for the size of a spot ETF. There has been plenty of analysis put forth by analysts and market pundits already. We would classify most of the analysis (including our own) as either top down (total addressable approach) or comparative (looking at other ETF launches or similar assets). But regardless of whether you think the demand for a spot ETF is de minimis or half a trillion dollars, the stark reality is no one knows. This would be a novel product for an asset and technology still early in its lifecycle. Strong assertions to the contrary, certainty around sizing, runs counter to that. Instead, we propose to do the opposite: let price appreciation tell us what the market thinks the AUM will be. Comparing that measure to existing products, assets, or prior fund launches might give us as sense as to whether the market has under or overshot expectations.
There are some important caveats, however. This analysis, like all analysis, suffers from imprecision in the measurement of variables, some of them critically important, like the money multiplier (bitcoin’s market cap impact compared to dollar flows). But there are important observations we can add to the conversation too – ones that don’t appear to have filtered their way into the public discourse. We hope some of these points help bolster the analysis and discussion.
Probability Weighting
While we, like many in the industry, are in the camp that approval of a spot ETF is more likely than not, we acknowledge that an approval is not an inevitability, and some probability needs to be assigned to a disapproval. Whether one thinks that’s 5% or 50%, one’s ETF AUM assumption and therefore price impact needs to be weighted by that probability. This is an expected value exercise and some probability of a denial, and therefore zero spot ETF AUM, should come into play.
Allocation Models
While we have long argued for a strategic allocation to bitcoin for its ability to reduce risk (low to no correlation to other asset classes) and enhance returns (high risk adjusted returns) for investor portfolios, the honest reality is that most wealth management and advisory platforms haven’t come to the same conclusion. As a result, model portfolios that managers and advisors tend to utilize for their clients don’t have allocations carved out for bitcoin. Some forward-looking enough platforms have made allocations to bitcoin, but it is still far from commonplace. While the action to “get off zero” represents the opportunity for the industry and any spot ETFs, the mere presence of a spot ETF still must contend with this allocation hurdle.
Existing Alternatives
For investors who have wished to gain access to bitcoin, alternatives have existed for as long as Bitcoin has. An analysis for the size of a spot bitcoin ETF therefore must incorporate the idea of investors who wish to buy bitcoin but for whom existing options (private funds, futures-based ETF, retail exchanges, or spot acquisition and custody through an entity like NYDIG) were insufficient. We agree that a spot ETF can be superior to many existing investment options (futures-based ETFs with roll costs, effectively closed-end trusts with high tracking error introduced by premiums/discounts to NAV, protections of securities laws, liquidity, and potentially costs), but sizing analysis should take this into consideration. Also, to what degree the ETF is cannibalistic to existing options presents a challenge. Remember, we are looking to determine the incremental benefit to bitcoin, not merely switching from one pot to another.
Geographic Access
Investors should keep in mind this potential product would be listed on securities exchanges in the US. While nothing precludes investors outside of the US from investing in securities traded in the US, additional steps would be required those outside the US gain access to a spot ETF (access to a US brokerage account). Additionally, spot ETFs and ETPs already exist in many other geographies.
Price Positive Correlation
The final caveat that comes to mind (we sure there are more) is reflexivity between price and spot ETF AUM. Price momentum is a huge factor in crypto investing; price appreciation tends to drive further price appreciation and vice versa. On the reflexivity aspect, the potential for a spot ETF drives prices up, which then drives up potential AUM (demand for spot), which therefore drives up spot prices further. Understanding this reflexivity loop, therefore, is a vital part of market sizing. Said slightly differently, if a spot ETF were to launch during the correction of 2022, its AUM, especially in the early days, might be very different than now launching, where the cycle seems to be underway.
Price Appreciation Implies Nearly $18B in AUM for Spot ETFs
Assuming all the price appreciation since the appearance of the ETF filings was due to expectations ahead of the launch (an oversimplification we are certain), the change in bitcoin’s market cap over that time, $180B, implies nearly $18B in AUM for spot ETFs (based on a 10x money multiplier). This exercise gets increasingly complex when accounting for timing of flows, but the exercise is still instructive enough to add value without being too prescriptive.
Whether or not one thinks that is aggressive or conservative, depends on one’s view on ultimate adoption of spot ETFs. To give that number some context, we compared the implied AUM against some other notable measures list below. The $18B AUM figure already surpasses some important historical comparisons, like the Year 1 inflows into SPDR Gold Shares ETF (GLD) of $5.3B (in 2023 dollars). It is notably lower, however, than all US based spot gold ETFs at $92.7B in AUM. If the launch of GLD in 2004 is an indication, its AUM grew at a +80% CAGR from its first year to its 5th year. Spot bitcoin ETFs may take a similar path, but that is far from knowable at this point. It is our observation, however, that $18B is a sizeable expectation, and may play a factor for those with shorter investment time horizons. This also assumes 100% probability of approval, so if investors wish to add there own probabilities (say 50%), that number should go up (double in the case of 50% probability).
