DDA Crypto Espresso – What’s the potential effect of a US Bitcoin Spot ETF on the price of Bitcoin?
by André Dragosch, Head of Research
- On average, we measure that a +1% increase in Bitcoin ETP Fund Flows relative to AuMs per week was associated with an increase in the price of Bitcoin of 0.96%-points in that same week since 2013
- However, that sensitivity can vary significantly over time: Over the past 26 weeks, an increase in BTC ETP fund flows of 1% in terms of AuM per week was on average associated with a +8.7% weekly change in the price of Bitcoin
- If the evolution of Bitcoin Spot ETFs follows the historical evolution of Gold ETFs, it is quite likely that Bitcoin’s price sensitivity to fund flows (“multiplier”) will decrease while the relative importance of fund flows for Bitcoin’s performance will increase over time
On the 15th of June 2023, the largest asset manager in the world Blackrock filed for a Bitcoin Spot ETF in the US. This has sparked a wave of euphoria in crypto markets with the price of Bitcoin rising over 20% in a matter of 8 days only. Most of these gains have already been reversed as the euphoria has largely faded.
Nonetheless, since then, other financial institutions such as Fidelity, Invesco or Wisdomtree have similarly filed for the issuance of a Bitcoin Spot ETF in the US.
We think that the potential price impact could be quite significant based on the following reasoning:
The combined value of assets under management (AuM) held by these financial institutions currently exceeds USD 17 trillion. Under the assumption that only 1% of these assets will be invested into the new Bitcoin Spot ETFs, this would imply approximately USD 170 bn of additional capital being invested into Bitcoin.
- The aggregate value of assets under management (AuM) in global Bitcoin ETPs currently still only amounts to USD 25.9 bn (single asset Bitcoin ETPs)
- The realized cap of Bitcoin, which is equivalent to the cost-basis of all money that was ever invested into Bitcoin on-chain, amounts to USD 395 bn
Thus, USD 170 bn would be equivalent to 650% of the current market value (AuM) of global Bitcoin ETPs or 43% of all the money ever invested into Bitcoin on-chain.
These numbers highlight the significance of a potential approval of the filed Bitcoin ETFs.
What will be the multiplier of this money being invested?
Our estimations show that the sensitivity of the price of Bitcoin to global Bitcoin ETP fund flows (Beta) is historically at 0.96 (full sample since October 2013).
However, this multiplier can vary significantly over time. The following chart shows the rolling sensitivity (Beta) as well as the amount of variation in the price of Bitcoin explained by Bitcoin ETP fund flows (R^2). We have chosen a 26-weeks rolling time frame (i.e. 1/2 year).
In fact, the sensitivity of Bitcoin’s performance to Bitcoin ETP fund flows can increase to a factor above 20 (!) and can at times even be negative (fund inflows being associated with negative performance and vice versa). More recently, the Beta has increased to a factor of +8.7.
In other words, an increase of BTC ETP fund flows of 1% in terms of AuM per week was associated with a +8.7% weekly change in the price of Bitcoin on average over the past 26 weeks.
This had likely something to do with the recent euphoria around Blackrock’s US Bitcoin Spot ETF filing.
Moreover, the importance of BTC ETP fund flows in explaining changes in performances (R^2) also varies over time. More recently, the rolling R^2 over the past 26 weeks has increased to 20% which means that around 1/5 of Bitcoin price variation could be explained by changes in BTC ETP fund flows over the past 6 months.
In other words, BTC ETP fund flows have become more important but other unobserved factors still seem to be more important for Bitcoin’s performance.
How will this likely develop going forward?
In order to answer this question, it is worth looking at the historical experience of Gold ETFs, especially since the introduction of the first gold ETF, the SPDR Gold Shares (GLD US Equity) in 2004.
This gold ETF is still the biggest gold ETF world-wide and accounts for around 6.5% of the global gold ETF market share.
The following estimations are also based on this single fund vehicle (GLD US Equity) as we assume that net fund flows into this fund vehicle (in % of AuM) are representative for the wider gold ETF market.
Comparing Bitcoin’s and Gold’s sensitivity to ETP fund flows, we can make the following observations:
- Gold’s sensitivity to GLD ETF fund flows (in % of AuM) is significantly smaller than Bitcoin’s sensitivity to BTC ETP fund flows
- However, the amount of variation in Gold’s performance explained by changes in GLD ETF flows is significantly higher than for Bitcoin
Based on these observations, it is reasonable to assume that the effect of additional capital on the price of Bitcoin will decrease over time as a larger part of Bitcoin’s overall market cap will be invested via ETPs.
That being said, it is also quite likely that the relative importance of BTC fund flows for Bitcoin’s performance will increase over time.
In fact, the %-share of gold’s market cap being invested into ETPs has also increased over time. While in 2004, the market share of gold ETPs relative to gold’s overall (above ground) market cap was 0%, that market share has now increased to 6.7% (assuming an above ground market cap of around USD 12.6 trn).
In comparison, based on our calculations, the current market share of Bitcoin ETPs of the total market cap of Bitcoin amounts to 4.8%.
We expect that relative market share to increase for Bitcoin ETPs as well which is likely going to result in a higher importance of fund flows for Bitcoin’s price performance.o Select 10 ETP (SLCT).
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