What the Finance #1 - BTC Spot ETFs 101
All about the hype and most importantly, why should you care.
Foreword
!!Buckle up as the approval is looming!! Here, my goals are simple: I highlight the approval’s significance to retail investors like yourself and I help you understand the potential price movements, macroeconomics, BTC halving and the relevance of the gold ETF.
(Disclaimer: any views express herein are the author’s personal view and should not be taken as investment advice and/or encouragement to engage in investment transactions, DYOR!)
1. Significance of the Approval
TL;DR: Retail investors can directly trade in BTC without dealing with the complexities associated with purchase and storage, all conducted within a regulated framework (I will write another piece on regulating VA ETFs). The ETFs can also legitimise and de-stigmatise BTC’s position in clients’ portfolio. Financial institutions have been suggesting that this can be a watershed moment for normalising BTC for institutions’ exposure, potentially drawing nations and sovereign wealth funds to hold BTC directly (woah, maybe too fanciful?)
Democratisation of BTC’s access? BTC as public good?
Recently, BitMEX founder Arthur Hayes said that “if the ETFs managed by Tradfi asset managers are too successful, they will completely destroy Bitcoin”. His premise is that as more investors purchase BTC ETF derivatives rather than hodling BTC in self-custodied wallets, the largest asset managers will hold all the BTC in circulations without actual uses of the BTC blockchain, rendering validation of transactions and therefore miners obsolete. And so, BTC vanishes.1
Meanwhile, ex-SEC official John Reed Stark X-ed that “the Bitcoin Spot ETF is perhaps the most ‘centralised’ crypto contraption conceivable’”. This begs the question of whether the Approval can reconcile (if at all) with Satoshi’s vision of a decentralised system or the notion of anarcho-capitalism.2
ETH Spot ETFs (maybe) coming to town
In a podcast,3 Markus said that if the ETFs were approved, momentum would shift to ETH, suggesting a potential approval for ETH Spot ETFs in 2024. This is echoed by Seyffart in a recent webinar.4 Market analysts predicted that by the end of Dec 2024, BTC may reach 80k (moving target, also having in mind in the last 3 halving cycles, BTC rallied nearly by 200%). For ETH, slightly above 3k.
2. Potential Price Movements
Latest update following the earlier hoax
BTC surged to 47.87k in 4 minutes after the fake approval tweet and sharply dropped to 46k in the next 10 minutes prior to Gary Gensler’s clarification.5
After the BTC dump, ETH started outperforming significantly. As at the time of writing, ETH is edging close to $2.4k.6 This may be in anticipation of Ethereum’s upcoming Dencun upgrade in Q1 2024 and potential ETH spot ETFs approvals down the road. For the upgrade, note EIP-4844 (proto-danksharding). It will interesting to see how L2 coins will be affected.
Zooming out…
Overall, the approval may signify a change in SEC’s regulatory stance. But you never know. It has been a decade-long road until we reach where we are at right now.
Immediately after the approval, there may be a small rise in BTC prices of 10-15% due to added side-line capital, as a “buy the news” event. If rejected, strong support above 30k expected. Nonetheless, it is envisaged that the positive momentum may be quickly offset by traders selling on the news and taking profits, reverting to (or even breaking below) the pre-Approval price level. One thing for certain is that the market will be extremely volatile. Pay attention also to the open interests of BTC, which in the past couple days, have indicated speculation over spot buying. Coins on the BTC Network may benefit from the recent events.
Again, it is never easy to determine whether the approval is sufficiently baked in, probably too soon to suggest a bull market? Anyway, WHEN IN DOUBT, CHECK VITALIK OUT:
3. Macros: Soft Landing In Sight and Increased Money Inflow to Cryptos?
In a nutshell, the current restrictive monetary policy and capital inflow have to be viewed against the projected Fed’s dovish stance in 2024, coupled with the expectation of at least 3 rate cuts in 2024 and soft landing. The pivoting stance may indicate capital inflow into high risk assets such as cryptocurrencies.
March: prospect of rate cuts and Hayes’ projection of healthy correction
Prospect of rate cuts
Last Friday, it was reported that the non-farm payrolls grew by an above-consensus 216,000, partially offset by downward revisions to previous months. Coupled with above-consensus growth in wages,7 these arguably lowered the odds of rate cuts by the Fed as early as March 2024. Without solid evidence of weakness in the labour market, the economy may be derailing from the target inflation of 2%. If the rate cuts are too early, this may lead to a re-acceleration in inflation and the possibility of recommencing hikes later in the year—the corollary being recession.
Currently the probabilities for an ease in target rate cut in the FOMC meeting on 20 March 2024 are 66.6% . The target rate has been held in a range of from 5.25% to 5.5% since July. The next FOMC meeting will be on 30-31 January 2024.
Reuters reported that according to projections issued at the Fed’s December meeting, all but two Fed officials see the benchmark policy rate lower by the end of 2024 than it is now, with a majority of policymakers seeing it trimmed by at least three quarters of a percentage point.8
Look out for …
Consumer inflation report for December will be out tomorrow (11 Jan) and the fourth-quarter earnings season starts on coming Friday (12 Jan) with some of the big banks.
Hayes’ projection of healthy correction
In addition to the possibility of rate cuts in March, in a recent post, Arthur Hayes9 highlighted that the balance of the Reverse Repo Program (RRP) and the renewal of Bank Term Funding Program (BTFP) are key indicators to look out for in March, as these will affect the market’s assumption for the future of how much dollar liquidity will or will not be provided by the Fed and US Treasury Department. He expected BTC to experience a healthy 20% to 30% correction from whatever level it has attained by early March, which could be more severe if the ETFs have already commenced trading. Hayes also envisaged a 30%-40% correction due to dollar liquidity rug pull. As such, he commented that he will refrain from buying BTC until the aforesaid decisions have passed.
4. April 2024: BTC Halving
The BTC halving will cut the block rewards to 3.125BTC, thereby reducing the rate of BTC issuance, rising scarcity and enabling BTC to serve as a deflationary asset. Previous halvings took place in 2012, 2016 and 2020. To say the least, halving has historically had generated upward price pressure, accompanied with short-term volatility and long-term price appreciation (buyer beware!)
A chart of Bitcoin’s price performance around the previous three Bitcoin halvings10
5. Relevance of the Gold ETF
The first spot gold ETF in the States was opened for trading on November 18, 2004 under the name "SPDR Gold Shares”. The Gold ETF is based on physically stored gold reserves and is traded like a stock. Can the same trajectory11 be expected of BTC (as Cathie Wood dubbed as “digital gold”)?
Deeper dive: the implication of gold ETF to BTC (Research Report by Galaxy Digital’s Charles Yu)
Will the trajectory of BTC spot ETFs be analogous to the gold ETF?
In Yu’s report,12 he assumed that:
The addressable market size of a U.S. Bitcoin ETF to be ~$14T in Year 1 after launch, ~$26T in Year 2, and $39T in Year 3; and
BTC is adopted by 10% of total available assets in each wealth channel with an average allocation of 1%
these would bring about an estimated $14bn of inflows into a Bitcoin ETF in Year 1, ~$27bn in Year 2, and $39bn in Year 3.
A comparison sizing the market for the Gold and BTC:
Taking into account of the differences between BTC and gold in terms of market capitalisation supply held in investment vehicles, it is assumed that a dollar-equivalent amount of fund inflows having a ~8.8x greater impact on BTC markets compared to gold markets.
Applying the estimated year-one inflow of 14bn into the historical relationship between gold ETF fund flows and change in gold price, it is estimated that in the first month, there will be a +6.2% price impact for BTC.
Holding the inflows constant but adjusting the multiplier downwards each month for the change in the gold / BTC market cap ratio from BTC price increases, the following chart shows that in the first year, there will be an estimated +74% increase in BTC.
6. Recap: what a ride!
3 Jan: 15 years after Satoshi mined genesis block; due to panic sell-offs allegedly triggered by Matrixport’s Report (suggested rejection of the ETFs)13, BTC experienced a 8% crash. Some market analysts however opined that it was a typical market correction. 10x Research's Markus Thielen clarified that the Report was leaked and contained only the cover pages, suggesting that the reasons for the project were due to the changes in market structure and technical signals14
5 Jan: VanEck pledged to give Brink, Bitcoin Core devs, 5% of its BTC spot ETFs profits
6 Jan: All 11 issuers submitted the amended 19b-4 (rule changes that SEC must approve), and the final S-1 (prospectus documents for ETFs) will be due on Monday; once approved, the ETFs could become public as early as the next business day; Better Markets (whose CEO is allegedly close with Gensler as they served on Biden’s presidential transition team together) commented “it would be a grave if not historic mistake almost certainly leading to massive investor harm if the SEC approves the pending rule changes”15
7 Jan: Market rumoured Blackrock has more than 2bil lined up for trading and 600 employees are to be laid off ahead of a potential approval
8 Jan: Multiple assets managers refiled their S1 amendments, BTC dropped for fear of delay (BTW if the fees are too low to cover operational cost, how will the AM make money? securities lending?); Sponsor’s Fees war kickstarted
9 Jan: SEC’s X was reportedly hacked and posted that the ETF was approved, briefly jumped to 48k before Gensler’s clarification that it was untrue and there was unauthorised access
10 Jan: SEC must either approve/reject the Ark 21Shares ETF (first in line)
Bitcoin ETF: 90% Odds of Approval with James Seyffart (Podcast with CryptoQuant):
Typically, during the last halving cycles, the mkt tends to have 2-3 days in rally in the first few days of the year, followed by a fake out and low in March. While expecting the first few days of 24 to edge closer to 50k, this is countered by (i) the massively high funding rate and long positions; (ii) Matrixport's model showing bearish signal for BTC for the first time since August 2023, which indicated the future return for the next 2 weeks to be a 7% decline. These pointed towards a vulnerable mkt and he suggested investors exercising put option. Thielen also emphasised that since 8 December 2023, he had warned that there can be some range trading and profit taking ahead of the ETF approval : https://www.coindesk.com/podcasts/markets-daily/crypto-update-polarizing-matrixport-report-emphasized-caution-not-panic-clarifies-matrixports-markus-thielen