The Potential Impact of Bitcoin ETF Approval: Anticipating Market Dynamics and Changes

After a decade of unsuccessful attempts, the Securities and Exchange Commission (SEC) in the United States is on the brink of giving the green light to the first spot bitcoin Exchange-Traded Fund (ETF). This potential development has triggered varying perspectives within the cryptocurrency market.
The desire for a U.S. spot bitcoin ETF has persisted for over ten years, with industry leaders consistently advocating for SEC approval of this financial instrument. Despite previous rejections, analysts are now speculating that one of the numerous proposals currently under consideration may finally secure approval, potentially as soon as this week.
Opinions on the potential impact of SEC approval on the cryptocurrency market differ. Gabor Gurbacs, the director of digital assets strategy at VanEck, advises against overestimating the initial impact, suggesting that the immediate influx of funds would likely amount to "a few hundred million of (mostly recycled) money." He believes that, while a spot ETF holds the promise of generating "trillions in value" in the long run, the initial effects might be more moderate.

In my view, people tend to overestimate the initial impact of U.S. Bitcoin ETFs. I think maybe a few $100mm flows (mostly recycled) money.

Long term, people tend to underestimate the impact of spot Bitcoin ETFs. If history is any guide, gold is worth studying as a parallel. https://t.co/6vvkA9aC09

— Gabor Gurbacs (@gaborgurbacs) December 31, 2023

Conversely, some analysts anticipate a significant shift in the supply and demand dynamics, asserting that approval would compel ETF issuers to acquire tens of billions of dollars worth of bitcoin to meet institutional demand. This surge in demand could potentially result in a "supply shock," particularly as exchange balances reached a five-year low in October, indicating a trend of holders storing bitcoin in personal wallets, signaling a decreased willingness to sell.

Reflecting on historical precedents, the launch of the SPDR Gold Shares ETF (GLD), the first spot gold ETF in the U.S. in 2004, attracted considerable attention. It amassed $1.9 billion in its initial four weeks, reaching $4.8 billion by the end of its first year. Currently, the GLD boasts a total asset value of $57.37 billion.

Similarly, Invesco's QQQ, an ETF tracking the Nasdaq-100 index, experienced substantial inflows within its first 30 days following its March 1999 launch, a year before the dotcom bubble burst, accumulating $847 million ($1.6 billion adjusted for inflation). Drawing parallels, the ProShares Bitcoin Strategy ETF (BITO), based on bitcoin futures, secured around $1.5 billion in inflation-adjusted terms within 30 days of its introduction in October 2021. As of the latest data, BITO holds $1.65 billion in total assets, effectively mirroring bitcoin's spot price.

Despite these optimistic scenarios, some analysts approach the situation with caution, considering the global economic context marked by elevated risk-free interest rates and worsening household finances. This macroeconomic environment could potentially hinder the widespread adoption of spot ETFs, indicating that challenges may arise even if the SEC grants approval.

Market Dynamics Unveiled: Anticipating the Ripple Effect

Bitcoin has undergone an impressive surge of 61% since the early days of October, primarily driven by widespread expectations surrounding the potential approval of one or more spot Exchange-Traded Fund (ETF) applications by the Securities and Exchange Commission (SEC). However, this notable increase in value has led analysts to anticipate a "sell-the-news" scenario, envisioning a market pullback once the official launch of the ETFs takes place. The underlying logic behind this expectation is that investors, having profited from the upward trend, may choose to sell their holdings to secure profits as soon as the news is confirmed.

Drawing parallels with historical events, such as the introduction of CME bitcoin futures in December 2017, Coinbase's listing on Nasdaq in mid-April 2021, and the inception of various futures ETFs, including the notable BITO, similar patterns of a pre-event rally followed by subsequent market corrections have been evident. Notably, bitcoin experienced a 15% surge in the three days leading up to the SEC approval of the first futures ETFs. Subsequently, a month later, it reached a record high of $69,000 before entering a bear market that persisted for over a year.

Recent evaluations by CryptoQuant have raised concerns, suggesting that bitcoin could potentially see a decline to as low as $32,000. This prediction is based on the observation that the level of unrealized profits in the market has reached a historical threshold that typically precedes a price correction, often characterized by a 10% decline in crypto markets. Despite Bitcoin's noteworthy 160% rally last year and an almost 4% gain this month, signs of an impending correction persist.

QCP Capital, a crypto trading firm based in Singapore, echoes these concerns. They conveyed on Telegram last month that the initial demand for the ETFs might fall below expectations, setting the stage for a classic "sell-the-news" scenario. Investors, mindful of the aftermath of the CME futures and ProShares' BITO launches, should note that both events occurred when the market had surged by several hundred percent within a 12-month period, rendering it susceptible to correction.

Adding complexity to the current situation is the anticipated launch of the spot ETF ahead of Bitcoin's blockchain quadrennial mining-reward halving. Historically, such halving events have signaled the beginning of substantial price rallies. However, the recent brief price slide to $41,000, triggered by a sell-off that liquidated $400 million in leverage bets and wiped out $2 billion in futures open interest, has introduced an element of uncertainty to the prevailing market conditions. Investors are now navigating this intricate landscape with caution, carefully weighing the potential for further gains against the looming possibility of a market correction.

Capital Chronicles: Unveiling the Origins of Market Funds

In the world of digital currencies, the upcoming introduction of a spot bitcoin Exchange-Traded Fund (ETF) introduces a fresh perspective to the sell-the-news scenario, distinguishing it from earlier occurrences. The key differentiator lies in the fact that a spot bitcoin ETF is backed by actual bitcoin, effectively taking a portion of the cryptocurrency's supply out of circulation. This marks a departure from previous situations, such as the debut of futures on the Chicago Mercantile Exchange (CME), where the ability to synthetically short the cryptocurrency contributed to price declines after a robust bull market driven by the unsustainable Initial Coin Offering (ICO) frenzy of 2017.

An intriguing facet of the spot bitcoin ETF is its potential influence on institutional investors. Traditionally conservative entities like pension funds and insurance funds now have a means to directly expose themselves to native bitcoin. This stands in contrast to previous alternatives such as ETF derivatives or bitcoin proxy shares exemplified by companies like Coinbase (COIN) or MicroStrategy (MSTR). This shift introduces a novel avenue for institutional players to engage with the cryptocurrency market.

Making a comparison with traditional financial instruments, a report from financial services firm NYDIG underscores the analogy between gold ETFs and the prospective bitcoin ETF. In the United States, there are currently 35 gold ETFs managing a combined total of $118.70 billion in assets. The report emphasizes that Bitcoin's volatility is approximately 3.6 times higher than that of gold. As a result, investors would need about 3.6 times less Bitcoin than dollar-denominated gold to achieve an equivalent level of risk exposure. This suggests that the introduction of a Bitcoin ETF could potentially generate an additional demand of nearly $30 billion, underscoring the potential significance of this development.

With the cryptocurrency market eagerly anticipating the potential approval of a spot bitcoin ETF by the Securities and Exchange Commission (SEC), the landscape is undergoing a transformation. The expectation of institutional investors entering the market through this new avenue, coupled with the unique characteristic of involving actual bitcoin, introduces layers of complexity to the sell-the-news narrative. As the crypto community observes these unfolding developments, discussions within the industry are centering on the potential implications for market dynamics and investment strategies.

Read More: CryptoQuant Insights: Unveiling the Post-Bitcoin ETF Era – Navigating the 'Sell the News' Surge