Galaxy: Spot Bitcoin ETFs, once launched, are expected to leverage the trillion-dollar market

Sizing the Market for a Bitcoin ETF

Originally written by Charles Yu

Source: Galaxy Digital

Compiled: Bitui BitpushNews Mary Liu

The approval of a U.S.-regulated spot Bitcoin ETF will be one of the most influential catalysts for Bitcoin adoption (and the adoption of cryptocurrencies as an asset class).

Significance of spot Bitcoin ETFs

Why spot Bitcoin ETFs are a more ideal solution than current investment vehicles

As of September 30, 2023, Bitcoin investment products, including ETPs and closed-end funds, held a total of 842,000 BTC (approximately $21.7 billion).

These Bitcoin investment products have significant drawbacks for investors — in addition to high fees, low liquidity, and tracking errors, these products are inaccessible to a broad investor base that represents a large portion of wealth. Alternative investment options that increase indirect exposure to Bitcoin (e.g. stocks, HF, futures ETFs) suffer from similar inefficiencies. Many investors are reluctant to bear the burdens that come with holding Bitcoin directly, such as wallet/private key management as well as self-custody and tax reporting.

Spot ETFs may be suitable for any investor looking to invest directly in Bitcoin without owning and managing Bitcoin through self-custody, and offer a number of advantages over current Bitcoin investment products and options, such as:

Increase efficiency with fees, liquidity, and price tracking. While Bitcoin ETF applicants have not yet listed fees, ETFs generally offer lower fees compared to hedge funds or closed-end funds, and a large number of ETF applicants will likely aim to keep fees low to remain competitive. A spot ETF will also provide enhanced liquidity as it is traded on major exchanges and can track prices better for Bitcoin exposure compared to futures products or proxies.

**Convenient. **Spot ETFs allow investors to gain exposure to Bitcoin through a wider range of channels and platforms, including established providers that investors are already familiar with. It provides an easier entry path for retail and institutional investors than direct ownership, which requires a certain level of self-education to onboard and is more expensive to manage.

Regulatory compliance. Spot ETFs are likely to meet stricter compliance requirements set by regulators in terms of custody setup, monitoring, and bankruptcy protection compared to existing Bitcoin investment products. In addition, ETFs can provide market participants with greater price transparency and discoverability, which may help reduce Bitcoin's market volatility.

Why spot Bitcoin ETFs are important

The two main factors that have particularly impacted the adoption of spot Bitcoin ETFs in the Bitcoin market are: (i) expanding accessibility across various wealth areas, and (ii) gaining greater acceptance through formal recognition by regulators and trusted financial services brands:

Accessibility

Expand retail and institutional reach. **The range of BTC investment funds currently available is limited, which includes products primarily driven by wealth advisors or offered through institutional platforms. ETFs are a more directly regulated product that can increase investment opportunities for more investors, including retail + wealthy individuals. ETFs can be used by a wider range of clients, including directly through brokerage firms or RIAs (which prohibit direct purchases of spot Bitcoin), rather than relying on wealth managers.

** Allocation through additional investment channels. **Without an approved Bitcoin investment solution like a spot ETF, financial advisors/trustees cannot consider Bitcoin in their wealth management strategies. The wealth management sector has a lot of money and cannot directly access Bitcoin investments through traditional channels – with an approved spot ETF, financial advisors can begin to guide their wealth clients to invest in Bitcoin.

Greater wealth opportunities. **Baby boomers and older (over 59) hold 62% of U.S. wealth, but only 8% of adults over 50 have invested in cryptocurrencies, compared to more than 25% of adults aged 18-49 (according to the Fed's Pew Research Center). Offering Bitcoin ETF products through familiar, trusted brands may help attract more older, affluent people who have not yet joined.

Acceptance

**Formal recognition/legitimacy from a trusted brand. **A large number of well-known financial brands have submitted Bitcoin ETF applications – formal recognition/verification of these mainstream companies can raise perceptions of the legitimacy of Bitcoin/cryptocurrencies as an asset class and can attract more acceptance and adoption. According to Pew Research, of the 88% of Americans who have heard of cryptocurrencies, 75% are not confident in the current way they invest, trade, or use cryptocurrencies.

Addressing regulatory and compliance issues; Regulatory clarity will attract more investment and development. **As a regulated investment product with a more comprehensive risk disclosure, SEC approval of ETFs could alleviate many of the safety and compliance concerns of investors. It will also provide market participants with long-demanded regulatory clarity on crypto industry operations. A more developed regulatory framework will attract more investment and development, increasing the competitiveness of the US crypto industry.

**Advantages of BTC portfolio/acceptance as an asset class. Bitcoin can offer the benefits of diversification and higher returns in a portfolio, no matter how it is matched. To help guide investment management decisions, more retail investors and financial advisors have increasingly turned to model portfolios and automated solutions that increasingly use ETFs and incorporate alternative asset classes to provide investors with more risk-optimized returns. A longer track record can support the use of Bitcoin in a portfolio in more investment strategies.

Estimating inflows from spot Bitcoin ETF approvals

Considering the accessibility reasons mentioned above, the US wealth management industry is probably the most accessible and straightforward market and receives the most net new accessibility from approved Bitcoin ETFs. As of October 2023, broker-dealers ($27 trillion), banks ($11 trillion), and RIAs ($9 trillion) had a total of $48.3 trillion in assets under management.

![ETF] (https://hx24-prod.mars-block.com/image/crawler/2023/10/25/1698193417788470.jpg)

We use $48.3 trillion from selected U.S. wealth management aggregators as benchmark TAMs in our analysis (excluding family office channels that manage approximately $2 trillion), although the addressable market size of Bitcoin ETFs and the indirect reach/impact of Bitcoin ETF approvals may extend well beyond U.S. wealth management channels (e.g., international, retail, other investment products, and other channels) and have the potential to attract more funds into the Bitcoin spot market and investment products.

(Note: While TAM-style analysis is employed to estimate inflows into Bitcoin ETFs, inflows into Bitcoin ETFs may also drive new net inflows rather than simply shifting from existing allocations — therefore, applying the capture percentage assumption to the estimated TAM numbers does not fully reflect Bitcoin ETF adoption.) ）

As the channel opens up, the Bitcoin ETF entry cycle across these segments may last for several years. The RIA channel consists primarily of independently registered investment advisors of a complex nature that have the potential to allow access earlier than bank- and broker-dealer affiliated advisors and therefore have a larger share of initial access in our analysis. For the banking and broker-dealer channel, each individual platform will decide when to unlock access to Bitcoin ETF products for its advisors – with certain exceptions, financial advisors affiliated with banks and b/d cannot offer/recommend specific investment products unless approved by the platform. The platform may have specific requirements before providing access to new investment products (e.g., track record of > 1 year or AUM exceeding a certain amount, general applicability issues, etc.), which will affect the access cycle.

Let's assume that the RIA channel will grow from 50% in year 1 and increase to 100% in year 3. For the broker-dealer and banking channels, we assume slower growth, starting at 25% in year 1 and growing steadily to 75% in year 3. Based on these assumptions, we estimate the addressable market size of the US spot Bitcoin ETF to be approximately $14 trillion in Year 1, approximately $26 trillion in Year 2, and approximately $39 trillion in Year 3. **

![ETF] (https://hx24-prod.mars-block.com/image/crawler/2023/10/25/1698193417668310.jpg)

Bitcoin ETF Inflow Estimates: Based on these market size estimates, if we assume that 10% of the total assets available in each wealth channel are BTC, with an average allocation of 1%, we estimate that Bitcoin ETF inflows will reach $14 billion in the first year after the ETF's launch, increase to $27 billion by the second year, and increase to $39 billion by the third year after launch. **Of course, if Bitcoin spot ETF approval is delayed or rejected, our analysis will change due to time and access restrictions. Alternatively, if the price underperformance or any other factors cause the use or adoption of a Bitcoin ETF to be lower than expected, our estimates may be too aggressive. On the other hand, we believe our assumptions about access, exposure and allocation are conservative, so inflows may also be higher than expected.

Potential impact on BTCUSD

According to the World Gold Council, global gold-backed ETFs held a total of around 3,282 tonnes (approximately US$198 billion in AUM) as at 30 September 2023, representing approximately 1.7% of the gold supply.

As of September 30, 2023, a total of 842,000 BTC (approximately $21.7 billion under management) was held in investment products, including ETPs and closed-end funds, representing 4.3% of the total issuance.

![ETF] (https://hx24-prod.mars-block.com/image/crawler/2023/10/25/1698193417664253.jpg)

![ETF] (https://hx24-prod.mars-block.com/image/crawler/2023/10/25/1698193417668025.jpg)

Compared to Bitcoin, gold's market capitalization is estimated to be about 24 times higher, while the supply in investment vehicles is reduced by 36%, so we assume that the impact of inflows of USD equivalent funds on the Bitcoin market is approximately 8.8 times greater than the gold market.

If we apply the estimate of $14.4 billion inflows in the first year (about $1.2 billion per month, or about $10.5 billion adjusted using an 8.8x multiplier) to the historical relationship between the flow of funds from a gold-backed ETF and changes in the gold price, we expect the price impact on BTC to increase by 6.2% in the first month.

Keeping the inflows unchanged, but adjusting the multiplier down monthly based on the change in the gold/BTC market cap ratio due to the rise in BTC prices, we can see the monthly return gradually falling from +6.2% in the first month to +3.7% in the last month The first year of ETF approval, BTC is expected to rise by 74% (starting from the BTC price of $26,920 on September 30, 2023).

![ETF] (https://hx24-prod.mars-block.com/image/crawler/2023/10/25/1698193417672515.jpg)

Broader financial impact of ETFs on the Bitcoin market

The above analysis estimates potential inflows into US Bitcoin ETF products. However, the second-order effect of Bitcoin ETF approval could have a greater impact on BTC demand.

In the short term, we expect other global/international markets to follow the U.S. in approving and offering similar Bitcoin ETF offerings to a wider range of investors. In addition to ETF products, various other investment vehicles may also add Bitcoin to their strategies (such as mutual funds, closed-end funds, and private equity funds, among others) – across investment objectives and strategies. For example, Bitcoin exposure can be increased through alternative funds (e.g. currencies, commodities, and other alternatives) and thematic funds (e.g. disruptive technologies, ESG, and social impact).

In the long run, the addressable market for Bitcoin investment products could extend further to all third-party assets under management (around $126 trillion under management, according to McKinsey) and even more broadly into the global wealth space (AUM of $454 trillion according to UBS). Some believe that as Bitcoin is monetized, it will systematically reduce the monetary premium applied to other assets such as real estate or precious metals, greatly expanding Bitcoin's TAM.

Based on these market sizes and keeping our adoption/distribution assumptions unchanged (Bitcoin is adopted by 10% of funds, with an average distribution of 1%), we estimate the potential incremental funding size of Bitcoin investment products to be around $125 billion to $450 billion over a long period of time.

![ETF] (https://hx24-prod.mars-block.com/image/crawler/2023/10/25/1698193417936843.jpg)

Summary and Conclusion

For a decade, various companies have been looking to list spot Bitcoin ETFs. During this time, Bitcoin's market capitalization has risen from less than $1 billion to $600 billion today ($1.27 trillion in 2021). Ownership and use of Bitcoin has increased dramatically around the world, with the emergence of many different types of wallets, cryptocurrency-native exchanges and custodians, and traditional market access tools. But the United States, the world's largest capital market, still lacks Bitcoin's most effective market access tool – spot ETFs. Expectations for ETFs to be approved soon are rising, and our analysis suggests that these products are likely to see significant inflows, driven primarily by wealth management channels that currently do not have access to safe and efficient Bitcoin exposure at scale.

Inflows from ETFs, market narratives about the upcoming Bitcoin halving (April 2024), and the likelihood that the Fed's rate hike has peaked or will peak in the near term, all suggest that 2024 could be a big year for Bitcoin.