Estimate the price shock of a spot Bitcoin ETF after it is listed

Source: Liu Jiaolian

A few days ago, Galaxy Digital, an investment institution, produced a research report entitled "The Market Size of Bitcoin ETFs".[1] 。 In the report, the researchers estimate the expected incremental funding for the Bitcoin market once the spot bitcoin ETF product is approved, as well as the likely impact of such incremental funds.

Below, the teaching chain will extract the key points in it, share it with readers, and give another rough estimation method as a comparison.

It is estimated that the Bitcoin ETF product may inject incremental funds through three wealth management channels: first, brokers, about $27.1 trillion, two, banks, about $11.9 trillion, and third, investment advisors (RIAs), about $9.3 trillion. **

As a result, the total reachable market (TAM) is approximately $27.1 + 11.9 + 9.3 = $48.3 trillion. Note that $2 trillion family offices are excluded here, and only the U.S. market is considered.

Next, the report assumes that BTC ETFs are allocated in all markets at 1/10000 (10% accepted, 1% allocation, multiplied by 1/1000), and based on this, it is estimated that the expected inflow of BTC ETFs in the first year after listing is $14.4 billion, $26.5 billion in the second year, and $38.6 billion in the third year. **

The next step is to estimate how these inflows will affect the price of BTC. The methodology used in the report is to reference gold/gold ETFs. After introducing the methodology and results of the report, the teaching chain will give another method of estimation.

First, pull out the data on gold and BTC. The chart below is as of September 30, 2023.

The market capitalization of gold is 24 times that of BTC, and the amount of gold held by gold ETFs is less than the estimated spot amount of BTC held by BTC ETFs, which is only 36% of the latter, so it can be estimated that the price impact of the same size of capital inflow on BTC is 24 x 36% = more than 8 times that of gold. Subsequently, the report pulled out the data related to the gold ETF and the gold price, conducted a data fitting, and finally concluded that the impact of the BTC ETF on the BTC price in the first year of listing was 74.1%. **

In the view of the teaching chain, the reported algorithm ignores the most important point, which is the difference between the S2F of gold and the S2F of Bitcoin, that is, the factor of asset increment. The increase in assets is the internal cause. The increase in funds is only an external factor.

Internal causes determine external causes. External causes work through internal causes. Ignoring the internal causes and only grasping the external causes is to abandon the basics and chase the end.

Here's another way to estimate the chain. Of course, this method of estimation is crude and only provides an enlightening meaning.

First of all, let's assume that after the BTC ETF is listed, the increase in BTC production is already at the rate after the halving in early 2024. That's 3.125 BTC per block.

Second, let's assume that the funds outside the ETF and the stock of BTC are always in equilibrium. In this way, the ETF's incremental funds only interact with incremental BTC. Then, the equilibrium price can be easily calculated by a simple equation:

**The first year incremental capital is $14.4 billion, divided by the BTC production in the first year 3.125 x 6 x 24 x 365 = 164250 BTC, and the equilibrium price is about $8.5w/BTC. **

**The incremental capital in the second year is 26.5 billion dollars, divided by the BTC production in the second year or 164,250 BTC, and the calculation result is 16w dollars/BTC. **

**The third year of incremental funds is $38.6 billion, still divided by 162,450 BTC, which yields $23.5w per BTC. **

Of course, due to the reflexive effect of the market, the stock will also be activated at any time with price fluctuations, which will break the above assumption of stock equilibrium, so that the real development of the market is full of fluctuations and twists and turns, and will never develop as linear as expected.

Finally, the report estimates that** in the long term, the passage of the spot BTC ETF is expected to bring an increase of $126 billion (McKinsey estimate) to $454 billion (UBS estimate). **As it is unclear how long this "long term" is, the report does not estimate how much of a final price impact.

We can simply take the previous estimate of the report as an instructive quick estimate: a first-year increment of 14.4 billion would have a 74% impact, and a long-term 20-fold increment would have an impact of 1.74 x 20 - 1 = 33.8x. 3w knife current price x 33.8 = about 100w knife / BTC.

Finally, I would like to emphasize that these numerical calculations are only thought-provoking and do not have any certainty, and should not be used as any investment basis or recommendation. The risk of market volatility is extremely high, so be careful to sail the ship of 10,000 years. Shortcuts are often the fastest path to bankruptcy. Thinking for yourself, judging for yourself, and being responsible for yourself is the right way.

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