The imminent decision by the U.S. Securities and Exchange Commission (SEC) on a series of U.S. spot Bitcoin Exchange-Traded Funds (ETFs) is stirring up the Bitcoin investment community. While many investors are caught up in a typical “buy the rumour, sell the fact” scenario, it’s crucial to consider the long-term implications on Bitcoin, guided by what I term the “7% principle”.
Access
The introduction of a spot Bitcoin ETF, which invests directly in the asset rather than derivatives, may not entice hardcore Bitcoin enthusiasts. However, it significantly broadens access for a new investor demographic. These are investors who either lack the time, inclination, or knowledge to navigate Bitcoin investments through alternative routes. A regulated Bitcoin ETF simplifies the process for asset advisers and managers, offering a familiar tool to integrate into diverse portfolios without the complexities associated with digital vaults or physical Bitcoin storage devices.
Despite some outlandish predictions of Bitcoin reaching a million dollars, I foresee the real price impact manifesting in the long term. Drawing parallels with the introduction of physical gold ETFs, we understand that alternative investments like Bitcoin don’t instantly attract hundreds of billions in assets. However, examining the broader ETF market reveals a notable trend: ETFs typically represent about 7 percent of the market share in their respective asset classes, including equities, bonds, and notably, gold. This is significant when viewing Bitcoin as a digital counterpart to gold.
The 14-Fold Factor
This 7 percent figure implies that the total market capitalisation can be estimated by multiplying the assets under management by a factor of 14. The crucial question is the potential asset accumulation by these spot Bitcoin ETFs. ARK Invest, known for its ambitious forecasts, predicts a 2.5 percent allocation to Bitcoin by institutional asset bases by 2030. While I remain open to possibilities, such a prediction for the entire market within six years seems optimistic, especially considering the conservative nature of traditional asset managers.
As a multi-asset and real-asset investor, I anticipate that our ilk will be among the first to consider strategic Bitcoin allocations. Based on ETF data from Bloomberg, I estimate this market to be around $4,200 billion. Assuming a third of these funds show no interest (according to a survey I conducted) and the rest allocate between 2.0 and 5.0 percent, we’re looking at a spot Bitcoin ETF market capitalisation of $56 billion to $140 billion. This estimate, while rough, leads to a potential Bitcoin price range of $41,000 to $103,000, placing the current Bitcoin price at the lower end of this spectrum.
A mechanical, yet incomplete analysis
This approach to estimating the asset and price impact of a spot Bitcoin ETF is just one method, and it intentionally omits other potential reasons for investing in Bitcoin. My personal rationale for allocating to Bitcoin is based on balancing the increasing debt and proliferation of devalued currencies against the emergence of a scarce alternative outside the traditional financial system. Gold sits comfortably between these extremes, offering a less volatile yet stable option.
Jeroen Blokland, founder of True Insights, specializes in independent research for diversified multi-asset portfolios. Formerly heading multi-assets at Robeco, Blokland’s insights are a weekly feature on Investment Officer.