How Bitcoin ETFs Could Propel the Price of Bitcoin

How Bitcoin ETFs Could Propel the Price of Bitcoin

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There are plenty of overly complex analyses that we could delve into regarding what will happen to the price of bitcoin going forward, however, the truth is often simpler than people make it out to be. As we analyze what will happen to bitcoin prices following the introduction of bitcoin ETFs, we’re going to segment it into a short-term, medium-term, and long-term impact. For the sake of this article, short-term is considered to be anything that happens over the next handful of days, medium term will refer to the calendar year, and long-term is anything beyond a year.

How Bitcoin ETF Will Impact the Price of Bitcoin in the Short Term

In the short term (over the next few days), Bitcoin looks like it is selling the news. However, just because this is a negative take on bitcoin price action, doesn’t mean this is a bear case. 

There are plenty of bears who were always bearish before about the price of bitcoin who will likely tell you that it’s a meaningless store of value, like Charlie Munger and Warren Buffett, who once famously called bitcoin “rat poison-squared.” These are people who have long discredited bitcoin and didn’t think it was a good buy at $1,000, or $10,000, or currently. 

However, this is not the point of the bear case we’re making here at all. Instead, the bear case in the short-term is a simple sell-the-news thesis. In a “sell the news” thesis, traders who have been buying short-term momentum in an asset leading up to a major event will then sell the asset upon the event’s arrival. The event is the “end” of the trade — this can generate a temporary top in price action as short term traders exit the position and some long term traders get scared out of their positions. It looks like this is already taking place in both bitcoin itself and several bitcoin affiliated stocks like RIOT and MARA.

However, don’t expect this to remain the top in price, if the gold ETF parallel has anything to say about it (more about that in the long-term thesis).

What Bitcoin ETFs Will Do to Bitcoin Price in the Medium Term

In the medium-term, we have an argument originally posted by Tom Lee of Fundstrat, and it really makes a lot of common sense. According to Tom Lee, all 11 bitcoin ETFs will now have to acquire Bitcoin spot via exchange. It’s unlikely that they “pre-bought” their inventory due to price risk. That means keeping up with more than $1 billion in demand, and a daily block reward supply of $25-$50 million. 

Put even more simply, it’s just supply and demand. Fund managers didn’t have it before, and now they have to have it, and so they’re going to buy it, since they will be the new facilitators of bitcoin trading via ETF. Ultimately, it’s likely that this will help push the price of bitcoin higher. In the medium term.

What Bitcoin ETFs Will Do to Bitcoin Price in the Long Term (Comparison to Gold ETF)

Bitcoin is one of the few areas of the market in which both retail and institutional investors had held limited exposure to for a long time due to the fact that it’s outside of the traditional umbrella of what investors are used to. Buying bitcoin has always been a bit of a “process.” You have to own a bitcoin wallet. You have to find an exchange that you can trust — which, in light of situations like the one that happened with FTX, isn’t always something that those with a lot of money feel they can put a lot of trust in. It’s quite difficult, for instance, to invest a piece of your 401K in bitcoin. However, that’s all changed now with the launch of ETFs. 

Now, retail investors (who in 2021 made up 22% of all trading volume in the market) and institutions alike will have a simple, above-board, highly regulated way to invest in bitcoin alongside their other typical investments. It will take no difficult stride or extra effort to buy bitcoin. You’d be hard pressed to find something bearish about this, something even the most ardent bitcoin bears likely admit. You can still think that bitcoin is a meaningless store of value (if that’s what side of the fence you fall on) — but it’s still going to be one that investors now have much much easier access to than ever before. In short, prices will likely rise in the medium term due to the creation of bitcoin ETFs. 

A lot of investors have compared this event to the introduction of the gold ETF. Since the year that the gold ETF was launched (in early 2003), the value of gold has risen dramatically.

One could draw a simple comparison and say that like gold, over the next 21 years bitcoin might rise roughly 386% to around $177K. However, there’s a caveat to that argument which suggests bitcoin will rise considerably higher if the parallel is true. That caveat: After the gold ETF was introduced, production of gold doubled. 

The difference here of course is that there are and will always be a finite number of bitcoin. In fact, there’s an important event in bitcoin called bitcoin halving, (the next bitcoin halving is April 22nd, 2024). 

Bitcoin halving is the process in which the block reward that miners receive when mining bitcoin is cut in half to help limit supply. In the next bitcoin halving, the reward will be cut to 3.125 BTC. This will continue perpetually until there are no bitcoin left. Currently, there are 19,594,212.5 bitcoin in existence today. There are only 1,405,787.5 bitcoin left to be mined ever, meaning that the percentage of bitcoins that have already been issued into circulation is roughly 93.31%. All that is to say, if you believe in the gold ETF being a parallel for the bitcoin ETF, you’d best increase your percentage range.

One more caveat here is that nation states already owned and continue to own gold as a store of value other than traditional currency. Currently, France owns 2,437 metric tons of gold in reserve. Russia owns 2,299 gold. China owns 1,948 gold. Most countries own exactly zero bitcoin. The ones that do don’t own very much. In fact, as of June 2023, only five countries own any bitcoin. 

Countries that Hold Bitcoin As of June 2023

America69,640$1,800,333,280These are bitcoin seized from the darkweb which the American government continues to hold. At one point, the U.S. government held $5 billion in bitcoin, but sold more than 195,000 of them. None of these were “bought” by the US government.
El Salvador2,473$63,931,996El Salvador has publically “bought the dip” in bitcoin and has a program to mine bitcoin as well, with their leader being very friendly to the idea of using bitcoin as real currency.
Ukraine642$16,596,984Bitcoin used to be illegal in Ukraine but was legalized after the Russian invasion as a currency for wartime donations.
Bhutan621$16,054,092Bhutan, ahead of the curb from a government standpoint, has actually been mining bitcoin with hydroelectric power since 2020 — but has sold more than 12,500 of the bitcoin it has mined, leaving 621 remaining.
Venezuela240$6,204,480Venezuela at one time began accepting bitcoin as a currency to buy a different currency which they were claiming was backed by oil, which has since failed.

As you can see, particularly relative to how much bitcoin exists, there isn’t a lot of government ownership here. However, as bitcoin continues gaining legitimacy as a store of value, and continues to be used to make real life purchases of completely legal things, it’s likely that governments start acquiring bitcoin just as they have gold, which comparably has very little use in the modern world outside of a few applications in electronics and medicine. 

To oversimplify a complicated concept, when you go to the coffee shop, it isn’t uncommon to see a QR code that says, “we accept Venmo” or “we accept Apple Pay” (which can be used synonymously with BitPay). It isn’t even uncommon to see, “we accept bitcoin.” However, something literally no one has seen at a coffee shop is, “we accept gold!” It’s just not a suitable method of making payments in the real world — and unless we go back to a bartering system, that’s probably how it’s going to stay. 

So, in conclusion, what will bitcoin ETFs do to the price of bitcoin?

In the short term, as in the next few days, maybe even the next week or two, bitcoin will probably consolidate as momentum-driven buyers liquidate their positions. In the medium and long term, however, it’s extremely likely that the value of bitcoin will rise for all of the reasons we’ve given above. 

There are plenty of bitcoin naysayers, but as the years have passed, there has been less and less to naysay about.

More Information About the Launch of New Bitcoin ETFs

In a historic move, the U.S. Securities and Exchange Commission (SEC) granted approval on Wednesday to a set of exchange-traded funds (ETFs) tied to the spot price of bitcoin, signaling a pivotal moment for the cryptocurrency industry’s quest for a regulated investment product. This breakthrough follows a more than decade-long effort by the industry to secure such approval.

The SEC’s decision comes after a previous rejection of multiple bitcoin ETF applications, citing concerns about vulnerability to market manipulation. However, a court ruling in August challenged the SEC’s stance, prompting a reconsideration. Notably, on Wednesday, the SEC approved applications from major players, including ARK Investments, BlackRock, and Fidelity.

These ETFs, listed on Nasdaq, NYSE, and CBOE, will track a bitcoin benchmark. To address manipulation concerns, Nasdaq and CBOE have implemented a market surveillance mechanism in collaboration with Coinbase, the largest U.S. cryptocurrency exchange. The ETFs’ assets will consist of physical bitcoin acquired from crypto exchanges and stored via custodians like Coinbase Global.

In contrast to buying bitcoin outright, these spot bitcoin ETFs offer investors exposure to bitcoin’s price without the complexities and risks associated with direct ownership. This includes avoiding the need for crypto wallets and accounts with potentially insecure exchanges (as we’ve seen in the past with FTX). Notably, the ETF structure ensures listing on tightly-regulated stock exchanges, enhancing accessibility for both retail and institutional investors.

The approval of bitcoin ETFs in the U.S. follows a previous green light for bitcoin futures ETFs in 2021. However, spot bitcoin ETFs differ by providing more precise tracking of price movements without the drawbacks associated with futures contracts, such as potential returns erosion due to rolling over contracts.

While Canada and Europe already have spot bitcoin ETFs, the significance of the U.S. approval cannot be overstated. With the United States being the world’s largest capital market, this development opens new avenues for institutional investors and asset managers, potentially attracting significant capital. There are a large swath of market participants who would invest in bitcoin if they didn’t have to go through the hassle of making a bitcoin wallet. Analysts estimate that the ProShares Bitcoin Strategy ETF, the first bitcoin futures ETF approved in 2021, saw approximately $1 billion in shares traded on its debut, with projections suggesting a spot bitcoin ETF could surpass this figure.

Beyond the financial implications, the approval marks a major victory for the cryptocurrency industry, enhancing its legitimacy and pushing bitcoin further into mainstream acceptance. The decision also reflects a broader dynamic between the industry and the SEC, which has been intensifying its scrutiny. In this specific instance, the industry can claim success in a long-standing battle for recognition and acceptance.

What’s the Difference Between the Proshares Bitcoin ETF and New Spot Bitcoin ETFs?

Unlike a spot bitcoin ETF, BITO, the Proshares Bitcoin ETF, invests in bitcoin futures and does not invest in bitcoin, so there is here is no guarantee the fund will closely track bitcoin returns. So while this has existed for a while, if you track the chart, you’ll notice that the performance is not identical to true BTC.

What Are the Different Bitcoin ETF Tickers?

  • ARK and 21Shares: $ARKB
  • Bitwise: $BITB
  • BlackRock (iShares): $IBIT
  • Fidelity: $FBTC
  • Franklin: $EZBC
  • Grayscale: $GBTC
  • Hashdex: $DEFI
  • Invesco Galaxy: $BTCO
  • VanEck: $HODL
  • Valkyrie: $BRRR
  • WisdomTree: $BTCW

As you look at some of these tickers, it’s impossible to ignore the meme-resemblance of “HODL” and “BRRR” — both memes originating first in Reddit’s options trading sub Wall Street Bets. This wasn’t an accident, and it’s more than just “for fun.” Retail traders made up 22% of all trading volume in 2021. This isn’t a small subset of the market. Now, those same retail traders can choose to invest in bitcoin with their 401K. They will be able to trade options on a bitcoin equivalent. They will be provided access in a new way that is significantly less complicated than making a bitcoin wallet and purchasing actual bitcoin, and safer than dealing with a less regulated exchange. Make no mistake — this is a big deal for the price of bitcoin. And as traders look at these 11 ETFs, they might have trouble making up their mind about which of these similar-seeming tickers they want to invest their hard earned dollars in. In moments like that, having a silly-sounding or relatable ticker can actually make a surprising difference. And for these ETF makers, encouraging customers to choose their ETF over the competition is of the utmost importance.

Which Bitcoin ETFs Offer Options?

None, yet. None of the Bitcoin ETFs currently offer options — but make no mistake, many of them will soon. ETFs don’t usually begin trading with an options chain on the first day, however given the audience of these ETFs, it’s an expectation if these ETFs want to reign over the others as the supremely traded ticker. Considering the high volatility of Bitcoin, these options will likely trade with a large amount of extrinsic value and IV baked into the premium — but that won’t be likely to stop prospective option buyers and sellers from wading into the fray.

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