Spot Bitcoin ETFs – The Hype, The Truth, & The Way Ahead

Bitcoin, often touted as the digital gold of the new age economy, posted a spectacular return of 160% for 2023. Interestingly, its gains surpassed other major trial-and-tested asset classes, including US equities and gold. A debate often states that owing to its speculative nature, the gains in Bitcoin and cryptos cannot be compared with other legacy asset classes. While the argument holds in some respects; markets are concerned about what has been giving returns. To put forward a broader perspective, during the initial years of heightened gains in Bitcoin, the overall realized annual volatility was much higher and choppy. For 2023, Bitcoin's gains have come at a much lower volatility level, ranging from 30 % to 40%. In some respects, this can be seen as Bitcoin's overall market profile showing more signs of maturity.

What exactly is a Bitcoin Spot ETF?

These spot ETFs are designed to provide retail and institutional investors with an investment vehicle that provides exposure to the underlying Bitcoin price. One of the critical benefits for the investors would be a lower absolute entry amount to gain exposure to Bitcoin crypto. Other significant benefits include doing away with wallet-based crypto custody holdings. In the past, major hacking attacks have targeted individual client accounts. With an ETF, investors will be less worried about cyber security threats.

The current hype - likely tectonic shift in adoption

Currently, there are several Bitcoin ETFs that exist in the markets. These, however, track the underlying Bitcoin futures contract series. Investors often suffer from tracking errors and rollover risks, especially during high, uneven volumes during expiry cycles. With the spot Bitcoin ETF, the providers must invest and buy directly from the underlying spot market custodians. This will ensure the retail participant is directly exposed to the physical coins. One of the primary reasons for the current hype is that post the successful ETF launch; markets now look for complete mainstream adoptions of digital assets from across the market stakeholders – exchanges, custodians, settlement agencies, brokers, and other derivative players. It would mark a significant tectonic shift in how digital assets are perceived and adopted across the investor spectrum. For digital asset and blockchain owners, this also means providing more accountability and transparency about their operations and use case concepts.

The truth – new ETF providers will chase from the small existing BTC supply

The US SEC is currently sitting over 13 proposed spot Bitcoin ETFs. Some significant names include Grayscale Bitcoin Trust, ARK 21 Shares Bitcoin ETF, iShares Bitcoin Trust, and VanEck Bitcoin Trust. Most have even gone for refilling after the initial hold-up and rejection by the US authorities. Such is the bullishness that market analysts now expect virtually a near zero chance of surprise rejections. While this is still possible, the US SEC is expected to hold up the application, at best asking for more review time rather than an outright rejection. Based on the recent filings and regulators' statements, markets hope the approval/rejection window ends by January 15th . By this date, the SEC will have given its final verdict on the applications.

One of the other main aspects is the existing BTC supply. Based on current statistics, Bitcoin supply is pegged at 19.59 million, up 1.75% from a year ago. The slow rate of the supply increase is due to the halving effect. With a max supply capacity of 21 million, around 1.4 million coins are left to be mined. Crypto lovers see these as hugely inflationary due to lowe supply expectations and higher anticipated spot market demand.

The Way Ahead – Crypto assets likely to occupy mainstream narrative

December 2022 saw the rise of an entirely negative narrative for the digital assets space. This was the time when significant cryptos touched their multi-year low. Death to the Crypto suddenly became the talk of the town. This was also the time when the investor sentiment was the worst. However, what followed this was a period of complete consolidation followed by the ongoing bullish uptick.

The point to note here is the crypto market, like other assets, will follow and react to the broader market cycle. Whether or not the current bull market cycle in the crypto lasts, the asset has grabbed the attention of ordinary retail market participants. When investing in today's markets, the theory of survival of the fittest applies the most. Not participating in the opportunities and overlooking the apparent trends is a riskier bet than paying no heed to the same.