This article is compiled and organized by BlockWeeks
Once a Bitcoin spot ETF under the U.S. regulatory framework is approved, it will become one of the most influential catalysts for driving the widespread adoption of Bitcoin and even the entire crypto asset class. Galaxy Research, in its latest research, conducted a systematic estimate around the advantages of spot ETFs compared with existing investment tools, the size of the addressable market, and the capital inflows that may be brought after approval.
Why spot ETFs are more ideal than existing investment tools
As of September 30, 2023, various Bitcoin investment products (including ETPs and closed-end funds) held a total of 842,000 BTC, worth about $21.7 billion.
But these products have obvious flaws for investors: in addition to high fees, low liquidity, and tracking error, they cannot cover investor groups representing a considerable amount of wealth. Alternative ways to gain Bitcoin exposure indirectly through stocks, hedge funds, futures ETFs, etc. also suffer from inefficient tracking. At the same time, many investors are unwilling to bear the administrative burden brought by directly holding Bitcoin—self-custody involves wallet and private key management, and also requires handling tax filings.
Spot ETFs are suitable for any investor who wants direct Bitcoin exposure but does not want to hold and manage Bitcoin through self-custody, and they have multiple advantages over existing Bitcoin investment products and solutions:
Better fees, liquidity, and price tracking efficiency. Although Bitcoin ETF applicants have not yet announced fees, ETF fees are usually lower than those of hedge funds or closed-end funds, and many applicants will likely keep fees low to remain competitive. Spot ETFs trade on major exchanges, have stronger liquidity, and have better price tracking than futures products or various indirect exposure tools.
Convenience. Spot ETFs can allow investors to gain Bitcoin exposure through a broader range of channels and platforms, including established service providers with which investors are already familiar. Compared with direct holding, which requires a certain amount of self-education and has higher administrative costs, it provides both retail and institutional investors with a simpler path to entry.
Compliance. Compared with existing Bitcoin investment products, spot ETFs are more likely to meet the stricter requirements set by regulators in areas such as custody arrangements, market surveillance, and bankruptcy protection. In addition, ETFs can also provide greater price transparency and price discovery efficiency, helping to reduce Bitcoin's market volatility.
Two key drivers: broader reach and formal recognition
The reason why a Bitcoin spot ETF may have a particularly significant impact on Bitcoin's market adoption mainly comes from two factors: first, the expansion of accessibility across different wealth tiers; second, formal recognition and acceptance by regulators and trusted financial services brands.
Broader reach for both retail and institutions
The range of currently available BTC investment funds is limited, mostly wealth-advisor-driven, or offered only through institutional platforms. ETFs are a more direct regulated product and will expand participation among investor groups (including retail and wealthy individuals). Investors no longer need to rely on wealth management managers; a broader set of clients can directly access ETFs through brokerage accounts or RIA channels—the latter of which are currently prohibited from directly purchasing spot Bitcoin.
Distribution through more investment channels
Before an approved Bitcoin investment solution (such as a spot ETF) is available, financial advisors and fiduciaries cannot consider Bitcoin in wealth management strategies. The wealth management sector controls a large amount of capital but has been unable to directly invest in Bitcoin through traditional channels; once a spot ETF is approved, financial advisors can begin guiding their wealth clients to allocate to Bitcoin.
Potential opportunities among wealthier groups
Baby boomers and earlier generations (over 59) hold 62% of U.S. wealth, but among adults over 50, only 8% have invested in crypto assets, while the proportion among those aged 18 to 49 exceeds 25% (Federal Reserve, Pew data). Bitcoin ETF products offered through familiar and trusted brands are expected to attract the older and wealthier segment that has not yet entered the market.
Formal recognition from trusted brands
Among the institutions submitting Bitcoin ETF applications, there are many well-known financial brands. Formal recognition and endorsement from these mainstream institutions can improve the market's perception of the legitimacy of Bitcoin and crypto assets, thereby attracting more acceptance and adoption. Pew Research shows that among the 88% of Americans who have heard of crypto assets, 75% lack confidence in the current ways of investing in, trading, or using crypto assets.
Responding to regulatory and compliance concerns
The SEC's approval of ETFs can serve as a regulated investment product with more comprehensive risk disclosure, alleviating many investor concerns about safety and compliance. This will also provide market participants with the regulatory clarity they have long called for, enabling them to operate compliantly in the crypto industry. A more complete regulatory framework will attract more investment and development, enhancing the United States' competitiveness in the crypto industry.
Bitcoin's portfolio benefits and asset class status
Regardless of which part of the portfolio the allocated funds come from, Bitcoin can bring diversification benefits and better return performance to the investment portfolio. In order for Bitcoin to be more widely used in various investment strategies within portfolios, a longer historical performance record will continue to provide support.
Estimating capital inflows after ETF approval
Based on the accessibility reasons above, the U.S. wealth management industry is very likely to be the most direct and most reachable market for new accessibility after a Bitcoin spot ETF is approved. As of October 2023, assets managed by broker-dealers were $27 trillion, banks $11 trillion, and registered investment advisors (RIAs) $9 trillion, totaling $48.3 trillion.
The analysis uses this $48.3 trillion as the baseline TAM (total addressable market), without including the family office channel, which manages about $2 trillion in assets. However, the addressable market for Bitcoin ETFs and the indirect spillover scope of their approval are likely to far exceed U.S. wealth management channels, and will also extend to international markets, retail investors, other investment products, and other channels, and may bring larger-scale capital inflows to the Bitcoin spot market and investment products.
It should be noted that although a TAM-style analysis is used to estimate the funds flowing into Bitcoin ETFs, the funds flowing into ETFs may also bring net new capital, rather than merely diverting from existing allocations. Therefore, applying a "capture ratio" assumption to the estimated TAM cannot fully reflect the view of the adoption path of Bitcoin ETFs, because it does not capture this new source of demand.
The "access ramp" cycle for opening Bitcoin ETFs across various sub-channels may last for years. The RIA channel, which is dominated by independent registered investment advisors and is more specialized, may open access earlier than advisors under banks and broker-dealers, and therefore has a higher initial accessibility share in the analysis. As for the bank and broker-dealer channels, each platform will decide on its own when to unlock access to Bitcoin ETF products.
A longer-cycle addressable market
In the short term, other global and international markets are expected to follow the United States in approving and offering similar Bitcoin ETF products to a broader set of investors. Beyond ETFs, various other investment vehicles are also very likely to incorporate Bitcoin into their strategies, such as mutual funds, closed-end funds, and private funds, covering different investment objectives and strategies. For example, alternative funds (foreign exchange, commodities, and other alternative assets) and thematic funds (disruptive technology, ESG and social impact, etc.) may all add Bitcoin exposure.
In the longer term, the addressable market for Bitcoin investment products may further expand to all third-party managed assets (about $126 trillion in assets under management, according to McKinsey), and even broader global wealth (about $454 trillion, according to UBS). Some believe that as Bitcoin continues to monetize, it will systematically suppress the monetary premium enjoyed by other assets such as real estate and precious metals, thereby greatly expanding Bitcoin's addressable market.
Based on the above market size, while keeping adoption and allocation assumptions unchanged (that is, 10% of funds adopt Bitcoin, with an average allocation ratio of 1%), it is estimated that Bitcoin investment products can obtain about $125 billion to $450 billion in new incremental inflows over a longer period.
Applicants have sought to list a spot Bitcoin ETF for ten years. During this period, Bitcoin's market value rose from less than $1 billion to today's $600 billion (it once reached as high as $1.27 trillion in 2021). Over the same period, Bitcoin's global holdings and usage have risen sharply, with wallets, native exchanges and custodians, and traditional market access tools in various regions emerging one after another. But the United States, as the world's largest capital market, still lacks the most efficient market tool for accessing Bitcoin—a spot ETF. Market expectations that the ETF will soon be approved are heating up, and analysis shows that such products may see considerable capital inflows, mainly driven by wealth management channels that currently cannot obtain Bitcoin exposure at scale, safely, and efficiently.
The capital inflows brought by ETFs, the market narrative around the April 2024 Bitcoin halving, and the possibility that interest rates may have already peaked or will peak in the short term all point to the same judgment: 2024 may become a big year for Bitcoin.
