CoinShares’ James Butterfill has published a note on the likely impact of the launch of a US bitcoin ETF on the price of bitcoin.
He writes that the big question once a bitcoin spot ETF is launched in the US, is just how much inflows into ETFs this may prompt and what impact on price those flows may have?
Butterfill writes: “Some good analysis has already been done on the former by Galaxy who surmised that there are USD14.4 trillion addressable assets in the United States. One could assume that perhaps 10 per cent invest in a spot bitcoin ETF with an average allocation of 1 per cent, which would equate to USD14.4 billion of inflows in the first year. If this were correct then it would be the largest inflows on record, with the largest so far being in 2021, which saw USD7.24 billion of inflows, representing 11.5 per cent of assets under management (AuM). On a proportional basis though, 2021 did not see the largest inflows, that was in 2020, where we saw USD5.5 billion of inflows representing a higher 21.6 per cent of AuM. It was also a year where the price rose by 303 per cent, compared to 60 per cent in 2021.
“There does seem to be a relationship between inflows as a percentage of AuM and change in price. Inflows do appear to be coincident, the week the prices rise so do flows rather than one leading the other.”
Butterfill comments that the highest inflows were witnessed when the prices were rising, suggesting many ETP investors are momentum trading.
“In periods where the price has floundered, the flows have moderated too, early 2019 and 2022 being good examples of this. We do not believe that ETP investors necessarily lead price action too, this is evident in the volumes data, which highlights that ETP volumes have averaged 3.5 per cent of daily bitcoin trading turnover on trusted exchanges, based on data going back to 2018. This year is unusual in the fact that ETP volumes have proportionally risen, this is due to the dramatic fall in volumes from Binance rather than a rise in ETP volumes. Historically at least, as overall market volumes rise, so have ETP volumes, where there is a form of “sentiment matching”.”
Looking at weekly ETP flows from a quantitative perspective, there is a relationship, Butterfill says. “Looking at 45 day change in prices and weekly flows as a percentage of AuM, the R2 is 0.31, not perfect by any means but signifies some semblance of a trend does exist.
“Using this trendline it can help us predict what inflows would have on price. If we take the aforementioned USD14.4 billion of inflows, the model suggests it could push the price up to USD141,000 per bitcoin. The problem with the estimate of inflows is that it is very difficult to ascertain exactly how much inflows there will be when the spot ETFs are launched.
“Ultimately, it is very difficult to ascertain just how big the potential wall of demand will be once a spot-based ETF is launched. We know that it effectively diversifies a portfolio and enhances Sharpe ratios, as discussed here, but regulatory approval and corporate acceptance are slow burn issues due to bitcoin’s perceived complexity. For this reason, it may well take some time for corporations and funds to build up their knowledge and confidence before they decide to invest.