Bitcoin ETFs: How Will They Reshape the Crypto Landscape?

Beyond the immediate buzz of excitement, what kind of structural changes are ETFs going to bring to cryptocurrency markets? How is it going to affect long term price projections? And what should we, as investors, do about it? 

These are some of the questions this article seeks to address. To start, let’s review what exactly the Bitcoin ETF is and where it came from. 

A brief history of Bitcoin ETFs

Bitcoin has long been called “digital gold” for its scarcity and popularity as an inflation hedge. This makes it a natural choice for an ETF, since gold ETFs have been highly popular since their introduction in 2003. The development of gold ETFs also coincided with a surge in gold prices, which makes many hope that the ETF will lead to the next big bull run.

The technical complexity of Bitcoin also makes it a natural choice for an ETF. It’s kind of terrifying when you consider how many people have lost millions of dollars worth of cryptocurrency to hackers, poor estate planning, and even typos. An ETF makes it easy for anyone to invest in Bitcoin in the same way they would invest in other assets, by way of normal brokerage or retirement accounts. 

The Winklevoss twins proposed the first Bitcoin ETF in 2013 and were promptly rejected by the SEC. The twins tried and failed again in 2016, with the SEC citing market volatility, manipulation, and the lack of robust Bitcoin derivatives markets as the reason for the rejection. Between the first application in 2013 and the final approval in 2024, more than 11 filings were rejected by the SEC. 

The development of Bitcoin futures on the Chicago Mercantile Exchange was a major step toward an ETF, since it was a step toward the SECs requirement for an active derivatives market. Finally, the SEC approved the first Bitcoin ETF on January 11, 2024, despite bitter resistance from some of the voting committee. 

Adding to the drama of these events, someone hacked the SEC’s social media account and made a false post about approval a few days prior to the actual approval. The hackers probably did this so that they could trade the subsequent price change.

Related: Free Download - Cryptocurrency Investor Guide

Positive side of ETFs

The main argument in favor of ETFs is that they will bring Bitcoin to the mainstream. For years, even mainstream financial advisors have suggested allotting a small percentage of investment portfolios in cryptocurrency. 

Approximately $60 trillion in assets is managed by pension and retirement funds worldwide, and if even 1% of this went into digital asset markets, it would have a huge impact on Bitcoin prices. 

This is just the tip of the iceberg. Many other institutional traders will now be able to trade the price of Bitcoin using established tools and institutions, so more volume will enter the market from multiple angles. 

More regulatory oversight could also help Bitcoin to start shedding its reputation as the currency of choice of cybercriminals. Some believe that more volume will also help to resolve one of the biggest complaints against Bitcoin— volatility. 

With more liquidity in the market and more buyers and sellers, it’s less likely that a single buyer or seller will be able to have a major impact on the market. This could reduce the wild price swings that have become Bitcoin’s trademark. If this does happen, it will seriously enhance Bitcoin’s status as a “safe haven” asset where people can protect their wealth from inflation.

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Criticisms of ETFs

Mainstream critics see things very differently. Many think that the ETF approval will only make Bitcoin’s volatility worse. 

There is some evidence to support this view. Recent studies have shown that ETFs do increase volatility. This is because more traders in the market can lead to “herd effects” as big trading firms use automated sell and buy orders. A market move can trigger automated orders, which then trigger more automated orders, amplifying the original price swing. 

This is likely to be a bigger problem with Bitcoin than other asset classes, because unlike precious metals or stocks, Bitcoin’s supply is fixed. If the gold price goes up, more people mine gold, which helps to regulate price. This is not the case with Bitcoin. 

Further aggravating this situation is the fact that most Bitcoin markets remain outside of the reach of regulators. Wash trading, where exchanges fake volume to manipulate price, is widespread in cryptocurrency markets. 

Regulators who oppose the move believe that an ETF will just subject a much wider pool of investors to the same kinds of problems that Bitcoin investors have been dealing with for years. This argument centers around investor protection, however— not the long term impact on Bitcoin price. 

Cryptocurrency advocates have very different reasons for opposing the ETF. Author Andreas Antonoupoulos, for example, believes that the ETF will eventually cause another fork, similar to the one that brought about Bitcoin Cash, as fund managers seek to gain more influence over Bitcoin. 

In general, Bitcoin advocates fear that big finance getting more exposure to Bitcoin will lead to more centralization. This is a big problem if you consider that Bitcoin’s main selling point is its decentralization. For example, most ETF issuers have chosen to work with Coinbase (COIN) as a custodian, which puts a big central point of failure in the market. 

Besides the fact that this is totally against the original mission of Bitcoin, many fear that it could be the beginning of a kind of fractional reserve system for Bitcoin. A number of gold bugs have long criticized gold ETFs for distorting gold prices by way of so-called “paper gold.” 

While considered a fringe theory by some, others argue that the rise of gold derivatives and ETFs has artificially suppressed the price of physical gold, since many investors and traders buy options, swaps, and futures contracts instead.

There are approximately 200-300 trillion dollars worth of gold derivatives in circulation, but only 11 trillion worth of physical gold. There are also concerns about some gold custodians misreporting their reserves.

Some fear the Bitcoin market will eventually mirror this dynamic. 

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How much money will ETFs really bring into Bitcoin?

Like it or not, the Bitcoin ETF will without a doubt bring more money into Bitcoin. A lot more. 

Investment firm VanEck intends to purchase $75 million worth of Bitcoin to seed its ETF, and they are just one of a handful of firms with similar plans. ETF trading took off to a running start, with $4.6 billion in trade volume on the first day of trading. 

With the popularity of ETFs, it's likely that Bitcoin held by funds will increase over the coming months. Galaxy Digital estimated that funds would purchase around $14 billion worth of Bitcoin within the first year after approval, leading to a 74% price increase. 

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The actual figure may be bigger than that— within two weeks of the approval, Blackrock alone acquired 11,500 Bitcoin valued at around $1.6 billion at the time of writing. Grayscale Investments sold a total of $2.1 billion in the same time frame.

If this scenario does play out, it will cause a multiplier effect, since price increases will generate more institutional investor demand, pushing up price further. This could trigger a buying frenzy as institutions are gripped by the FOMO (fear of missing out) that has driven past Bitcoin rallies. 

How will ETFs affect the price of Bitcoin?

Because Bitcoin is so unique as an asset class, it’s difficult to predict exactly what the impact of an influx of capital will be. Some think that much of the gains have been “priced in” already, since the ETF acceptance was widely expected. 

The drop in price shortly after the approval was probably traders who were “trading the news” taking profits in the post-approval surge. We cannot rule out the possibility that the post-ETF dip in price is engineered to allow major investors to get in cheap before a coming rally.

Still, it will likely be some time before a supply crunch emerges as investment funds make big buys on the open Bitcoin market. Currently, there are enough reserves in OTC trading firms that the effect of the ETF has not hit the open market yet. 

Grayscale is holding over 550,000 Bitcoin valued at over $21 billion at the time of writing, so if ETFs continue to grow at the current pace, it will likely be at least a few months before any liquidity squeeze starts to set in. 

It’s nearly impossible to assess what the impact of the ETF will be, because there are many other factors at play— especially the upcoming halving on April 24th, 2024. Also, when price does start to move, prior experience has shown that it can trigger a chain reaction. 

The first halving happened in November of 2012. Price at the time of the halving was around $13, and it increased to over $1000 within a year. The next halving was in 2016 when price was around $664, and within a year price increased to over $17,000. The last halving was in March 2020 at a price of around $10,000, and price increased almost to $70,000 within a year. 

This gives us percentage figures of around 7,600% gains for the first halving, 2,500% for the second, and 700% for the third, which does indicate the Bitcoin is becoming less volatile as time goes on. The price gains following each halving were also a bit less than a third of the previous post-halving price gains. 

If this pattern keeps up, post-halving price gains of the next rally would be somewhere around 200-300%. With price hovering around $40,000 at the time of writing, that would give us a price target of anywhere between $80,000 and $120,000 by mid 2025. This is consistent with the views of many well-known Bitcoin industry analysts. Outlying predictions range as high as $500,000 to $1 million. 

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The ETF could skew these predictions. Past rallies were mostly driven by retail investors, but more boomers entering the market via ETFs in addition to institutional trading could act as an accelerant. If ETFs maintain or build on their present rate of growth, $100,000 would be a conservative estimate for 2025, with $200,000-300,000 being a more likely target. 

If other factors come into play, especially a sudden loss in confidence in fiat currencies in several countries, higher predictions would become more likely.

How will ETFs change cryptocurrency markets?

It remains to be seen whether Bitcoin will become more or less volatile after the ETF approval. It’s likely there won’t be a lot of change— there are both stabilizing and destabilizing factors about it, so they may balance out. Given Bitcoin’s unique fixed supply, Bitcoin will probably continue to be quite volatile. 

Some think the ETF will lead to a split in Bitcoin price, with “institutional” Bitcoin stuck in a closed loop, and “free” Bitcoin traded on peer-to-peer markets commanding a premium. This is quite likely as regulators continue to clamp down on cryptocurrency. 

Bitcoin that does not require KYC already commands a premium, and not only from criminals. Many people around the world don’t trust their governments, and with good reason. Investors with large Bitcoin holdings also worry about information about their holdings falling into the hands of criminals who could try to extort them. 

The divergence between institutional and non-institutional Bitcoin could grow into a major divide as investment funds absorb more and more Bitcoin. The new ETFs have already had difficulties tracking the Bitcoin price, which may be a sign of things to come.

What do Bitcoin ETFs mean for investors?

Beyond the potential for “selling the news,” what does the ETF mean for investors? It seems very likely that this will mark the beginning of a bull phase, but it may take a year or two for this process to unfold. This means now would be the time to accumulate Bitcoin holdings. 

For those who want to invest via ETFs, it may be worth researching what the various funds offer. It may also make sense to diversify— although these are major investment funds, there is a long history of hacks, scams, and collapses in the cryptocurrency space. 

Since 9 of the 12 Bitcoin ETFs approved so far are using Coinbase as their custodian, it might be worth looking into funds using other custodians. While it’s very unlikely that Coinbase will go the way of FTX, it can't hurt to hedge your bets. 

For those who are willing to get their hands dirty, there may also be increased profit in trading Bitcoin on unregulated markets in the next few years. Arbitrage between regulated and unregulated exchanges could also be potentially lucrative.  

In any case, for those who can stomach the risk, there are now more ways than ever to get in on the action.