Bitcoin ETF Approval: Potential Catalyst for Historic Crypto Bull Run

TL; DR

The SEC’s approval of Bitcoin ETFs is likely to trigger a crypto bull run.

BlackRock and Fidelity are some of the large institutional investors that have applied for spot bitcoin ETFs.

The increase in institutional investment in bitcoin and its derivatives will likely increase its price in the short-term and long-term.

Introduction

The crypto market has been anticipating that the United States Securities and Exchange Commission would approve bitcoin exchange traded funds (ETFs) in the fourth quarter of 2023. Nevertheless, those who expected the approval of Bitcoin ETF application this year have become heartbroken as they have to wait for a few more months. Still, it is not certain that the SEC will approve the BTC ETF applications in the first quarter of 2023.

Today, we discuss the possible impact of the SEC’s approval of bitcoin ETFs such as an increase in institutional investment in BTC and growing confidence in cryptocurrencies. We will also look at the differences between spot and futures based ETFs.

Possible Reasons for SEC’s Postponement of Bitcoin ETF Approval

There are various possible explanations for the SEC’s postponement of bitcoin ETF approval decision to 2024. First, that delay in making its final decision has caused much speculation within the crypto sector.

However, the SEC knows that if it approves the first batch of spot crypto ETFs more will be coming in the future. For example, we may expect spot Ethereum ETFs as well. It is important to note that there are many institutional investors who are ready to invest in crypto ETFs.

Some investors are waiting to find out if the SEC will approve the spot BTC ETF applications, something that is likely to confirm the importance of cryptocurrencies, especially bitcoin. As such, if the SEC approves spot bitcoin ETFs there is likely to be much capital inflows into the crypto sector.

On the other hand, some investors believe that the approval of spot BTC ETFs is likely to lead to a crypto bull run. Therefore, they remain ready to invest in popular cryptocurrencies like bitcoin and Ethereum. It is important to note that we have witnessed such SEC regulatory hesitations in the past. Eventually, though, it may approve them.

Institutional Capital Inflow into Crypto ETFs

The approval of at least one spot BTC ETF will become an important development for the crypto market. For example, BTC approval in the United States will create room for institutional financial inflows into the crypto market. The reason is that spot bitcoin ETFs are regulated financial investment assets with very low risks.

Apart from attracting capital injection, the entry of large-scale investors into the cryptocurrency industry will also bring essential expertise and other resources into the sector. With that, they increase liquidity, stability and credibility of the industry.

As an example, large asset management firms, insurance companies, hedge funds and pension funds that invest in the sector have well-established infrastructure which may bring growth to the sector. They also have good track records and huge experience in regulatory compliance which creates confidence in the industry.

Spot Vs. Futures-based ETFs: Understanding the Key Differences

The spot BTC ETFs and BTC Futures based ETFs are both bitcoin derivatives. A spot bitcoin ETF is a financial investment asset that tracks the market price of BTC at any time. Bitcoin ETFs enable investors to benefit from BTC price changes without owning it.

On the contrary, Bitcoin ETFs are tied to BTC futures contracts, not its market price. Specifically, the value of a bitcoin futures ETF is based on the expected future price of BTC not on its existing market value. Basically, though, spot bitcoin ETFs are backed by BTC held in custodian wallets. Yet, the values of bitcoin futures ETFs are tied to market speculation of future BTC price movements and the related contractual agreements.

A representative of Galaxy gave the following explanation on ETFs. “An ETF is a more direct regulated offering that would increase access for a larger population of investors. Rather than relying on wealth managers, ETFs can be accessed by a wider scope of clients including directly in brokerage.”

In the meantime, Galaxy expects the industry to attract more than $14 billion within the first year. It stated “We estimate the addressable market size of a U.S. Bitcoin ETF to be $14T in Year 1 after launch, $26T in Year 2, and $39T in Year 3.” The following table shows the other possible financial inflows into the sector.

Estimated Financial inflows after Approval of BTC ETFs - Galaxy

BlackRock and Fidelity’s Interest in Spot Bitcoin ETFs

BlackRock and Fidelity are among the companies that have applied for bitcoin ETTs in the United States. The involvement of such large financial institutions indicates the growing interest people and companies have in bitcoin and its derivatives.

Such companies will help in integrating the cryptocurrency sector with the traditional financial one. This may assist in shaping the regulatory environment in the digital industry. Grayscale Investments and ARK Investment are examples of other large companies that have applied for spot bitcoin ETFs

Potential Bull Run across Crypto Market: Spot Bitcoin ETF Approval Boost Altcoin

The effect of spot bitcoin ETFS on the price of bitcoin depends on the number which the SEC and other regulatory authorities approve. Definitely, with the passage of time we are likely to see other countries approving spot BTC ETFs which will increase the demand for bitcoin.

Galaxy has given its estimation of a possible Bitcoin price change if the SEC approves spot bitcoin ETFs. It has predicted that the bitcoin market may have many incremental inflows of between $125bn and $450bn over an extended period. Such a financial inflow into the bitcoin market is likely to lead to a more than 6.2% increase in its price in the first month.

Nevertheless, bitcoin is likely to experience a sustained price increase over a long period which may push its price up. The bitcoin price rise is likely to spill over into the entire crypto market since they are correlated. According to Lab4Crypto, bitcoin and major cryptocurrencies have a correlation index of close to 1.0.

Specifically, Lab4Crypo said, “The correlation between Bitcoin and altcoins is impressively close to 1 (very strong positive linear relationship). This implies that observing Bitcoin price movements can serve as a predictive indicator for the direction of altcoins.” The next diagram shows bitcoin’s correlation with other cryptocurrencies.

Bitcoin Correlation with Altcoins - X-Lab4Crypto

Based on the above analysis, any bitcoin ETF approval is likely to have a contagion effect on the entire crypto market which will ignite a crypto Bull Run, especially if there is a prolonged bullish market.

Conclusion

The crypto market expects the SEC to make its final decision on various spot bitcoin applications. It is likely that the SEC will approve some of the spot BTC ETFS during the first quarter of 2024. The approval of the ETFs may attract more institutional investment into the sector.