ETFs
Research Analyst at Fineqia Discusses Impact of Spot ETFs on Bitcoin Market Dynamics
Crypto.news recently sat down with Matteo Greco of Fineqia International to discuss the current state of the Bitcoin ETF market and what we can expect in the future.
Bitcoin has become one of the best performing assets of the last decade.
It has surpassed its status as a lesser-known peer-to-peer payment system, catalyzing the creation of an entirely new asset class that now boasts a market capitalization exceeding $1 trillion.
With the approval of 11 spot Bitcoin ETFs in January 2024, traditional investors now have an easier way to gain exposure to the flagship cryptocurrency.
These investment vehicles are reshaping the crypto sector, having attracted billions in stock market capital. In addition to legitimizing Bitcoin, these measures have also attracted significant interest of institutional actors.
Another factor that could impact the Bitcoin ETF sector is the potential Ethereum spot ETF approval. Analysts expect these to capture 20% of investment flows currently flowing into spot Bitcoin ETFs, further adding to the intrigue.
With these developments in place, the market remains a dynamic and unpredictable arena. The future of Bitcoin ETFs, while promising, is shaped by a multitude of factors, including regulatory developments and macroeconomic trends.
How could these influence the market dynamics of these investment vehicles? What impact could this have on the price of Bitcoin?
According to Greco, inflows into Bitcoin ETFs are significant but are not the only factor influencing the price of Bitcoin.
Why does the large inflow of capital into Bitcoin ETFs not correspond to an equivalent increase in the market price of Bitcoin?
Several factors can cause prices to rise or fall, including supply and demand, liquidity and leverage. It’s not as simple as a single-factor correlation for price action. However, it is incorrect to say that the inflow of capital did not support positive price developments. When the BTC ETFs were approved on January 10, the price of BTC was around $46,000. Currently, BTC has been hovering between $65,000 and $70,000 for weeks, indicating a 40-50% price increase after approval. At the time of approval, the total market cap of BTC was around $900 billion, and now, with BTC at $67,000, it is around $1.3 trillion. This represents a $400 billion increase in total market capitalization, while BTC ETFs saw a net inflow of around $16 billion. This means that the growth in BTC market cap has been 25 times greater than the amount of net inflows into BTC Spot ETFs. This demonstrates that the impact of the approval and trading of these products has been substantial, going beyond direct flows into these financial products. This has helped support demand for the asset due to positive sentiment and medium-term expectations surrounding Bitcoin and the digital asset space in general.
Could the potential approval of an Ethereum ETF significantly change the investment landscape for Bitcoin ETFs?
Bitcoin (BTC) and Ethereum (ETH) are fundamentally different assets with distinct intrinsic characteristics. Bitcoin uses a proof-of-work consensus mechanism, which relies on miners, while Ethereum, like most digital assets, uses proof-of-stake, which does not require computing power to confirm transactions. This mechanism allows ETH and many other digital assets to offer investors staking rewards, similar to dividends in traditional finance. BTC, however, does not have built-in staking rewards and, therefore, has different characteristics and cannot be classified as a security. Given the different characteristics and use cases of these two major digital assets, I do not expect outflows from BTC ETFs to shift to ETH ETFs. Instead, I expect net inflows to ETH ETFs, as they represent a separate asset that new investors, or those already invested in BTC ETFs, may also want to gain exposure to.
What impact could the introduction of an Ethereum ETF have on Bitcoin’s status as the leading cryptocurrency?
BTC was the largest cryptocurrency before the ETFs were approved and will remain so after the BTC and ETH ETFs were approved. If BTC ever loses its dominance, it will take a considerable amount of time for ETH to overtake BTC in terms of market cap. It will be interesting to observe the appetite of traditional finance for ETH as an asset. For comparison, BTC attracted approximately $16 billion in net inflows during the first and second quarters, assuming fairly neutral flows for the remaining three weeks of the second quarter, for simplicity. ETH’s market cap is about a third of that of BTC, so proportionally it would need to attract around $5 billion within six months of launch to match BTC’s level. Higher inflows would indicate greater enthusiasm for ETH, and lower inflows would suggest the opposite. Although it is difficult to make direct comparisons due to divergent market sentiments at the time of launch, this index provides a useful index for medium-term analysis.
Do traditional asset ETFs, such as gold, influence the dynamics of the Bitcoin market?
I would look at it from the opposite perspective. Traditional asset ETFs have been trading for a long time and the introduction of digital asset ETFs to the market represents increased competition. For example, the impact of BTC ETFs has been significantly stronger than the introduction of the first gold ETF in 2004. This indicates that investors have a clear appetite for digital assets, meaning that part of the allocation previously reserved exclusively for traditional financial assets. is now moving towards digital asset ETFs.
Regarding the influence of BTC Spot ETFs on the market, these products undoubtedly strengthen the global recognition of BTC. With some of the largest traditional financial firms issuing and/or holding BTC, this results in increased liquidity, enhanced security, and reduced spreads and commissions for investors and traders.
With the launch of ETFs, has Bitcoin generated enough institutional and retail interest to maintain its proposed role as an inflation hedge?
I would not limit BTC to being classified only as an inflation hedge. Although BTC can serve as a hedge against inflation over long periods of time, it is not a safe hedge in the short term due to its high volatility. BTC has attracted strong institutional and retail interest for a variety of use cases, highlighting its versatility. Being fully decentralized, without a CEO or board of directors, investors can buy and trade BTC based on their preferred use case. Some people buy and hold BTC as a long-term investment or as a hedge against inflation. In countries with hyperinflation, people can use BTC as a hedge against short-term inflation. Others see it as a speculative investment, while others like its decentralized nature and the idea of a currency not issued by central governments. It is incorrect to classify BTC into just one category. Bitcoin is an asset that can be used for a variety of purposes depending on individual circumstances and preferences, and its overall adoption is increasing around the world.
Would you classify Bitcoin as a traditional investment hedge like gold?
At the current stage, I would classify BTC more as an investment, similar to stocks, due to its high volatility rather than as a hedge against inflation like gold or bonds during periods of high interest rates. In my opinion, an inflation hedge should first and foremost provide high stability and serve as an alternative to fiat currency – something stable and liquid that can be easily used to pay for services and quickly converted to cash in the event emergency. BTC falls short in this regard as its value can fluctuate significantly depending on market conditions, meaning that converting BTC to fiat could result in significant losses if done at an unfavorable time.
What does this mean for Bitcoin?
Although BTC can serve as a long-term inflation hedge and a way to increase purchasing power, it cannot be defined as an inflation hedge by default. For example, during the last bear market, BTC saw its biggest declines coinciding with inflation spikes and interest rate hikes. Conversely, BTC started to perform well again when central banks stopped raising interest rates as inflation fell. If BTC was a short-term inflation hedge, it would have behaved in the opposite direction, rising during times of high inflation and macroeconomic uncertainty and slowing down when inflation fell and interest rates fell. stabilized. This trend indicates that BTC is currently traded more as a risk asset, similar to stocks, rather than as a hedge against short-term inflation. As mentioned earlier, the decentralized nature of BTC means that investors can define its function in the market. Currently, the majority of investors perceive BTC as a risky asset and trade it accordingly.