A forerunner in the realm of digital assets and blockchain, Galaxy Digital Holdings Ltd. offers a comprehensive suite of services that bridge institutions, startups, and qualified individuals with the burgeoning crypto economy.

On 24 October 2023, Charles Yu, a Research Associate at the company, presented “Sizing the Market for a Bitcoin ETF,” a report that underscores the potential ramifications of approval of a spot Bitcoin Exchange Traded Fund (ETF) in the U.S. by the Securities and Exchange Commission (SEC).

Yu emphasizes the importance of a US-regulated spot Bitcoin ETF, hailing it as a game-changing catalyst for Bitcoin’s adoption and its recognition as a legitimate asset class. The current landscape of Bitcoin investment products, which held approximately 842k BTC (valued at around $21.7 billion) as of 30 September 2023, presents challenges such as high fees, reduced liquidity, and accessibility barriers for a vast segment of potential investors.

Conversely, he argues that a spot Bitcoin ETF would address many of these issues, offering:

  • Efficiencies: Lower fees, enhanced liquidity, and accurate price tracking.
  • Convenience: A seamless integration with familiar platforms for both retail and institutional investors.
  • Regulatory Compliance: Meeting stringent compliance requirements around custody setups, surveillance, and bankruptcy protection while also enhancing price transparency.

Yu identifies two primary reasons why a Bitcoin spot ETF could revolutionize the market:

  • Accessibility: Broadening the reach for both retail and institutional investors, breaking down the barriers posed by wealth advisor-driven products.
  • Acceptance: Earning validation from established financial brands, thereby bolstering Bitcoin’s legitimacy as an asset class.
    Crunching the Numbers: Inflows and Impact

Yu’s research dives deep into the financial implications. Drawing from the $48.3 trillion assets managed by broker-dealers, banks, and RIAs, the report estimates the potential inflow into a spot Bitcoin ETF. If adopted by 10% of total assets with a 1% allocation, Galaxy Digital’s projected inflow stands at $14 billion in the first year post-launch, $27 billion in the second, and $39 billion in the third.

The analysis draws parallels between Bitcoin and gold, noting that while gold has a substantially larger market capitalization, Bitcoin has a higher percentage held in investment vehicles. This dynamic suggests that fund inflows could have an almost 8.8 times more significant impact on Bitcoin markets than on gold.

Yu’s analysis extends beyond just the immediate effects of a Bitcoin ETF. He anticipates that a Bitcoin ETF’s approval would catalyze similar offerings worldwide and other investment vehicles incorporating Bitcoin strategies. Given these market sizes, Galaxy Digital predicts that the potential inflow into Bitcoin investment products could range between ~$125 billion to ~$450 billion over an extended timeframe.