Bitcoin ETF: What Approval Means For BTC (Cryptocurrency:BTC-USD)

Before we get too deep, this article was written and submitted on Friday, January 5, 2024. It is possible that a Bitcoin spot (BTC-USD) The ETF will be approved in the United States when you are reading this. What I hope to offer in this updated view of Bitcoin is a fundamental framework of what Bitcoin has been in the past and what it will likely be in the future with an ETF approved in the US market. In my opinion, taking all of these points together, it is reasonable to expect higher BTC prices this year and well after the approval of spot ETFs nationwide.

Peer-to-peer payments or digital gold?

This is a concept I've explored in previous Seeking Alpha articles, but I think it's important to keep in mind. The vision set forth in Satoshi Nakamoto. White paper. Bitcoin was designed to be digital money that can be easily moved from peer to peer. In the early years, there was a clear understanding of the scalability problem within the Bitcoin development community. With increased demand for Bitcoin block space, user-level fee prices increase, harming adoption and scalability.

These scaling issues become relevant again with the sustained increase in average transaction fees on Bitcoin's main layer in November and December 2023.

The average Bitcoin transaction fee in the month of December was $19; This makes the cost of using the network completely prohibitive for holders of smaller dollar securities. Unlike the blockchain pair Ethereum (ETH-USD), Bitcoin's layer 2 scaling opportunities are much less robust. Therefore, when we see fees increase to the level they have over the last two months, it pushes Bitcoiners at the lower end of the total holdings spectrum away from mainframe usage. Without viable L2s, one could easily argue that escrow solutions like Coinbase (CURRENCY) much more acceptable for peer-to-peer Bitcoin transfers.

Of course, custodian currencies go against the spirit of the original vision and potentially lead to the same fragmentation issues that can be seen on other fintech platforms. For example, I can't send dollars from my Cash app (SQ) wallet to a friend's Venmo (PYPL) wallet to settle the shared lunch bill. Frankly, none of this is all that surprising. Addressing scalability through block size changes is what led to the Bitcoin Civil War several years ago.

The manifestation of that war was Bitcoin cash (BCH-USD) forked in 2017. Two cycles later, the small block field has clearly been winning. Since the fork, the total non-zero wallet addresses holding BTC has increased by 185%, while BCH holders have increased by only 24%. But there is a problem:

18.7 million of those 52 million BTC addresses are under $10. With an average transaction fee of $19 in December, the funds held by these 18.7 million wallet addresses are non-mobile and effectively “burned” BTC. This means that 35% of wallet addresses holding Bitcoin cannot do anything with it right now. That said, those wallets only contain about $53 million of BTC's $855 billion market cap. Which brings us to what Bitcoin will likely be in the future.

settlement layer

As a decentralized ledger and settlement layer, Bitcoin works very well. On a typical day, $32.3 billion in dollar-denominated value moved on the network during the month of December. This figure is up from $16.7 billion in January 2023. What I would caution bulls putting all their eggs in a single cryptocurrency basket is to pay attention to transfer volume going forward.

Despite the coin's price raising $45K recently and all the excitement over the potential of an ETF and the halving in April, daily transfer volume measured in USD is still a long way off the highs of last cycle. Depending on how you choose to interpret this, it could theoretically lend credence to the idea that the approval of an ETF he hasn't done it The price of BTC has still been discounted even though ETF analysts are bullish on one in early January.

Bitwise/VettaFi Survey 2024

On January 4, Bitwise Investments and VettaFI launched the results from a survey of financial advisors that took place during the fourth quarter of 2023 between October 20 and December 18.

During that period, the price of Bitcoin increased by 44%, from around $30,000 in late October to approximately $42,000 in mid-December. With this as a backdrop, it is very interesting to see that the majority of respondents did not believe that a Bitcoin spot ETF would be approved in 2024. According to the survey release:

Surprisingly, only 39% of advisors believe a bitcoin spot ETF will be approved in 2024. By contrast, Bloomberg ETF analysts put the probability of a January approval at 90%.

This is interesting because the study also found that 88% of advisors who want to buy BTC are waiting for a spot ETF and only 19% said they can currently buy BTC in client accounts. Despite these challenges, the overwhelming majority of advisors reported in the survey that their clients ask about cryptocurrencies.

While not the main issue, the lack of a suitable ETF was one of the top five concerns respondents raised about lower-than-desired allocations. 42% said the lack of an ETF was holding back allocations, up from 32% in the 2022 survey. Regulatory concerns have been the biggest issue of the past three years in the eyes of these financial advisors.

This is probably not surprising given that respondents are largely independent of smaller AUM. 60% of respondents manage less than $100 million and 41% manage less than $50 million. So while the information coming from the minds of these financial advisors is interesting, it is important to note that even the 2% BTC allocations of these exact respondents would likely not represent a larger inflow than what we just witnessed in 2023.

Average AUM	AUM x 437 respondents	BTC entry with 2% allocation
$50,000,000	$21,850,000,000	$437,000,000
$100,000,000	$43,700,000,000	$874,000,000

Click to enlarge

Source: Author's calculations based on Bitwise/VettaFi AUM Mean

There were 437 respondents. Of which, the average AUM was between $50 million and $100 million. If we simply use those figures as baseline estimates for expected future inflow from these specific financial advisors and apply an aggressive 2% BTC allocation across the board, we'll end up with between $437 million and $874 million in BTC investment inflow. In previous articles I have highlighted CoinShares net flow figures.

By the end of the year, Bitcoin accounted for more than $1.9 billion in cryptocurrency investment capital flows. This makes at least 7 consecutive years of positive net flow into Bitcoin from capital allocators. Personally, I'm not betting on this trend continuing in 2024, as according to ETF analysts, spot approval of a US-based ETF seems imminent.

Risks

None of this means that the price of BTC has to rise in the short or medium term. In my opinion, we are in for a considerable pullback in BTC before the halving. Whether we achieve it or not is anyone's guess. Like all digital assets, Bitcoin is volatile and can go to zero. Paradoxically, what is good for Bitcoin miners may not be good for the growth of the main layer network. While I am personally an advocate for self-custody and regularly use Bitcoin's Lightning Network, there is no doubt that the fee market is problematic for onboarding users outside of a custodial environment.

Battling an already cumbersome user experience, Lightning Network capacity growth stalled last summer before transaction fees began to rise. High base layer fees make the cost of opening new channels prohibitive. And I've already gone into great detail about base layer wallet address balances. Peer-to-peer payment network? I'm not seeing it. Digital gold? Time will tell.

Summary

We can have political discussions and theoretical and philosophical discussions off camera and over a drink. When I wear this tie, it's about making and saving money in the financial markets. - Darius Dale, Founder and CEO of 42 Macro via Thoughtful Money

Bitcoin looks to be in custody in 2024. That's my personal opinion. The comments section can certainly debate whether that's a good thing or not. But at the end of the day, most of us are trying to grow our wealth and not be destroyed by fiat currency devaluation. Due to its strict supply limit and dominant position in the cryptocurrency market, Bitcoin still serves that purpose. While I maintain that the safest way to hold BTC is through self-custody, in an environment where transaction fees can eclipse the value held by 35% of wallet addresses, the reality is that BTC cannot be self-custodial. for everyone without major changes. to the network or a better L2 ecosystem. There is still no verdict on the latter and I suspect that major changes at the network level are unlikely.

I believe we will get the immediate ETF approval that many in the market are expecting. But as I mentioned in the risks section, I think BTC needs to pull back before we hit the new post-halving all-time high. For me, any deeper pullback is a buying opportunity. In the long term, I still think BTC functions as a fiat hedging instrument. There are many good things about self-custody and I cannot emphasize enough that this is the approach I want for BTC exposure. But there are no solutions, only trade-offs. For many people, the ETF is the way they want to do this and I think next year we will see that spot ETFs were quite in demand.