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Galaxy Digital: Reassessing the market size of Bitcoin ETFs

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The narrative from ETFs, the market regarding the upcoming Bitcoin halving, and the possibility that interest rates may have peaked or will soon peak in the short term, all indicate that 2024 may be a big year for Bitcoin.

Original Title: "Sizing the Market for a Bitcoin ETF"

Original Author: Charles Yu, Galaxy Digital

Original Translation: Kaori, BlockBeats

The approval of a US-regulated spot Bitcoin ETF will be one of the most influential catalysts for the adoption of Bitcoin (and cryptocurrencies as an asset class).

Meaning of Bitcoin ETF

Why Bitcoin ETF is a more ideal solution than current investment tools

As of September 30th, year 23, the total number of BTC held by Bitcoin investment products (including ETPs and closed-end funds) is 842,000 (approximately 21.7 billion US dollars).

These Bitcoin investment products have significant disadvantages for investors. In addition to high fees, low liquidity, and tracking errors, these products are not convenient enough for a large group of investors who hold a considerable share of wealth. Other investment options that indirectly gain exposure to Bitcoin (such as stocks, hedge funds, futures ETFs) also have similar issues with low tracking efficiency. Moreover, many investors prefer not to manage Bitcoin themselves, avoiding administrative burdens such as wallet/private key management, self-custody, and tax reporting.

Spot ETFs may be suitable for any investor who wishes to have direct exposure to Bitcoin but does not want to personally own and manage Bitcoin. They offer many advantages over current Bitcoin investment products and options, such as:

Higher efficiency, including cost, liquidity, and price tracking. Although the applicants for Bitcoin ETF have not listed specific fees, overall, ETFs typically offer lower fees compared to hedge funds or closed-end funds, and many ETF applicants may strive to maintain low fees to remain competitive. Spot ETFs will also provide enhanced liquidity as they are listed on major exchanges and have better price tracking compared to futures products or proxy products exposed to Bitcoin.

Convenience. Spot ETFs allow investors to gain exposure to Bitcoin through a wider range of channels and platforms, including a range of providers that investors are already familiar with. Compared to owning Bitcoin directly, it provides an easier entry point for both retail and institutional investors, who require a certain degree of self-education and come with greater administrative costs.

Compliance. Compared to existing Bitcoin investment products, spot ETFs may be more easily able to meet the stricter compliance requirements set by regulatory agencies for custody arrangements, monitoring, and bankruptcy protection. In addition, ETFs can provide greater price transparency and market discovery for market participants, which helps to reduce volatility in the Bitcoin market.

Importance of Bitcoin ETF

The adoption of Bitcoin spot ETF is particularly important for the Bitcoin market for two main reasons:

(一) Expanding accessibility across different wealth levels

(二) By obtaining formal recognition from regulatory agencies and being associated with trusted financial service brands, the acceptance of Bitcoin in the market has been strengthened.

可获得性（Accessibility） Accessibility

There is a wider coverage for both retail and institutional investors. Currently available Bitcoin investment funds are mainly driven by wealth advisors or offered through institutional platforms. ETFs, on the other hand, are a more directly regulated product that will expand access to more investors (including retail and affluent individual investors). Unlike relying on wealth managers, ETFs can be accessed through a wider range of channels, including directly in brokerage firms or RIAs (which do not allow direct purchase of spot Bitcoin).

Distributed through more investment channels. Financial advisors/trustees cannot include Bitcoin in their wealth management strategies without approved Bitcoin investment solutions like spot ETFs. The wealth management industry has a large amount of capital, but has not been able to invest directly in Bitcoin through traditional channels. With approved spot ETFs, financial advisors can begin to guide their wealth clients to invest in Bitcoin.

Greater wealth opportunities. The baby boomer generation and those older than 59 years old hold 62% of the wealth in the United States, but only 8% of adults over 50 have invested in cryptocurrency, while over 25% of adults aged 18-49 have (according to data from the Federal Reserve and Pew Research Center). Offering a Bitcoin ETF product through a familiar and trusted brand can help attract more affluent, older individuals who have yet to enter the market.

认可（Acceptance）

Official recognition and legitimacy from trusted brands. Many well-known financial brands have submitted Bitcoin ETF applications - the formal recognition and validation from these mainstream companies can improve people's perception of Bitcoin/cryptocurrency as an asset class and attract more recognition and adoption. According to data from the Pew Research Center, among the 88% of Americans who are familiar with cryptocurrency, 75% lack confidence in the current way of investing, trading, or using cryptocurrency.

Addressing regulatory and compliance concerns; clear regulations will attract more investment and development. The approval of ETF by SEC will alleviate many security and compliance concerns for investors, as it is a regulated investment product with more comprehensive risk disclosure. It will also provide the regulatory clarity that market participants have long needed to conduct business in the cryptocurrency industry. A more mature regulatory framework will attract more investment and development, enhancing the competitiveness of the United States in the cryptocurrency industry.

The benefits of a Bitcoin investment portfolio / recognition as an asset class. Regardless of which part of the investment portfolio funds are allocated to, Bitcoin can provide diversification and enhanced returns for the investment portfolio (please read our recent report "Bitcoin in Investment Portfolios").

In order to guide investment management decisions, more and more retail investors and financial advisors are turning to model investment portfolios and automated solutions, which increasingly use ETFs and incorporate alternative asset classes to provide investors with more risk-optimized returns. Longer investment records can support the use of Bitcoin in more investment strategies.

Predicting the capital inflow after the approval of Bitcoin ETF

Given the accessibility reasons mentioned above, the US wealth management industry may be the most potential and directly benefited market from the approved Bitcoin ETF. As of October 2023, the total assets managed by brokers ($27 trillion), banks ($11 trillion), and trustee advisors ($9 trillion) reached $48.3 trillion.

In our analysis, we use $48.3 trillion as the total addressable market (TAM) benchmark, applicable to the US wealth management aggregator we have selected (excluding the family office channel that manages approximately $2 trillion).

However, the accessible market for Bitcoin ETFs and the indirect impact and coverage of Bitcoin ETF approvals may far exceed the US wealth management channels (such as international markets, retail markets, other investment products, and other channels), and may attract more funds into the Bitcoin spot market and investment products.

(Note: Although we use TAM-style analysis to estimate the inflow of funds into Bitcoin ETFs, we acknowledge that the inflow of funds into Bitcoin ETFs may also bring net new inflows, rather than just shifting from existing allocations - therefore, applying the % capture assumption to the estimated TAM figure does not fully reflect our view on how Bitcoin ETFs will be adopted, as it does not capture this new demand flow.)

For the admission cycle of Bitcoin ETF in each channel, it may span several years because the admission time varies among different channels. The RIA channel, which is led by independent registered investment advisors, is more complex in nature and may allow admission earlier than advisors associated with banks and brokers, thus having a larger initial available market share in our analysis.

For banking and brokerage channels, each independent platform will decide when to open access to Bitcoin ETF products for its advisors - with some exceptions, financial advisors associated with banks and brokerages cannot provide/recommend specific investment products unless approved by the platform.