Why Are Bitcoin ETFs Such a Big Deal? Gold Provides a $100 Billion Answer

Bitcoin ETFs, which just won regulatory approval in the U.S. on Wednesday, have been hugely hyped by dreamers exhilarated by the prospect they will open up cryptocurrency investing to the masses.

But there's always the danger that the newest new thing in finance will turn into a dud. Take meme stocks like GameStop, AMC and Hertz, which won a feverish following during the pandemic that shot their prices to the moon. But it was a fad that passed.

For full coverage of bitcoin ETFs, click here.

Sometimes they get traction, though. Two decades ago, the debut of exchange-traded funds that let investors easily invest in gold prompted wildly optimistic predictions.

"This one is going to go gangbusters," Jim Wiandt, a well-known figure in the ETF space, told MarketWatch in November 2004 when speaking about gold ETFs. "It opens up a new asset class to investors."

He was right. Over $100 billion is now stashed in gold ETFs that trade in the U.S., the world's largest capital market. They have made investing in the precious metal as simple as clicking the "buy" button in a plain vanilla brokerage account; no vaults or armed guards needed.

Read more: What Is a Bitcoin ETF?

Gold soared after gold ETFs were introduced two decades ago. Standard Chartered, the global bank, views this as relevant history for bitcoin ETFs.

Gold's price more than quadrupled in the seven years following their 2004 introduction in the U.S. "We expect bitcoin to enjoy price gains of a similar magnitude as a result of U.S. spot ETF approval, but we see these gains materialising over a shorter (one- to two-year) period, given our view that the BTC ETF market will develop more quickly." The firm sees the price of bitcoin rising to $100,000 by the end of this year.

This is what has some crypto observers so enthusiastic about bitcoin ETFs. A flood of companies, including asset management giant BlackRock, just got approval to offer them in the U.S. There's hopes that'll bring a gusher of institutional and retail money into the investment ecosystem.

"The first gold ETF undoubtedly changed the industry as it allowed gold to be included in an investment portfolio for the first time," said William Rhind, founder and CEO of GraniteShares, an independent ETF company.

He's not sure bitcoin ETFs will quite match the goldenness of its predecessor, though. "I think, ultimately, there will be less demand for a spot bitcoin ETF than there was for gold because bitcoin was always digital and buying it was not a market access issue in the same way as it was for gold."

Spot bitcoin ETFs – the fuller term for the just-approved products, which own bitcoin itself, as opposed to the bitcoin futures ETFs that have already existed for several years and which hold derivatives contracts instead – have the potential to develop into a $100 billion product, according to some analysts. That, in turn, could result in a significant shift for the cryptocurrency industry.

Without bitcoin ETFs, institutional investors have few options for investing in the world's largest cryptocurrency. Most do not have the infrastructure to hold bitcoin directly nor have authorization to trade it at existing exchanges, so they can either invest through futures ETFs like ProShares' BITO or closed-ended funds such as Grayscale's Bitcoin Trust (GBTC). However, these options come with high fees and multiple downsides.

Similar to how the first gold ETF created in 2003 injected billions of dollars worth of inflow into gold, a bitcoin spot ETF could potentially do the same. Bernstein, the brokerage, said in a research report it expects a spot bitcoin ETF market to be sizable, reaching 10% of bitcoin's market capitalization in two to three years. (Bitcoin's market cap is around $900 billion.)

Martin Leinweber, a digital asset product strategist at MarketVector Index, said the current exchange balances of bitcoin equate to around $47.5 billion, so an ETF approval could bring more than triple the amount of capital to bitcoin than what every single exchange currently holds.

The first gold ETF increased demand for gold, and a bitcoin spot ETF might do the same. Since the first gold ETF was launched in 2003, gold prices have jumped from around $332 to $1,800, and there are around 35 gold ETFs traded on the U.S. markets. Gold ETFs have a total of $105 billion assets under management (AUM).

Bitcoin soared 155% in 2023. Much of the gain followed BlackRock's surprising June filing for a bitcoin ETF. Bitcoin went from trading at a low of around $25,500 on June 15 to about $46,000 now.

Rhind explained that the major market for gold ETFs was from professional investors like financial advisers or asset managers who now could own gold for the first time in their portfolios. As such, there was a huge amount of pent-up demand for this, which was reflected in AUM rising exponentially in fairly short order.

Leinweber said that approval for a bitcoin spot ETF by a traditional institution would be a significant validation for the cryptocurrency space. "As the U.S. is currently lagging behind other countries in terms of spot bitcoin ETFs, this move could position Wall Street as a more dominant player in the global crypto space," Leinweber said.

Currently, bitcoin ETFs exist in Canada and Europe. However, data from Euronext shows that the Jacobi ETF in Europe has seen muted trading volume since launching in August.

There is potential for the likes of BlackRock to advise their clients to allocate a proportion of their portfolio to the bitcoin ETF that they offer. "If financial advisers and institutions find a bitcoin ETF as liquid and convenient as other popular ETFs (like GLD or SPY), they might very well allocate around 1% or more to it," said Leinweber.

"It is not outlandish to imagine a scenario where traditional finance firms are going so far as to recommend small allocations to crypto via ETFs," according to Conor Ryder, head of research at Ethena Labs. "From an overall portfolio allocation perspective, a small allocation to a highly volatile asset with asymmetric upside makes a lot of sense, and now they can point them towards their own ETFs for some fees."

Bitcoin ETFs showcase the merging of the traditionally separate worlds of crypto and traditional finance. Mona El Isa, CEO of Avantgarde, recognizes the significant potential impact of a bitcoin spot ETF approval, stating, "The approval of a bitcoin spot ETF holds immense significance for the cryptocurrency industry. It has the potential to bring substantial capital into the market, potentially in the billions, as investors seek exposure to bitcoin through a trusted and regulated vehicle."

Given that bitcoin ETFs directly hold the underlying asset, there could also be organic demand for bitcoin itself, said El Isa. "This could potentially drive up its value as more investors, including institutional allocators like BlackRock and Fidelity, seek to hold the asset within the ETF. This, in turn, could have a cascading effect, further solidifying bitcoin's position in the global financial landscape."

In terms of the balance of power, El Isa adds, bitcoin ETF approval signifies "a growing acknowledgment of cryptocurrencies within traditional finance. It can lead to increased collaboration between crypto and Wall Street, ultimately reshaping the dynamics of the industry as we know it."

Before bitcoin ETFs, the next best option was the Grayscale Bitcoin Trust (GBTC). It has almost $30 billion of assets under management. GBTC's popularity among investors – despite being harder to buy than an ETF and having a less-appealing structure – suggests that there could be a significant amount of appetite for a spot bitcoin ETF.

"There will no doubt be demand for a spot bitcoin ETF, the question is really more about appetite from investors or enthusiasm for bitcoin after all the recent travails in the crypto space," said Rhind.