big country
Author: Christopher Summer, CFA
One of the biggest stories for U.S. ETFs in the first quarter of 2024 was the launch of 11 different spot Bitcoin strategies. January 11, 2024, is indeed the date that will go down in ETF history, something like Launched SPDR Gold Trust in 20041 Even the SPDR’s S&P 500 Index Trust in 1993.2
As we write these words, these 11 spot Bitcoin ETF strategies represent approximately $60 billion in AUM.3 As is often the case, the $60 billion represents a broad diversification, with some fairly large strategies, some mid-sized, and some smaller.
halved
In April 2024, an event called “halving” will occur in the Bitcoin protocol. This was widely expected as the block rewards paid to Bitcoin miners will be written into the code. From 6.25 Bitcoin to approximately 3.13 Bitcoin. Bitcoin’s protocol has a so-called “halving cycle” of about four years, so we’ve seen these events before – the reward starts at 50, first drops to 25, then 12.5, then 6.25. This will continue to happen between now and 2140, when all 21 million Bitcoins will be created.
Figure 1 is the chart we showed previously, noting that if we adjusted the Bitcoin price on the day of the past halving to 1.0, we would see that over the next approximately 2.5 years, each of these three scenarios have further appreciated.
- On the one hand, we can think about Bitcoin in terms of supply and demand. If demand exceeds supply, there will be upward pressure on prices. The halving indicates that there is less new Bitcoin supply in the world, so if demand remains the same, the supply and demand balance immediately shifts more towards demand exceeding supply.
- To maintain balance, we must also recognize that many factors influence the behavior of investors across the Bitcoin market. Previous halving cycles associated with Bitcoin price appreciation cannot tell us with certainty what will happen in the future.
Figure 1: Bitcoin price behavior after three halving cycles to date
Spot Bitcoin ETFs: A new source of demand
One of Bitcoin’s most popular attributes is the certainty of supply over time based on the protocol’s code. For example, we know that by 2140, there will be 21 million Bitcoins, and we know that nothing can change that. We know that the amount of new supply coming online is cut in half roughly every four years, as stated by halvings.
This is in stark contrast to a fiat currency system, where the government can decide to print more units of currency indefinitely. Throughout history, we have seen examples of fiat currencies losing their value and primacy due to more and more printing. We saw the dollar depreciate over time after decoupling from gold in 1971,4 Allowing the U.S. government to print more and more currency without the need for backing it in gold.
Presumably, if the SEC approves a spot Bitcoin ETF, a new source of demand for holding Bitcoin will emerge. In 2004, a new option was created for investors who did not want to go through the hassle of purchasing and storing physical gold bars. In a similar fashion, 2024 opened an option to allow investors to acquire spot Bitcoin through a familiar brokerage platform where ETFs backed by other types of assets can be traded.
Now, more than two months later, we can take a look back at how Bitcoin’s supply and demand situation has evolved, and whether we can clearly see the impact of ETFs.
Figure 2 shows us:
- It looks like a lot of people are interested in Bitcoin: One hypothesis put forth before the ETF was launched was that an increase in the types of investors (such as those unable to set up their own crypto wallets) would be able to gain access to investment. Daily net BTC flows into ETFs are definitely skewed towards the positive, and we note that there are still many investors working in companies where the Central Ministry of Home Affairs has not yet fully approved the use of these products.
- ETF purchases exceed Bitcoin issuance: During this particular period, the ETF purchased more Bitcoins than new Bitcoins were created, approximately 153,294 units. This may not always be the case, and as we write, we note that the total value of the Bitcoin market exceeds $1 trillion, but it turns out that large amounts of Bitcoin are traded infrequently. This space is transparent – we can see ETF purchases, we can see wallets, we can see how much time has passed since a single unit was moved. The only thing we don’t know is when or why the owners were able to trade.
Figure 2: ETF demand and Bitcoin issuance
Conclusion: Bitcoin is all about supply and demand
There is no shortage of different models that can create potential prices or ranges of price levels that may be suitable for Bitcoin. The field is very new, having only started in 2009, and there isn’t yet a universally accepted valuation method – unlike, say, discounted cash flow for stocks or bonds.
While investors continue to find and refine better ways to set price targets, we’ve found that considering supply and demand is more informative. At the moment, ETF demand seems high and we know the halving is coming. Now, ETF demand can change quickly – that’s the beauty of the structure – but it will be visible and transparent, and we (and others) will be able to monitor these trends near instantaneously.
1 The SPDR Gold Stock Strategy (GLD) was launched on November 18, 2004. As of March 19, 2024, it had more than $58 billion in assets under management.
2 SPDR S&P 500 ETF Trust (SPY) was launched on January 22, 2093. As of March 19, 2024, it had more than $526 billion in assets under management.
3 Source: Bloomberg, data as of March 19, 2024.
4 Source: Sandra Colen Gizzoni, “Nickerson ends Dollars Convertible to Gold and Wage/Price Controls Announced,” Fed History, November 22, 2013.
Important risks associated with this article
Crypto-assets such as Bitcoin and Ethereum are complex, often exhibit extreme price volatility and unpredictability, and should be considered highly speculative assets. Cryptoassets are often referred to as crypto “currencies,” but they typically operate without a central authority or bank, are not backed by any government or issuing entity (i.e. have no recourse), have no government or insurance protection, and are not legal It has limited or no availability compared to fiat currencies. Federal, state, or foreign governments may restrict the use, transfer, exchange, and value of cryptoassets, and regulation in the United States and globally is still evolving.
Cryptoasset exchanges and/or settlement facilities may be subject to failure due to security breaches, fraud, bankruptcy, market manipulation, market surveillance, KYC/AML (Know Your Customer/Anti-Money Laundering) procedures, non-compliance with applicable rules and regulations, technical failures , hacking, malware or other causes, may negatively affect the price of any cryptocurrency traded on such exchanges or rely on settlement facilities, or may prevent access to or use of cryptoassets. Crypto-assets may experience unique events, such as forks or airdrops, which may affect the value and functionality of the crypto-asset. Cryptoasset transactions are generally irreversible, meaning that the cryptoasset may not be recoverable if: (i) the cryptoasset is sent to an incorrect address, (ii) the incorrect amount is sent, or (iii) the transaction is Made from a fraudulent address. account. The popularity, acceptance or usage of a crypto-asset may decline, thereby harming its price, and the price of a crypto-asset may also be affected by transactions by a small number of holders of the crypto-asset. Crypto-assets can be difficult to value, and even for the same crypto-asset, valuations can vary significantly depending on pricing sources, or be suspect due to market fragmentation, illiquidity, volatility and potential manipulation. Crypto-assets often rely on blockchain technology, a relatively new and untested technology that operates as a decentralized ledger. The blockchain system may be affected by network connection interruptions, consensus failures, or network security attacks, and the date or time you initiate a transaction may be different from the date or time recorded on the blockchain. Access to a given blockchain requires a personalized key, which if compromised could result in loss through theft, destruction, or loss of access. Additionally, different cryptoassets exhibit different characteristics, use cases, and risk profiles. The information on digital assets, crypto-assets or blockchain networks provided by WisdomTree should not be considered or relied upon as investment or other advice, as a recommendation by WisdomTree, including regarding any specific digital assets, crypto-assets, blockchain networks or information about its use or suitability. any specific strategy.
Christopher Gannatti, CFA, Global Head of Research
Christopher Gannatti began working at WisdomTree as a Research Analyst in December 2010, working directly with Director of Research Jeremy Schwartz, CFA®. In January 2014, he was promoted to Associate Director of Research, where he was responsible for leading a diverse group of analysts and strategists within WisdomTree’s broader research team. In February 2018, Christopher was promoted to Head of European Research and is based in WisdomTree’s London office. He is responsible for comprehensive WisdomTree research work in the European market and provides support for the global UCIT platform. In November 2021, Christopher was promoted to Global Head of Research and is currently responsible for much of the communications on global investment strategies, particularly in the thematic equity space. Christopher comes to WisdomTree from Lord Abbett, where he served as regional advisor for four and a half years. He received an MBA in quantitative finance, accounting and economics from New York University’s Stern School of Business in 2010 and a BA in economics from Colgate University in 2006. Christopher is a holder of the Chartered Financial Analyst designation.
