Spot Bitcoin ETF: Unraveling the Magnetism for Pros

• Bitcoin Adoption: A Gradual Yet Certain Progress
• The Urgency of a Spot Bitcoin ETF
• Opening New Horizons for Investments
• Bitcoin: A Gamechanger in Investment Strategies
• Future Outlook on Bitcoin Spot ETFs

Bitcoin Adoption: A Gradual Yet Certain Progress

Bitcoin$42,260 -0.64% has been making steady strides towards the mainstream, with notable asset management giants such as BlackRock and Fidelity preparing to introduce a spot bitcoin ETF in the U.S. The market anticipates a 90% chance that the Securities and Exchange Commission will give the green light to such an initiative, as indicated by the narrowing discount on the Grayscale Bitcoin Trust's NAV.

The Urgency of a Spot Bitcoin ETF

Despite the existence of futures-based bitcoin ETFs, the demand for a spot bitcoin ETF remains high. This can be attributed to the disadvantages associated with BTC futures ETFs, such as steep roll costs, which can devour up to 30% of the yearly performance during a significant contango in the bitcoin futures curve. In layman's terms, if bitcoin futures are priced much higher than the current spot price, investors might have to forgo a significant portion of their performance. As a result, the full advantages of holding bitcoin are not realized when investing in a futures-based product.

Opening New Horizons for Investments

Facilitating investment access to bitcoin and other cryptocurrencies has the potential to create a brand new realm of potential portfolio allocations that were previously non-existent. In portfolio management terms, investments in bitcoin significantly widen the so-called efficient frontier of potential multi-asset portfolios. The efficient frontier encapsulates all the potential portfolios outlined in a return-risk diagram, based on the varying weightage of different asset classes.

Bitcoin: A Gamechanger in Investment Strategies

With the inclusion of bitcoin into the equation, there is a significant expansion in the universe of potential portfolios. For instance, the inclusion of bitcoin in a traditional 60/40 stock-bond multi-asset portfolio has resulted in a substantial increase in risk-adjusted returns, or the Sharpe Ratio, with only a minor rise in portfolio drawdowns in the past.

Future Outlook on Bitcoin Spot ETFs

While the approval timeline for these spot bitcoin ETF applications remains uncertain, the general consensus predicts a likely approval in January. Given that these upcoming bitcoin ETF issues handle a staggering amount of assets under management (approximately $16 trillion by our estimation), their influence on the crypto realm could be substantial. Even if a minor percentage of these assets find their way into bitcoin, the impact could be highly significant given that the current AUM for bitcoin exchange-traded products only amounts to $38.8 billion, based on our calculations, which includes Grayscale's trust. However, this capital infusion will not be immediate and will likely take several months as investors gradually reallocate parts of their traditional asset investments into bitcoin.

Edited by Jonathan Stoker