How Bitcoin ETFs Can Drive Up Bitcoin Price in Five Years

Except for the 1980 peak, the price from 1979 to 2001 was as if nothing had happened in a 20-year period. If Rip Wan Winkle had gone to sleep in 1979 and woken up in 2002, it would have been as if nothing had happened to the price of gold, despite it being the most popular asset class for billions of people.

After 2009, the global financial crisis and quantitative easing occurred. We knew then that gold prices would rise and they did as cheap money was printed. The next rise occurred in 2020 with the outbreak of Covid-19 and another massive round of fiat money printing.

But let’s take a look at gold prices from 2002 to 2009, a fascinating period:

1. The USA emerged from the dotcom bubble

2. It was after the recession after September 11

3. Interest rates rose

4. The economy was doing well

5. The real estate bubble formed throughout the USA

Despite rising interest rates and a good economy, gold prices also rose.

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So what happened here?

The first gold exchange-traded fund (ETF) was launched on the Australian Stock Exchange in 2003.

This was followed by the launch of the Gold ETF (GLD) by State Street Advisors in the US. Both started with modest assets under management (AUM), but by the end of 2005, the GLD ETF had reached nearly $5 billion in assets under management. By the end of 2006, assets under management were nearly $10 billion, and by the end of 2007, assets under management were $16 billion.

The price of gold doubled to nearly $700 at that time. Towards the end of 2008 and the beginning of the financial crisis, assets under management reached $21 billion. By March 2009, when the financial crisis was in full swing, assets under management rose to $30 billion and by September the price of gold was at $1,200.

By 2024, State Street Advisors' GLD had over $60 billion in assets under management, and the next largest gold ETF, BlackRock's iShares Gold Trust, had $30 billion in assets.

How could the gold ETF cause this increase in the price of gold when gold is an investment that has been available for 3,000 years?

With stocks, you have individual investors and large pension funds and hedge funds that buy stocks. You can never hold a physical stock certificate in your hand like you used to when the stock exchange would send you stock certificates on your behalf. Nowadays, they are held in a central depository like the Depository Trust and Clearing Corporation (DTCC) in the US for the New York Stock Exchange.

Large financial institutions such as hedge funds and pension funds are subject to regulation by state and federal laws about what types of assets they can buy and who can hold the assets they buy. These regulations are designed to protect investors' money.

A portfolio manager with experience in stock picking would like to avoid having to deal with custody issues and security risks associated with his investments. As a fund manager, he would rather spend his time analyzing investments than worrying about securing the assets he has acquired.

It is advisable for large financial institutions and family offices to have diversified assets in their portfolio. This strategy allows them to protect their wealth when one asset class in the market experiences a massive collapse. Gold is an asset class that is considered a safe haven in times of inflation. Many funds were unable to buy physical gold due to the risks associated with custody. They were able to purchase mutual funds that invested in gold.

ETFs allowed pension funds, hedge funds and large family offices to invest in gold and trade it like a stock. Previously, they could only buy mutual funds or trusts that invested in gold or in companies that mine and refine gold.

Compared to mutual funds, ETFs have enormous advantages such as:

1. ETFs trade all day like stocks; mutual funds can only trade at closing prices. If the market dropped 8% at the open, you placed an order, and the market was up 10% by the close, you wouldn't be able to buy the massive dip.

2. ETFs have much lower costs and your fees are much lower

3. If the ETFs are trading below the net asset value of the underlying assets, you can redeem your ETFs through authorized partners and brokers to receive the underlying asset and sell it at market prices. In the case of mutual funds, you have to wait until the price of the mutual fund reaches the net asset value of the underlying asset.

The history of Bitcoin ETFs

The road to a Bitcoin ETF in the US has been long and complex, marked by regulatory concerns, legal challenges and growing investor demand. While futures-based Bitcoin ETFs were approved and successfully traded starting in 2021, the spot didn't get the green light until 2024. The history of Bitcoin ETFs in America since 2017 is one of perseverance in the face of regulatory challenges.

The first major attempt to launch a Bitcoin ETF was made by the Winklevoss twins in March 2017 with a proposal to create the Winklevoss Bitcoin Trust. However, the US Securities and Exchange Commission (SEC) rejected their application, citing concerns about market manipulation, lack of regulation of the Bitcoin markets and potential for fraud.

In July 2018, the SEC rejected the Winklevoss twins' second attempt, as well as several other Bitcoin ETF proposals, including those from ProShares and Direxion. The main reasons were consistent: concerns about market manipulation and inadequate investor protections.

Several companies, including VanEck and SolidX, continued to submit Bitcoin ETF proposals. VanEck SolidX Bitcoin Trust notably attempted to address the SEC's concerns by proposing a physically-backed ETF, meaning it would hold real bitcoins. However, the proposal was delayed several times and eventually withdrawn due to ongoing regulatory uncertainty.

In October 2021, after years of denials, the SEC finally approved the first Bitcoin-related ETF, but with one major caveat: it was a Bitcoin futures-based ETF, rather than a physically backed one. This ETF, the ProShares Bitcoin Strategy ETF (BITO), launched on October 19, 2021, marking a historic moment for Bitcoin in traditional financial markets. The ProShares Bitcoin Strategy ETF invests in Bitcoin futures contracts, rather than directly in Bitcoin. Futures-based ETFs are generally considered safer from a regulatory perspective because they are based on regulated futures contracts rather than the underlying, less regulated asset.

The immediate impact was that the ProShares Bitcoin Strategy ETF received huge traction, reaching over $1 billion in assets under management in just a few days, and on its first day it was the second most traded new ETF in its history.

In 2022, Grayscale filed a lawsuit against the SEC after its application to convert its Bitcoin Trust into a spot Bitcoin ETF was denied. Grayscale argued that the SEC acted arbitrarily by approving futures-based ETFs but not spot ETFs. The case attracted significant attention and highlighted the ongoing battle between crypto advocates and regulators.

The District of Columbia Court of Appeals has settled a dispute between the SEC and Grayscale with a final ruling, ordering the agency to reverse its rejection of the asset manager's spot bitcoin ETF application in October 2023.

On January 10, 2024, the SEC finally approved 11 new spot Bitcoin ETFs. A spot Bitcoin ETF is an ETF that tracks the spot or current price of Bitcoin.

Various funds started holding ETFs in bonds, currencies, gold, real estate investment trusts and volatility, but none caused as big a storm as the Bitcoin spot ETFs in 2024.

In six months, the top Bitcoin ETFs had $42 billion in total assets, which the gold ETF achieved in six years. The price rose from $27,000 in October 2023 after the court ruling to $45,000 by the first ETF approval date. From the first ETF trading day in January 2024, it rose to $70,000 by March 2024.

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Assuming we can learn from history regarding other ETFs, their assets under management, and their correlation with underlying asset prices over a five-year period, then the idea of ​​Bitcoin price skyrocketing over the next five years would not be far-fetched.

Nithin Eapen is an experienced speaker, technologist and entrepreneur with a huge passion for finance, cryptocurrencies and technology. With a computer science and finance background, Nithin has spent over two decades in the technology and finance industry working with cutting-edge technologies and innovative startups.

Note: This article is for the purpose of expressing opinions only. It is not a recommendation. If you are considering investing, be sure to consult your advisor. This article is for educational and informational purposes only.