Podcast Notes | Conversation with Galaxy Digital: Potential Market Impact of Spot Bitcoin ETFs
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Podcast Notes | Conversation with Galaxy Digital: Potential Market Impact of Spot Bitcoin ETFs
The launch of spot Bitcoin ETFs will enable wealth management advisors who were previously restricted to offer Bitcoin investments to their clients, opening a new channel for capital inflows into the Bitcoin market.
Navigating Web3 tides with focused insightsCompilation & Translation: TechFlow
In this episode of the Bankless podcast, hosts David and Ryan are joined by guest Alex Thorne to discuss the potential implications of Bitcoin ETFs. Alex Thorne is Head of Research at Galaxy Digital, who shares his insights on Bitcoin ETFs, particularly focusing on interest in spot Bitcoin ETFs and their possible market impact.
Hosts: David & Ryan, Bankless Podcast
Guest: Alex Thorne, Head of Research at Galaxy Digital
Original Title: "Bitcoin ETFs: Bullish or Bearish?"
Release Date: November 2
Two-Way Impact Between Spot Bitcoin ETFs and Traditional Investing
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Alex points out that the total assets under management (AUM) in the U.S. wealth management industry amount to approximately $48.3 trillion, excluding self-managed accounts such as personal retirement accounts (PRA) or self-directed brokerage accounts. The wealth management sector is divided into three main categories: broker-dealers (~$27 trillion), banks (~$11.9 trillion), and registered investment advisors (RIAs) (~$9.3 trillion).
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Alex notes that spot Bitcoin ETFs would provide a new investment avenue for wealth managers currently unable to directly purchase Bitcoin. While individual investors can buy Bitcoin directly on cryptocurrency exchanges like Kraken, many wealth management institutions cannot offer direct exposure to Bitcoin or other cryptocurrencies due to compliance and approval constraints.
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Alex explains that many banks and broker-dealers prohibit their financial advisors from investing client funds in Bitcoin trust products or cash-settled Bitcoin futures ETFs, deeming them too risky or unsuitable. He believes that the introduction of a spot Bitcoin ETF will enable restricted wealth managers to offer Bitcoin investments, thereby opening a new channel for capital inflows into the Bitcoin market.
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Alex emphasizes that wealth advisors cannot simply buy Bitcoin on crypto exchanges like Kraken due to complications involving sub-accounts, regulation, custody, and integration with existing portfolio management tools. The advantage of a spot Bitcoin ETF lies in its seamless integration into current investment management systems and back-office operations, making Bitcoin as easy to manage as any traditional asset.
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Although not all $48 trillion will flow into Bitcoin, given that Bitcoin’s market cap is less than $1 trillion, even a small percentage of inflows could significantly impact its price.
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Alex mentions they estimate around $1.44 billion in inflows during the first year following the launch of a spot Bitcoin ETF, based on analysis of the wealth management sector. They project this could rise to $2.65 billion in the second year as market access expands. These flows are considered net new capital—funds that would not have entered the Bitcoin market without the ETF—and the projections are rooted in wealth management channel analysis.
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The hosts note that investor behavior may not follow spreadsheet models evenly or rationally; rising prices could trigger FOMO (fear of missing out). Even hardcore Bitcoin supporters view it as a long-term hold, which might make actual inflows more volatile than predicted. Alex responds that wealth advisors tend to trade less frequently than retail investors and focus more on long-term planning rather than short-term market moves.
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Alex likes comparing Bitcoin to gold, as both are scarce assets with similar investment profiles. After gold ETFs were approved, the gold market experienced a prolonged and substantial bull run over the next decade. They estimate that equivalent investment inflows into Bitcoin could drive its price up eight times more than gold.
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Alex stresses that this forecast is extremely bullish and based on rough estimates. He acknowledges that gold's price surge in the mid-2000s wasn't solely due to improved accessibility but also influenced by macroeconomic events such as the global financial crisis.
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Alex notes that ETF inflows won’t happen instantly but will grow gradually. In their model, the monthly multiplier effect diminishes over time as Bitcoin’s market cap grows and its share within investment portfolios increases.
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Alex emphasizes that their analysis offers a defensible framework, not a guaranteed outcome. If other analysts’ inflow predictions are accurate, Bitcoin’s price could increase by approximately 75% within a year of the ETF launch.
Potential Future Market Dynamics
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Alex and the hosts explore how markets might react to anticipated inflows, particularly whether rising prices could lead to front-running behavior that “pulls forward future demand.”
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Regarding front-running’s impact on demand, Alex says it’s complex. On one hand, higher prices may deter some investors who perceive them as too high and wait for corrections. On the other, as Bitcoin becomes less volatile and larger in size, investors may feel comfortable allocating more capital to it.
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Alex mentions they use risk-adjusted metrics like the Sharpe ratio to determine allocation levels. As Bitcoin’s market grows and volatility declines, it becomes more attractive on a risk-adjusted basis. Additionally, very large pools of capital—such as sovereign wealth funds or central banks—may only enter once the market matures, volatility drops, and liquidity improves.
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Alex stresses that while their analysis assumes current demand and limited access for wealth managers, actual inflows could be affected by market expectations and broader macroeconomic factors.
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The hosts point out that once a Bitcoin ETF is approved, it will likely trigger extensive marketing and educational campaigns aimed at capturing investor attention and market share, enhancing Bitcoin’s legitimacy and institutional adoption.
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Alex agrees, noting similar promotional surges occurred during previous ETF launches. He believes Bitcoin ETF approval would signal regulatory confidence in crypto’s custody, transfer, and oversight mechanisms—an endorsement of Bitcoin’s maturity.
Potential Risks and Challenges
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Alex notes that ETF approval and launch could trigger a “buy the rumor, sell the news” reaction, where investors buy ahead of approval and sell after launch, potentially dampening ETF inflows.
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He emphasizes that even with optimistic sentiment, inflow speeds may lag expectations. Even the most proactive platforms may take months to roll out ETFs due to internal risk assessment procedures.
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Alex adds that regulatory issues could affect ETF inflows. While Bitcoin itself may not be the primary target of regulators, broader crypto regulations—such as those from FinCEN (Financial Crimes Enforcement Network)—could impact the entire ecosystem.
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He points out that all firms applying for Bitcoin ETFs have updated their S-1 filings to include mining-related risk disclosures, particularly around energy consumption, which could provoke political backlash and regulatory changes.
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Alex mentions figures like U.S. Senator Elizabeth Warren, who has expressed skepticism toward self-custodied crypto, posing a potential headwind for Bitcoin and the broader crypto market.
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Compared to spot Bitcoin, futures-based ETFs suffer from roll costs and decay, making them poor vehicles for long-term holders. Since wealth advisors typically adopt long-term strategies, this may reduce their interest in Bitcoin futures ETFs.
How Bitcoin ETFs Could Influence Ethereum ETFs
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Alex and the hosts believe that if a spot Bitcoin ETF is approved, an Ethereum ETF could follow within months. While Ethereum ETF approval remains less certain than Bitcoin’s, the greenlighting of a Bitcoin ETF would likely accelerate Ethereum ETF reviews.
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On market impact, Alex notes that while their analysis primarily compares Bitcoin to gold, from an accessibility standpoint, the same benefits of increased access via ETFs would apply to Ethereum. Currently, many advisors lack access to either spot Bitcoin or spot Ethereum, so ETFs would greatly enhance availability for both assets.
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Alex observes that the investment community still views Ethereum as less mature than Bitcoin. Bitcoin is widely seen as “digital gold,” whereas Ethereum is often categorized as a risk asset or tech investment. Thus, Bitcoin and Ethereum ETFs may attract different investor segments.
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Alex sees Ethereum more as an investment in technological innovation rather than just a digital commodity. If an Ethereum ETF is approved, it could have a major price impact. Given Ethereum’s smaller market cap and lower institutional legitimacy compared to Bitcoin, the ETF could produce an amplified effect on its price.
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One unique aspect of Ethereum is staking, which functions similarly to an internet bond. An ETF that includes staking functionality could offer additional yield, increasing its appeal to investors.
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While both Bitcoin and Ethereum serve as native tokens fueling their networks and possess relative scarcity, they play different roles in investors’ minds. Bitcoin’s scarcity is predictable, while Ethereum is viewed more as a technological platform.
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Alex aligns with Bloomberg Intelligence analysts Eric Balchunas and James Seyffart, who have deep insight into the legal and regulatory timelines for ETF approvals. Alex believes the most likely date for Ethereum ETF approval is January 10, 2023, or earlier.
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