Ecoinometrics - The BlackRock Bitcoin ETF: are we expecting too much from it?
If institutional money is coming there are reasons to be extra bullish on Bitcoin but is an ETF enough.
BlackRock, Fidelity, Invesco, Valkyrie… everyone is rushing to get the SEC to approve their own flavour of spot Bitcoin ETF. And while we are still at least 8 months away from getting any feedback from the SEC, Bitcoin has already surged back to $30k.
This whole sequence is based on the hope that the launch of a new spot Bitcoin ETF, the first of its kind in the US, will bring fresh institutional money into the space.
Yes that’s the old dream of the institutional money wave revived every couple of years…
Now common sense tells you this is good for Bitcoin (if the ETF comes true). However I’d like to come back on the historical example of the physical gold ETF GLD to show you that maybe investors are expecting too much from a Bitcoin ETF.
Without data you are just another investor with an opinion.
The Ecoinometrics newsletter gives you insights from crypto and macro data to help you make better investment decisions.
Each issue of the newsletter tells you what you need to know in 5 minutes or less, direct to the point, with lots of charts to allow you to quickly visualize what’s important.
Join more than 20,000 investors here:
Done? Thanks! That’s great! Now let’s dive in.
P.S. Checkout our latest tracker of MicroStrategy Bitcoin holdings at https://www.ecoinometrics.com/microstrategy-bitcoin-holdings-with-charts/.
The BlackRock Bitcoin ETF: are we expecting too much?
The takeaway
Many people have compared the potential launch of a BlackRock Bitcoin ETF backed by “physical” Bitcoins to the introduction of the GLD ETF for gold in the 2000s.
Bitcoin being labelled as digital gold certainly helped with that.
The problem is that the impressive rise of gold in the 2000s has more to do with a favourable macro environment and a weakening dollar than simply the launch of a new Exchange Traded Fund.
So reasoning by analogy with GLD could be misleading. But that’s not to say there is nothing to hope for Bitcoin over the next 5 to 10 years. On the contrary, the macro environment is bound to turn in the next 12-24 months.
When that happens a spot Bitcoin ETF will have its role to play in driving more money into the space. But it is unlikely to turn the tide on its own.
Context for the launch of the GLD ETF
Exchange Traded Funds are such a big part of the modern investment landscape that it is hard to remember that these types of products were only introduced in the 1990s.
So when you think about it, it isn’t surprising that the US did not have any ETF backed by physical gold until the mid 2000s. By comparison you could already trade gold futures in the US since 1974. That’s 30 years before the GLD ETF was introduced!
Which means before 2004 you had only a few ways to get exposure to gold:
Owning physical gold in the form of bars or coins. You had to either custody this gold yourself or pay someone to do that for you.
Own shares of a gold mining company. But already that’s some indirect exposure since the miners don’t track exactly the value of gold.
Trade gold futures. But at this point you are only trading paper gold for the most part.
Therefore you can understand how the GLD ETF filled a void:
It is a product easy to trade, you simply own some shares like you would do for any stock.
It does track the price of physical gold simply by holding physical gold in reserve.
You can kinda redeem GLD for physical gold (but only if you own a multiple of 100k shares last time I checked).
So GLD is a hybrid between convenience and the real deal. That’s the value proposition.
The GLD ETF was approved by the SEC in March 2003 and the fund launched in November 2004. That’s right in the middle of an 8 years bull market for gold which was only paused by the start of the Great Recession.
Over that period gold went from about $270 per ounce all the way to $1,000 per ounce. That’s some 19% annualized returns. Not too shabby.
Of course gold had a good run again after the initial panic of the 2008 financial crisis. But since our goal is to understand the role of the launch of the GLD ETF on gold’s price I think it is fair to consider the period going from 2000 to the start Great Recession.
If you look at the chart quickly you might think “of course that’s a no brainer, institutional money came in with GLD and that pushed gold forward”.
Is that really the case though? Let’s look at the data a bit differently.
Measuring the impact of the launch of the GLD ETF
So we want to know whether or not GLD juiced up gold’s returns. Instead of looking at the chart of gold’s price let’s look at the rolling year-on-year returns over the same period.
That’s what you can see on the chart below. A positive sign would be something like a step function for those year-on-year returns after GLD was approved or after it was launched.
But that’s not really what we see.
Roughly the pattern we get is:
The average year-on-year return for gold is the same before and after GLD was approved.
In the year that followed the launch of GLD, the average year-on-year return for gold actually declined.
And moving further away from the launch what we get is more volatility.
Right. The GLD effect isn’t clear cut.
To see that better let’s switch to a view of the distribution of those year-on-year returns.
On the chart below each point represent a year-on-year return over a rolling window. The value of the return is read on the horizontal axis. Yellow points are around the launch of GLD. Towards the blue means further before the launch of GLD. Towards the red means further after the launch of GLD.
We break down these returns in three distributions:
Before the GLD approval. About 3 years prior.
Between the approval and the launch. About one year.
After the launch. About 3 years after.
This way we can compare before and after to estimate the effect of GLD on gold’s price.
Take a moment to read the chart.
This really confirms what we had guessed earlier. The major difference in the before and after GLD is the volatility of gold’s price.
As you can see the after distribution is really spread out. That’s a sign of volatility.
But what we would really like to see to be able to say that GLD clearly pushed gold higher is an after distribution firmly centred to the right of the before distribution.
That’s not the case.
The table below breaks it down with numbers. See for yourself.
The median return is the same before, in between and after. The same. So the three distributions are centred around the same year-on-year return.
The average return is higher in the 3-4 years following the launch of GLD. But given the higher volatility it is hard to attribute the effect to the ETF. Higher highs and lower lows.
We can’t really say GLD had no effect at all on gold, but the fact is gold’s price was on a given trajectory before GLD and it stayed on the same trajectory after GLD. And the crucial point here is that there is something else that can explain the rise of gold during the 2000s.
Macro as the real driver of gold’s rise in the 2000s
The answer is macro of course. Because another way to look at things is not so much that gold strengthened rather than the US$ weakened over the 2000s.
Checkout the chart below. It shows the evolution of gold’s price but this time each point is coloured based on the US$ Index DXY. A strong US$ (relative to a basket of other currencies from its trading partners) is indicated in red. A weak US$ is coloured in blue.
What is clear is that the uptrend of gold corresponds to a weakening of the US$ over the same period, -42% over 8 years.
So while the GLD ETF definitely didn’t hurt and probably brought some nice inflow to the gold market, macro was really in the driver’s seat over that period.
Bitcoin and gold can’t be compared one-to-one, still…
Now I don’t want to say that a spot Bitcoin ETF would also be a nothing burger for Bitcoin. Gold in the 2000s and Bitcoin today aren’t exactly comparable.
On the positive side, Bitcoin only have a finite supply. You can’t dig more out of the ground if there is demand for it. That means any “physical” Bitcoin sink, such as some ETF backed by actual coins, can make the liquid supply of coins smaller and thus drive BTC higher.
Moreover while anyone can buy Bitcoins and self custody, most institutional investors can’t execute on that for regulatory reasons. By comparison getting exposure to Bitcoin through an ETF is much more straightforward for traditional investors. An easier access to the asset class means more money flowing into the space pushing the price higher.
But the real question is how much money this will attract in the short term.
Because if you look at the current products that are used to track Bitcoin, combining GBTC, MicroStrategy and the miners gives you a total market cap of less than $20bn for a something like 6-7% of the total Bitcoin supply captured. That’s compared to a $600bn market for Bitcoin as of today.
If there is say a BlackRock Bitcoin ETF then no one needs to use Grayscale anymore. And there are less reasons to use MicroStrategy as a proxy for BTC. So how much new money is going to come in with this new ETF versus how much money is just going to be shuffled around?
A spot Bitcoin ETF can help with drumming up more interest into Bitcoin and will undoubtedly attract some fresh money into the space. But that won’t make one Bitcoin worth $100k single handedly.
No, the real deal is not a spot Bitcoin ETF alone. The real deal is a spot Bitcoin ETF getting online at the same time as the macro winds turn positive for Bitcoin:
A weaker US$.
A Fed turning back to QE to pump the economy during a recession.
The beginning of a generational transfer of money towards the younger generation that’s more likely to allocate their wealth to crypto.
When you think about it, actually Bitcoin over the next 10 years could very well be in the same situation as gold in the 2000s: pushed forward by macro and facilitated by new financial instruments. That’s something you want to consider if you are looking to bet on Bitcoin over 5-10 years investment horizon.
Your call.
Referral program
If you like the newsletter you can now share it and get rewards:
If you bring 3 new subscribers you’ll get one month free access to the paid tier.
If you bring 10 new subscribers you’ll get three months free access to the paid tier.
If you bring 25 new subscribers you’ll get six months free access to the paid tier.
For those of you who are already paid subscribers the extra free months will be automatically added at the end of you current subscription period.
Visit https://ecoinometrics.substack.com/leaderboard to get your unique referral link and track your referrals.
That’s it for today. If you have any question don’t hesitate to reply to this email and I’ll get back to you.
If you have learned something please like and share to help the newsletter grow. Using the referral button you get rewarded for bringing in new subscribers:
Don’t forget to checkout other resources on the Ecoinometrics website such as:
A dollar cost averaging performance calculator for the stock market.
Which assets really hold up against inflation over the long run.
If you are already a free subscriber please consider upgrading to a paid tier to get the full access including:
All the newsletters.
A fast track to getting your questions answered.
Cheers,
Nick
P.S. For hot takes and daily charts follow Ecoinometrics on Twitter and Instagram.
An important tailwind for Bitcoin price with this expected ETF is the signal that "operation chokepoint 2.0" will be limited to shitcoins and shitcoins' exchanges. Larry Fink is an important democrat donor, so he will have his ways...