Research analyst at Fineqia discusses the impact of spot ETFs on Bitcoin’s market dynamics

Crypto.news recently spoke with Fineqia International’s Matteo Greco to discuss the current state of the Bitcoin ETF market and what we can expect going forward.

Bitcoin has emerged as one of the best-performing assets of the last decade.

It has moved beyond its status as a lesser-known peer-to-peer payment system, catalyzing the creation of an entirely new asset class that now has a market capitalization in excess of $1 trillion.

With the approval of 11 spot Bitcoin ETFs in January 2024, traditional investors now have an easier path to access the flagship cryptocurrency.

These investment vehicles are reshaping the crypto industry by attracting billions of dollars of market capital. In addition to legitimizing Bitcoin, these have also attracted a lot of attention from institutional players.

Another factor that could impact the Bitcoin ETF industry is the potential approval of spot Ethereum ETFs. Analysts expect these to capture 20% of investment flows currently heading towards spot Bitcoin ETFs, further increasing interest.

With these developments taking place, the market continues to be a dynamic and unpredictable arena. While the future of Bitcoin ETFs is promising, it is shaped by numerous factors, including regulatory developments and macroeconomic trends.

How might these affect the market dynamics of investment instruments? How might these affect Bitcoin price?

According to Greco, inflows into Bitcoin ETFs are important but not the only factor affecting the price of Bitcoin.

Why do significant capital flows into Bitcoin ETFs not coincide with an equivalent increase in Bitcoin’s market price?

There are several factors that can drive the price up and down, including supply and demand, liquidity, and leverage. It’s not as simple as single-factor correlation for price movement. However, it is wrong to say that the entry did not sustain the positive price movement. When BTC ETFs were approved on January 10, the price of BTC was approximately $46,000. Currently, BTC has been floating between $65,000 and $70,000 for weeks, indicating a 40% to 50% price increase post-confirmation. At the time of approval, the total market cap of BTC was approximately $900 billion, and with BTC currently at $67,000, that value is approximately $1.3 trillion. This represents a $400 billion increase in total market cap, while BTC ETFs saw net inflows of approximately $16 billion. This means that BTC’s market cap growth is 25 times the amount of net inflows into BTC Spot ETFs. This suggests that the impact of approval and trading of these products is significant, going beyond direct entry into these financial products. It has helped sustain demand for the asset due to positive sentiment and medium-term expectations around Bitcoin and the digital assets space in general.

Could the potential approval of an Ethereum ETF significantly change the investment landscape for Bitcoin ETFs?

Bitcoin (BTC) and Ethereum (ETH) are fundamentally different assets with different inherent characteristics. While Bitcoin uses a Proof-of-Work consensus mechanism that relies on miners, Ethereum, like most digital assets, uses Proof-of-Stake, which does not require computing power to confirm transactions. This mechanism allows ETH and many other digital assets to offer staking rewards to investors, similar to dividends in traditional finance. However, BTC does not have built-in staking rewards and as a result has different characteristics and cannot be classified as a security. Given the different characteristics and use cases of these two major digital assets, I do not predict a shift from BTC ETFs to ETH ETFs. Instead, I expect net inflows into ETH ETFs as they represent a different asset that new investors or those already invested in BTC ETFs may also want to take advantage of.

⁠What impact might the launch of the Ethereum ETF have on Bitcoin’s status as the leading cryptocurrency?

BTC was the most prominent cryptocurrency before the ETFs were approved and will remain so after both the BTC and ETH ETFs are approved. If BTC loses its dominance, it will take quite some time for ETH to overtake BTC in market value. It will be interesting to observe traditional finance’s appetite for ETH as an asset. By comparison, BTC attracted approximately $16 billion in net inflows in the first and second quarters; For simplicity, fairly neutral flows are assumed for the remaining three weeks of the second quarter. ETH’s market cap is about a third of BTC, so proportionally, it needs to attract around $5 billion within six months of launch to reach BTC’s level. Higher inflows indicate greater interest in ETH, while lower inflows indicate the opposite. Although direct comparisons are difficult to make due to different market sentiments at launch, this serves as a useful index for medium-term analysis.

Do traditional asset ETFs like gold impact Bitcoin’s market dynamics?

I would look at it from the opposite perspective. Traditional asset ETFs have been trading for a long time, and the introduction of digital asset ETFs shows that competition is increasing. For example, the impact of BTC ETFs has been significantly stronger compared to the launch of the first gold ETF in 2004. This shows that investors have a definite appetite for digital assets, meaning a portion of the allocation was previously reserved only for traditional financial assets. is now turning to digital asset ETFs.

Regarding the impact of BTC Spot ETFs on the market, these products undoubtedly support the global recognition of BTC. Some of the most important traditional financial companies issue and/or hold BTC, leading to increased liquidity, increased security, and reduced spreads and commissions for investors and traders.

With the launch of ETFs, has Bitcoin generated enough institutional and retail interest to sustain its proposed role as an inflation hedge?

I wouldn’t limit BTC to being classified only as an inflation hedge. Although BTC can serve as an inflation hedge over long periods of time, it is not a safe hedge in the short term due to its high volatility. BTC has attracted strong institutional and retail interest for a variety of use cases, underlining its versatility. Completely decentralized, without a CEO or board of directors, investors can purchase and trade BTC according to their preferred use case. Some people buy and hold BTC as a long-term investment or inflation hedge. In countries with hyperinflation, people can use BTC as a short-term inflation hedge. While others see it as a speculative investment, some appreciate its decentralized nature and the idea of ​​a currency not issued by central governments. It is wrong to divide BTC into a single category. Bitcoin is an asset that can be used for a variety of purposes depending on individual circumstances and preferences, and its overall adoption is increasing worldwide.

Would you classify Bitcoin as a traditional investment hedge like gold?

At the current stage, I classify BTC as an investment, similar to stocks, due to its high volatility, rather than an inflation hedge like gold or bonds during periods of high interest rates. In my view, inflation protection should primarily offer high stability and serve as an alternative to fiat money; It is a stable and liquid currency; It can easily be used to pay for services and can be quickly converted into cash in emergency situations. BTC falls short in this regard because its value can change dramatically depending on market conditions; This means that converting BTC to fiat can lead to significant losses if done at an inopportune time.

What does this mean for Bitcoin?

While BTC can serve as a long-term inflation hedge and increase purchasing power, it cannot be described as an inflation hedge by default. For example, during this past bear market, BTC’s biggest declines coincided with peaks in inflation and interest rate hikes. Conversely, when central banks stopped increasing interest rates as inflation fell, BTC started performing well again. If BTC were a short-term inflation hedge, it would behave exactly the opposite; It would rise during high inflation and macroeconomic uncertainty and slow down when inflation fell and interest rates stabilized. This pattern suggests that BTC is currently traded as a risk-bearing asset, similar to stocks, rather than a hedge of short-term inflation risk. As mentioned earlier, BTC’s decentralized nature means investors can define its function in the market. Currently, the majority of investors perceive BTC as a risky asset and trade accordingly.