Following last week's launch of 11 spot bitcoin exchange-traded funds (ETFs) in the United States, Matt Hougan, Bitwise's chief investment officer (CIO), offered a compelling perspective about the potential impact of these ETFs on the bitcoin market. His comments come at a critical time, as the next bitcoin halving event is anticipated for mid-April 2024.
Spot ETFs Could Have Similar Impact to 1.4 bitcoin Halvings
Hougan draws a parallel between the impact of bitcoin ETFs and bitcoin halving events. He states: “crypto natives have a good mental model for the impact of bitcoin ETFs on the market: the halving.” He further explains the historical context: “Approximately every four years, the number of new bitcoins created is halved. Historically, the price of bitcoin has increased in the +/- year surrounding the halving.”
In April, when the block number reaches 740,000, the reward will drop from 6.25 to 3.125 btc. Highlighting the supply and demand dynamics of bitcoin, Hougan comments: “The price of bitcoin is set by supply and demand. If new supply is reduced, that should be (and historically has been) good for prices.” He then quantifies the impact of the upcoming halving: “At current prices, it will remove approximately $7 billion in new supply from the market each year.”
Moving on to the core of his analysis, Hougan compares expected ETF inflows to the halving effect. He notes that estimates of ETF inflows vary, but many people think these products will generate around $10 billion a year for the foreseeable future.
“If that happens, that means the ETF's direct impact on bitcoin's supply-demand balance will be something like 1.4 halvings,” Hougan says.
However, it warns about when these impacts will occur and states:
Please note that 'halvings' do not affect prices overnight. If the next halving takes place on April 22, we do not expect prices to rise sharply on April 23. Historically, prices have increased by +/- the year surrounding each halving. The same will happen with ETFs.
An even greater reach?
Hougan also highlights the indirect benefits of ETFs. According to him, these products could have indirect benefits that are not reflected in his analogy. “IMHO, the ETF is very positive for regulation, long-term education, etc. It will substantially increase the number of people interested in cryptocurrencies and therefore have a multiplier effect.”
Concluding his thoughts, Hougan says: “Still, the halving is a pretty good mental model for the direct impact of ETFs: ~1.4 halvings, plus significant ancillary benefits. We'll take it.”
Hougan's estimate of $10 billion annually in net inflows to spot bitcoin ETFs is quite conservative. Analysts at Standard Chartered predicted a few days ago that this year there will be inflows of between $50 billion and $100 billion. If $100 billion really flows into ETFs, the products could even have an impact as strong as 14 btc halvings.
At the time of this publication, btc traded 42,964.
Featured image created with DALL·E 3, chart from TradingView.com
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