Crypto.news recently discussed the current state of the Bitcoin ETF market with Matteo Greco from Fineqia International and explored future expectations.

Bitcoin has emerged as one of the top-performing assets of the past decade. It has evolved from a lesser-known peer-to-peer payment system to a major asset class, boasting a market capitalization exceeding $1 trillion. With the approval of 11 spot Bitcoin ETFs in January 2024, traditional investors now have an easier route to gain exposure to Bitcoin. These investment vehicles are reshaping the crypto sector, attracting billions in market capital and substantial interest from institutional players.

Another factor that might impact the Bitcoin ETF sector is the potential approval of spot Ethereum ETFs. Analysts expect these to capture 20% of the investment flows currently heading towards spot Bitcoin ETFs, adding to the market’s complexity.

The market remains an unpredictable arena influenced by various factors, including regulatory developments and macroeconomic trends. According to Greco, the inflows into Bitcoin ETFs are significant but not the sole factor influencing Bitcoin’s price.

Why Does Capital Inflow Not Always Correspond with Bitcoin Price?

Several factors drive Bitcoin’s price, including supply and demand, liquidity, and leverage. For instance, when the BTC ETFs were approved on January 10th, the price of BTC was about $46,000. Currently, BTC has been ranging between $65,000 and $70,000, indicating a 40% – 50% price increase post-approval. At the time of the approval, BTC’s total market cap was about $900 billion, and now, with BTC at $67,000, it is about $1.3 trillion. This represents a $400 billion increase in total market cap, while BTC ETFs saw around $16 billion in net inflow. This shows that BTC’s market cap growth has been 25 times the amount of net inflow into the BTC Spot ETFs. The impact of the approval and trading of these products has been substantial, extending beyond direct inflow into these financial products. It has helped sustain demand for the asset due to positive sentiment and mid-term expectations about Bitcoin.

Potential Impact of an Ethereum ETF

Bitcoin (BTC) and Ethereum (ETH) are fundamentally different assets with distinct characteristics. Bitcoin uses a Proof-of-Work consensus mechanism, while Ethereum employs Proof-of-Stake, which does not require computational power to confirm transactions and offers staking rewards similar to dividends in traditional finance. BTC, however, does not have built-in staking rewards and cannot be classified as a security.

Given these differences, Greco does not anticipate outflows from BTC ETFs moving into ETH ETFs. Instead, he expects net inflows for ETH ETFs as they represent a distinct asset that new investors, or those who have already invested in BTC ETFs, might also want to explore.

Bitcoin’s Status Amidst Ethereum ETF Approval

BTC has been the most prominent cryptocurrency before the ETF approvals and will likely remain so. If BTC ever loses its dominance, it will take considerable time for ETH to surpass BTC in market cap. Comparing the net inflows, BTC attracted about $16 billion during Q1 and Q2. ETH’s market cap is about one-third of BTC’s, so proportionally, it should attract around $5 billion in the six months post-launch to match BTC’s level. Higher inflows would indicate more enthusiasm for ETH, and lower inflows would suggest the opposite.

Influence of Traditional Asset ETFs

Traditional asset ETFs have been trading for a long time, and the introduction of digital asset ETFs represents increased competition. The impact of BTC ETFs has been significantly stronger compared to the introduction of the first gold ETF in 2004. This indicates a definite appetite for digital assets among investors, meaning that a portion of the allocation previously reserved for traditional financial assets is now being directed towards digital asset ETFs.

Regarding the influence of the BTC Spot ETFs in the market, these products undoubtedly bolster the global recognition of BTC. With significant traditional finance businesses issuing and/or holding BTC, this leads to increased liquidity, enhanced safety, and reduced spreads and commissions for investors and traders.

Bitcoin’s Role as an Investment Hedge

While BTC can serve as an inflation hedge over long time frames, it is not a safe hedge in the short term due to its high volatility. BTC has attracted strong institutional and retail interest for various use cases, highlighting its versatility. Being decentralized, without a CEO or board, investors can purchase and trade BTC based on their preferred use case. Some people buy and hold BTC as a long-term investment or inflation hedge. In countries with hyperinflation, people might use BTC as a short-term inflation hedge. Others see it as a speculative investment, while some appreciate its decentralized nature and the idea of a currency not issued by central governments.

BTC vs. Traditional Investment Hedges

At the current stage, BTC is more similar to stocks due to its high volatility rather than an inflation hedge like gold or bonds during periods of high interest rates. An inflation hedge should primarily offer high stability and serve as an alternative to fiat money—something stable and liquid that can be easily used to pay for services and quickly converted to cash in an emergency. BTC falls short in this regard because its value can vary dramatically depending on market conditions.

While BTC can serve as a long-term inflation hedge and a means to increase purchasing power, it cannot be defined as an inflation hedge by default. During the past bear market, BTC experienced its biggest drawdowns coinciding with peaks in inflation and interest rate hikes. Conversely, BTC began performing well again when central banks stopped raising interest rates as inflation decreased. This pattern indicates that BTC is currently traded more as a risk-on asset, similar to stocks, rather than a short-term inflation hedge.

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