Thoughts On The Bitcoin ETF That No One Is Talking About

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To investors,

The speculation around spot bitcoin ETF approvals is intensifying. Market participants are preparing for the applications to get a green light from regulators. At the same time, the mainstream media is interested in predicting whether the digital currency price will go up or down upon approval.

I shared my thoughts on CNBC’s Squawk Box this morning but figured it would be valuable to expand those thoughts here for all of you.

First, the short term price action of bitcoin is a non-story in the grand scheme of things. I explained to Becky Quick that I anticipate the same thing happening whether the applications are approved or denied — there will be severe short-term volatility and then bitcoin will get back on track with the current medium-to-long term trajectory.

Regardless of whether the price goes up or down thousands of dollars on decision day, the movement will look like a small blip on the chart after a year or two has passed. Keeping this in context of the broader picture is important.

Second, it is important to warn Wall Street investors of the volatility bitcoin presents to the market. The great team over at Reflexivity Research explained what happened yesterday when more than $1 billion of open interest was wiped from the market, leverage was flushed out, and bitcoin went down thousands of dollars in mere minutes. (Highly recommend subscribing to Reflexivity by clicking here)

All of the investors who thought it would be as easy as “go long with leverage into the ETF approval” started Wednesday morning with a surprise. Remember, bitcoin was $1,000 in 2017 and it has experienced a 45x increase since then. Along the way, there were two different drawdowns of about 80%, multiple 50% drawdowns, and five separate 30% drawdowns in 2021 alone. Bitcoin’s volatility is unlike anything else in traditional finance — that is attractive to some investors, but will ruin others.

Third, most of the public conversation is focused on the primary flows from retail and institutions into the bitcoin ETF. Those flows will be measured in tens of billions of dollars in the coming years. But another area of fresh demand will be what I call “secondary flows.” These are inflows to the ETF that will come from other publicly traded funds.

Earlier this week we saw one of these funds amend their prospectus so they can allocate up to 15% of their AUM to the bitcoin spot ETF when it is approved. Given that bitcoin is the best performing asset over the last 15 years, there are likely a lot of existing funds that would love to add a small exposure into their fund to juice returns.

Fourth, Wall Street sales teams and meme accounts on Twitter/X are going to be reading from the same script for years to come. The talking points have become clear over the last few years, but the messenger is going to change once the ETFs are approved.

We have never had large financial institutions spending hundreds of millions of dollars to market bitcoin to their clients. That effort is going to lead to capital inflow, but it is also going to do quite a bit to drive investor education as well.

Lastly, bitcoin has had an impressive financial performance without the persistent bid of large financial institutions allocating to the asset. That is going to change with endowments, pension funds, insurance companies, sovereign wealth funds, and other large organizations buying the spot ETF.

The benefit from this will be that bitcoin’s unlikely to continue to see large 80% drawdowns in the future. The downside is that some of the volatility of bitcoin will be taken away, which means it is unlikely to be as asymmetric to the upside as well.

Bitcoin will continue to do very well, but as I explained on television this morning, don’t anticipate the asset to go to $1 million over night. Thankfully, it probably gets there over time though because the government won’t stop printing money.

Hope you all have a great day. I’ll talk to everyone tomorrow.

-Anthony Pompliano

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Darius Dale is the Founder & CEO of 42Macro.

In this conversation, we talk about global liquidity, Wall Street investors on bitcoin ETF, Macro Weather Model on asset prices in 2024, and more.

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