The Bull & Bear Cases for the Bitcoin ETF

We assess the potential impact the approval could have if/when it gets approved, not only on Bitcoin but for the rest of the crypto market as well.

The crypto space has awaited an ETF for years, with the Winklevoss twins applying for one as early as 2013. Although a futures-backed ETF might not be exactly what the industry wished for it would be a milestone nonetheless. And it is likely to have significant implications for Bitcoin and the rest of the crypto market. Here we explore two potential outcomes (not financial advice!):

The bull case

After years of rejected ETFs, Bitcoin and its community is poised to finally get one approved in the U.S. This should bring institutional participants who may have been hesitant to go out of their way to buy and custody Bitcoin on their own. It may also make investors feel more comfortable as this could be a regulatory stamp of approval and a sign that crypto is not going away. 

This could propel Bitcoin to new all-time highs, potentially as early as this weekend. One or more ETFs get approved next week and begin trading within a few days. Reception of the first ETF is remarkable with billions of dollars of inflows per day. Given that the ETF incurs costs from the contango of futures contracts, investors seek to short the ETFs while going long in spot markets, pushing prices higher and pocketing the difference. 

After a few weeks of new all-time highs the market rotates into other crypto-assets in anticipation of a parabolic run-up like the one seen in December 2017 and early January 2018. Due to these inflows, most crypto-assets hit new all-time highs, as few people are willing to sell in anticipation of a bullish end of the year. 

The bear case

The ETF decisions get rejected or postponed. After such anticipation and buying activity front-running the announcement, this is likely to crash all crypto markets, and potentially create doubts of further highs this year. 

Another bearish outcome would be the market extensively selling the news. If the ETF is approved and launched within days (as was the case with the mutual funds), investors would have a new way to short Bitcoin shortly after the approval.

Selling pressure in derivatives markets can simultaneously deter buyers from spot markets, crashing prices similar to how the launch of Bitcoin futures in December 2017 marked the top. The rest of crypto market would bleed along with Bitcoin. 

Overall, it is likely that the crypto market takes a path in between these two. While the odds of an approval of an ETF appear to be quite high, it is possible for Bitcoin to be vulnerable to an upset or too many investors selling the news. Ultimately, this approval would still be a milestone for the crypto space as it continues to evolve and become ever-more-present in the real economy.