Summary It is widely expected that a spot Bitcoin ETF will be approved for the US market in early January. The price of BTC has run up over 40% in the last three months, raising justifiable concerns that approval has already been priced in. A recent survey shows the majority of independent financial advisors are waiting for a spot ETF approval and regulatory clarity before building BTC allocations with client funds. Before we get too far into it, this article has been written and submitted on Friday January 5th, 2024. It is possible that a spot Bitcoin ( BTC-USD ) ETF will be approved in the United States by the time you're reading this. What I'm hoping to provide in this updated view of Bitcoin is a fundamental framework for what Bitcoin has been in the past and what it is likely to be in a future with an approved ETF in the US market. In my view, when taking all of these points together, it is reasonable to expect higher BTC prices this year and long after the approval of spot ETFs domestically. Peer to Peer Payments or Digital Gold? This is a concept that I've explored in previous articles for Seeking Alpha but I think it's important to remain aware of the vision laid out in Satoshi Nakamoto's white paper . Bitcoin was designed to be a digital money that can easily be moved peer to peer. In the early years, there was a clear understanding of the scalability problem within the Bitcoin development community. With increased demand for Bitcoin's block space, the fee prices at the user level increase, which hurts adoption and scalability. These scaling issues are relevant once again with the sustained surge in average transaction fees on Bitcoin's main layer in November and December of 2023. 1 Year Trend (IntoTheBlock) Bitcoin's average transaction fee in the month of December was $19; this makes it completely cost prohibitive for smaller dollar value holders to use the network. Unlike blockchain peer Ethereum ( ETH-USD ), Bitcoin's layer 2 scaling opportunities are far less robust. Thus, when we see fees spike to the degree that they have in the last two months, it pushes Bitcoiners on the lower end of the total holdings spectrum away from main-layer usage. Without viable L2s, one could easily argue it makes custodial solutions like Coinbase ( COIN ) far more palatable for Bitcoin transfers between peers. Of course, coins with custodians goes against the ethos of the original vision and potentially leads to all of the same fragmentation problems that can be observed through other fintech platforms. For instance, I can't send dollars from my Cash App ( SQ ) wallet to a friend's Venmo ( PYPL ) wallet to settle up a shared lunch tab. Frankly, none of this is all that surprising. Addressing scalability through block size changes is what led to the Bitcoin Civil War several years ago. Non Zero Wallet Addresses (CoinMetrics) The manifestation of that war was the Bitcoin Cash ( BCH-USD ) fork in 2017. Two cycles later, the small block camp has clearly been winning. Since the fork, the total non-zero wallet addresses holding BTC have increased by 185% while BCH holders have increased by just 24%. But there's a problem: BTC Address Comparison (CoinMetrics) 18.7 million of those 52 million BTC addresses have less than $10. With an average transaction fee of $19 in December, the funds held by these 18.7 million wallet addresses are not movable and are effectively "burned" BTC. This means 35% of the wallet addresses holding Bitcoin can't actually do anything with it at this point in time. That said, those wallets only hold about $53 million of the $855 billion BTC market cap. Which brings us to what Bitcoin will probably be in the future. Settlement Layer As a decentralized ledger and settlement layer, Bitcoin functions very well. In a typical day, $32.3 billion in dollar denominated value moved around on the network during the month of December. This was up from $16.7 billion in January 2023. Where I would caution bulls who put all their eggs in one cryptocurrency basket would be to pay attention to the transfer volume going forward. Bitcoin USD Transfer Volume (IntoTheBlock) Despite the price of the coin taking out $45k recently and all of the excitement about both the potential for an ETF and the halving in April, the daily transfer volume measured in USD is still well off the highs from the last cycle. Depending on how one chooses to interpret this, it could theoretically lend credence to the notion that an ETF approval hasn't yet been priced in to BTC even though ETF analysts are optimistic for one in early January. Bitwise/VettaFi 2024 Survey On January 4th, Bitwise Investments and VettaFI released the results of a financial advisor survey that took place during Q4 2023 between October 20th through December 18th. Data by YCharts During that time period, Bitcoin's price increased 44% from about $30k in late October to roughly $42k by mid-December. With this as a backdrop, it's very interesting seeing that the majority of the survey respondents didn't think a spot Bitcoin ETF would be approved in 2024. According to the survey release: Surprisingly, only 39% of advisors believe a spot bitcoin ETF will be approved in 2024. By contrast, Bloomberg ETF analysts peg the likelihood of a January approval at 90%. This is interesting because the study also found that 88% of advisors who want to buy BTC are waiting for a spot ETF and only 19% said they can currently buy BTC in client accounts. Despite these challenges, the overwhelming majority of advisors reported in the survey that their clients ask about crypto. What is preventing crypto allocations? (Bitwise/VettaFi) While it isn't the primary problem, the lack of a proper ETF was one of the top 5 concerns respondents provided for smaller than desired allocations. 42% said the lack of an ETF was holding back allocations - up from 32% in the 2022 survey. Regulatory concerns have been the largest issue the last three years in the eyes of these financial advisors. Respondent Breakout (Bitwise?VettaFi) This is probably unsurprising given the survey respondents are largely smaller AUM independents. 60% of the respondents manage less than $100 million and 41% manage less than $50 million. So while interesting insight from the minds of these financial advisors, its important to keep in mind that even 2% BTC allocations from these exact survey respondents would likely not be a larger inflow than what we just witnessed in 2023. AUM Mean AUM x 437 Respondents BTC Inflow at 2% Allocation $50,000,000 $21,850,000,000 $437,000,000 $100,000,000 $43,700,000,000 $874,000,000 Source: Author's Calculations based off Bitwise/VettaFi AUM Mean There were 437 survey respondents. Of which, the mean AUM was between $50 million and $100 million. If we just use those figures as baseline estimates for the expected future inflow from these specific financial advisors and apply an aggressive 2% BTC allocation across the board, we get somewhere between $437 million and $874 million in BTC investment inflow. In previous articles I've highlighted the net flows figures from CoinShares. Annual Asset Net Flow (CoinShares) At the end of the year, Bitcoin accounted for over $1.9 billion in crypto investment capital flows. This makes at least 7 consecutive years for positive net flow into Bitcoin from capital allocators. I'm not personally betting against this trend continuing in 2024 with a US-based spot ETF approval appearing imminent according to ETF analysts. Risks None of this means the price of BTC has to go up in the short to medium term. In my view, we're due for a sizeable pullback in BTC before the halving. Whether we get it or not is anybody's guess. Like all digital assets, Bitcoin is volatile and can go to zero. Paradoxically, what is good for Bitcoin miners may not be good for main layer network growth. While I'm personally a proponent for self-custody who regularly uses Bitcoin's Lightning Network, there is no question the fee market is problematic for onboarding users outside of a custodial environment. Lightning Capacity (LookIntoBitcoin) Fighting an already cumbersome UX, Lightning Network capacity growth stalled out last summer before transaction fees started to ramp up. High base layer fees make opening new channels cost prohibitive. And I've already gone into great detail about base layer wallet address balances. Peer to peer payment network? I'm not seeing it. Digital Gold? Time will tell. Summary We can have political discussions and theoretical, philosophical discussions off camera and over drinks. When I put this tie on, it's about making and saving money in financial markets. - Darius Dale, Founder and CEO of 42 Macro via Thoughtful Money Bitcoin appears to be going custodial in 2024. That's my personal view. The comment section can certainly debate whether or not that's a good thing. But at the end of the day most of us are trying to grow our wealth and not get destroyed by fiat currency devaluation. Because of its hard supply cap and commanding position in the cryptocurrency market, Bitcoin still serves that purpose. While I maintain that the safest way to hold BTC is through self-custody, in an environment where transaction fees can eclipse the value held by 35% of wallet addresses, the reality is BTC can't be self-custodial for everyone without major changes to the network or a better L2 ecosystem. The verdict is still out on the latter and I suspect major changes at the network level are unlikely. I do think we'll get the spot ETF approval that many in the market are expecting. But as I alluded in the risks section, I believe BTC is due for a pullback before we get the new post-halving all time high. For me, any deeper pullback is a buy opportunity. Long term, I still think BTC works as a fiat-hedging instrument. There are a lot of great things about self-custody and I can't stress enough that this is my desired approach to BTC exposure. But there are no solutions, only tradeoffs. For many people, the ETF is the way they want to do this and I think this time next year we'll see that the spot ETFs had quite a bit of demand.
