Spot ETFs will reduce the volatility of BTC

2 years ago 240

Most analysts expect bitcoin to mature into a less volatile asset following the introduction of spot ETFs in the US.

The U.S. Securities and Exchange Commission (SEC) is expected to soon give the green light to one or more exchange-traded funds (ETFs) that invest directly in bitcoin (BTC) rather than futures contracts tied to the cryptocurrency. .

Analyst consensus is that the approval will have a bullish impact on prices. But analysts disagree on whether the approval will ease bitcoin's notorious price volatility, which has reduced its appeal as a safe-haven asset. However, most believe that volatility will fall.

Namely, while the Bitcoin blockchain is decentralized, its token, BTC, is concentrated in the hands of a relatively small number of owners, known as whales. Due to the size of their holdings, these whales have a large influence on prices, often causing violent oscillations.

A spot ETF, which should closely track the value of the underlying asset, i.e. bitcoin, could reduce their impact on volatility by broadening the investor base. In other words, it should make it harder for the bigger bitcoin whales to push up prices.

This is followed by the entry of huge amounts of capital into BTC

Additionally, volatility tends to fall as the space matures and more institutional liquidity and infrastructure is developed as seen in equity ETFs. Namely, ETFs increase the liquidity of their underlying assets through arbitrage.

Arbitrage traders take compensating positions in two markets to profit from price differences between them. For example, if an ETF is trading at a discount to the value of BTC, the arbitrageur will buy shares of the ETF and sell the underlying asset effectively adding liquidity.

And speaking of that liquidity, which perhaps interests us the most, how much liquidity will pour into BTC? Well, according to Galaxy Digital's estimates, the US bitcoin ETF market size could be $14 trillion in just the first year and as much as $39 trillion in the third year.

To put that into perspective, currently the total market capitalization of bitcoin is approximately $750 billion. So it is possible to enter roughly 20 to 50 times larger than the current BTC capitalization.