Ever since BlackRock (BLK +0.00%) announced its plans to apply for permission to create a spot Bitcoin (BTC 0.12%) exchange-traded fund (ETF) back in June, the crypto market has been buzzing about what this new fund's launch might mean for the price of Bitcoin. That buzz only intensified when six other financial institutions also announced plans to launch their own spot Bitcoin ETFs. The conventional wisdom is that the token could surge past the $30,000 level and begin another rally as new investor money floods into the crypto market.
In fact, a new report from blockchain analytics firm CryptoQuant says that Bitcoin could soar above $50,000 and start to challenge its all-time high of $68,790. It even speculates about a price jump to as high as $73,000. That would imply an increase of close to $1 trillion in the market cap of Bitcoin. Given the huge numbers involved here, it's only natural to ask: Just how realistic is this scenario?
Key assumptions
A number of key assumptions underpin this pricing model. The most important of them is that the financial institutions creating these new spot Bitcoin ETF products will recommend to their clients that they allocate at least 1% of their portfolios to Bitcoin. This percentage will give you a good idea of how much new money could flood into the crypto market after the ETF approvals.
Combined, the firms with pending ETF applications have $15.6 trillion in assets under management. Take 1% of that number and you arrive at a figure of $156 billion. This gives you a rough idea of how much money theoretically could immediately start to flow into Bitcoin.
Image source: Getty Images.
But we're not done yet. You also have to assume that there will be a sort of multiplier effect. In essence, new money pursuing a limited supply of tokens will lead to higher prices, which will attract even more new money from investors, which will lead to even higher prices, which will attract even more new money.
CRYPTO: BTC
Key Data Points
If you take a look at past Bitcoin bull market cycles and analyze how its market capitalization has increased during those periods, it's possible to calculate that the multiplier effect applies at a ratio of between 3 and 6. By taking the base figure of $155 billion, and then using this multiplier to determine upper and lower bounds, the total market cap of Bitcoin could increase by anywhere from $465 billion to $930 billion.
Stress testing the numbers
To see if these numbers make sense, it's important to provide some perspective about the total size of the crypto market. Right now, the total market capitalization of Bitcoin is roughly $560 billion and the total market cap of the entire crypto market is just over $1 trillion, so it accounts for more than half of the total value of the crypto market. This value, known as the Bitcoin dominance factor, has oscillated between 0.40 and 0.55 over the past three years, and now stands at 0.52.
Data source: TradingView.
That's why I think the multiplier effect might be much lower than some people think. After all, by saying that Bitcoin will double in value, you are making another implicit assumption: that investors will be pouring money into other crypto assets as well, keeping the ratio between Bitcoin and other tokens at roughly the same level. Otherwise, the Bitcoin dominance factor will go completely off the charts.
Even if you are a Bitcoin super-bull who thinks that it really should account for 95% of the entire crypto market (as it did back in 2017, before there were so many other tokens), there is another way to think about the numbers. If the market cap of Bitcoin really does increase by $1 trillion, that would make it a $1.55 trillion asset. Right now, there are only a handful of companies in the world worth more than $1 trillion. Thus, you would be saying that Bitcoin should be worth more than Amazon ($1.35 trillion), NVIDIA ($1.06 trillion), Meta ($820 billion), or Tesla ($725 billion). Just about the only companies that would be more valuable than Bitcoin would be Apple ($2.7 trillion) and Microsoft ($2.5 trillion).
Where will Bitcoin be in 2024?
While I'm certainly bullish on the prospects of a new spot Bitcoin ETF, it's important to push back on some of the assumptions that underpin any Bitcoin pricing model. From my perspective, some of the assumptions used by those who conclude that these ETFs could lead to a doubling in the price of Bitcoin appear to be overly optimistic.
Moreover, it's important to keep in mind that Bitcoin-linked investment products already exist. For example, the Grayscale Bitcoin Trust (GBTC +3.91%) currently has $17.6 billion in assets, and the ProShares Bitcoin Strategy ETF (BITO +3.98%) has $1 billion in assets. So it's not like there aren't already ways to invest in Bitcoin beyond directly buying the tokens.
That said, I'm long-term bullish on Bitcoin. The flow of new institutional money should help to push up its price. And it should also help to make the crypto go even more mainstream. Anytime you have big Wall Street firms supporting Bitcoin, it helps to make it more attractive to all investors, which has the potential to send prices higher.
