Plan #02: The Mathematics Behind Bitcoin ETFs

Bitcoin ETFs are in the news.

Wondering how ETFs will change Bitcoin price?

Let’s look at the math of 4 realistic scenarios.

We reported in our June Insider Newsletter that companies, including BlackRock, Charles Schwab, Fidelity, Citadel, and Deutsche Bank are pushing forward with Bitcoin ETFs.

At a basic level, a Bitcoin ETF does three things that will cause more funds to flow into Bitcoin:

1. Creates easy Bitcoin exposure for retirement and traditional investment accounts.
2. Gives high-net-worth investors a way to add Bitcoin to their portfolio without hurting their balance sheet.
3. Adds legitimacy and credibility for mainstream investors.

With this in place, expect financial advisors to begin recommending their clients put a percentage of their net worth in Bitcoin.

Since Bitcoin has a fixed supply, additional demand will increase Bitcoin price. This post will look at the math.

Why is Bitcoin ETF Relevant?

Bitcoin has a fixed supply. Increased demand will cause prices to go up. The demand can be estimated, giving us a price target.

• Conservative scenarios put the new base price of Bitcoin between $47,397 and $63,687,.
• A more aggressive, realistic scenario puts the new ETF base price at $130,374.

Bitcoin ETF Background

Bitcoin is separating from the scams that have overshadowed the broader crypto landscape. On the heels of the SEC statements, traditional finance, and Wall Street are pushing forward with their own Bitcoin products and services.

• Charles Schwab, Fidelity, Citadel Securities, and Deutsche Bank are live with Bitcoin and Ether (finance.yahoo.com and cnbc.com).
• BlackRock, the #1 global money manager, is moving forward with a Bitcoin ETF (finbold.com). Their track record with ETF approvals is 575-to-1.

Bitcoin ETF Overview

The importance of the BlackRock deal cannot be understated. An ETF will give nearly every investor an easy way to gain exposure to Bitcoin as part of their investment and retirement portfolios. It will ensure professionalism and compliance in the handling.

BlackRock has over $8 trillion in assets under management. Their actions are closely followed by investors and analysts. This ETF lends a huge amount of credibility and legitimacy to Bitcoin as an asset.

For those of us who have been in Bitcoin for years, this means demand may be about to increase dramatically as BlackRock buys Bitcoin to back their ETF. If you are wondering on the value of Bitcoin, you can read our perspective on Bitcoin here.

Bitcoin ETF Conspiracy

Since the crypto community loves a good conspiracy, you’ll see plenty of chats talking about how the BlackRock ETF is a fiat scheme to short crypto and destroy the ecosystem.

That is false. The ETF will buy the underlying asset (actual Bitcoin) to maintain value. You can cut past the nonsense yourself and read the actual filing PDF (nasdaq.com).

Market manipulation is a real thing, but this ETF very clearly makes BlackRock money when Bitcoin goes up in value.

It’s not a short ETF designed to increase in value as Bitcoin goes down. That may come separately in the future, but that is not this.

Bitcoin ETFs fix important balance sheet problems

We here have many high-net-worth individuals in our network and can confirm they generally want some exposure to Bitcoin (not crypto) in their portfolios. However, with traditional bankers, Bitcoin does not typically count as an asset on their balance sheets. This limits access to certain types of loans and investments.

High-net-worth individuals use their money to make money. Holding Bitcoin causes issues here.

A Bitcoin ETF fixes this problem. It will be a huge money maker for BlackRock and should create significant long-term demand for Bitcoin.

Top 5 Reasons to Invest in Bitcoin

How Will ETFs Change Bitcoin Price? Let’s Look at the Math.

Bitcoin has a fixed supply and we can estimate the additional inflows. That means we can estimate the impact to Bitcoin price.

Of course, many factors impact Bitcoin price. But ETFs stand to provide the next major growth leg. We can look here, holding other factors constant, to see a new baseline price for Bitcoin.

Fundamental to this analysis is that the ETF managers will buy actual Bitcoin. This means the ETFs are backed by the underlying asset.

Total investment funds available

As of 2023, here are the asset stats considered:

• $35.4 trillion in total US retirement assets (ici.org).
• $6.93 trillion in ETFs (ici.org).
• $38.8 trillion in managed assets globally, with $30.2 trillion in the United States and an additional $8.6 trillion outside the United States (ici.org).

Bitcoin market capitalization and price change calculation

Since additional purchasing of Bitcoin will cause a new inflow of capital, we can determine the impact to Bitcoin price using these two formulas:

1. New market cap = Current market cap + Inflow of capital
2. New price = New market cap / Number of Bitcoins in circulation

Let’s use this framework to look at four scenarios.

Bitcoin currently has 19,564,168 coins circulating at a price of $43,899, giving it a market capitalization of $858,847,411,032 (19,564,168 coins * $43,899). Call it $858B.

Please excuse any minor variations due to rounding.

Scenario 1: 1% of US retirement assets allocated to Bitcoin ETFs

Bitcoin base moves up to $62,406, all things equal.

1. 1% of $35T is $354B.
2. New market cap: $1,212B ($858B + $354B)
3. New price: $62,406 ($1,212B / 19,564,168 coins)

That’s a price increase of 42%.

Scenario 2: 1% of ETF investments allocated to Bitcoin ETFs

Bitcoin base moves up to $47,397, all things equal.

1. 1% of $6.93T is $69.3B.
2. New market cap: $927.3B ($858B + $69.3B)
3. New price: $47,397 ($927.3B / 19,564,168 coins)

That’s a price increase of 7%.

Scenario 3: 1% of assets managed globally allocated to Bitcoin ETFs

Bitcoin base moves up to $63,687, all things equal.

1. 1% of $38.8T is $388B.
2. New market cap: $1,246B ($858B + $388B)
3. New price: $63,687 ($942B / 19,564,168 coins)

That’s a price increase of 45%.

Scenario 4: 5% of assets managed globally allocated to Bitcoin ETFs

Bitcoin base moves up to $130,374, all things equal.

1. 5% of $38.8T is $1.94T.
2. New market cap: $2.80T ($858B + $1.94T)
3. New price: $143,016 ($2.80T / 19,564,168 coins)

That’s a price increase of 235%.

Other Considerations

As funds flow into Bitcoin via ETFs, many other important factors will change:

• Profit-taking may occur.
• On the flip side, more money may pile into Bitcoin as part of ETF speculation.
• Interest rates may change impacting liquidity.
• Political and regulatory events may occur.
• Other major adoption events may occur, further increasing demand.

Others have said this is a “buy the rumor, sell the news” event. There is likely speculative money in Bitcoin waiting to sell on the announcement of an approved ETF. But real purchasing of limited Bitcoin is coming.

Regardless of these factors, more money into a limited-supply asset will cause its price to go up in a predictable manner.

Conclusion

ETFs and other forms of traditional finance stand to drive a significant increase in the base price of Bitcoin. Scenarios 1 through 3 are conservative.

Scenario 4 is more aggressive, but it’s not unreasonable. Asset managers push diversity and typically recommend percentage-based allocations to different types of domestic and international stocks, bonds, real estate, commodities, and cash.

Here’s a sample recommended investment portfolio:

• 62% Stocks
• 25% Bonds
• 7% Commodities
• 3% Real Estate
• 3% Cash

It’s not hard to see Bitcoin creeping to 5% of portfolios, namely eating into commodities, bonds, and cash. This may start with the younger investors and remain as Bitcoin grows in a more stable manner in the future.

Whenever you are ready, there is one way we can help you.

1. Crypto-OS Waitlist: Learn how to apply proven long-term investing principles to the crypto market. It’s free, actionable, and to the point.