Bitcoin spot ETF and what you don’t know.

I have had a lot of people reach out for my take on what the Spot ETF for Bitcoin will mean so I decided to write this and point them to it.

?

Disclaimer: This is not investment advice and information contained is not an offer to sell or buy anything. I have been and will be a holder of Bitcoin. I HODL.

?

“If?you want to know what?water?is like,?don't ask the fish” – Chinese proverb

?

Ok, with that said, I am going to try to explain this anyway. I am not going to go deep on the demand part of the equation. I believe this has been sufficiently covered. I will just simply say that Spot ETF means the ETF will hold actual Bitcoin reserves. They will need to buy this Bitcoin and hold this Bitcoin to back the ETF. Before this, the SEC in 2021 allowed ETFs to hold bitcoin futures- a type of derivative that tracks the price of the digital currency. Now (but not overnight), we will have new demand for actual bitcoin coming from a much larger audience.

?

This isn’t a new narrative so I will not elaborate on the demand side. Prices of assets in a free market are dictated by not only demand but supply. What I am attempting to explain is supply and why the formula is unique to Bitcoin. If you are a fish in the deep end, this will not be news. For some reason, I do not see much talk about it in layman’s terms so here we go. ?

?

21 Million

?

The maximum supply of Bitcoin is 21 million. That is it. No additional Bitcoin will ever be created. The final Bitcoin mined is expected to be generated in 2140. When Bitcoin was established, the number of new Bitcoins minted per block was set at 50. Today, that number is 6.25 per block. Around April 2024 this will be 3.125 per block. This “halving” happens approximately every four years.

?

Mining

?

Bitcoins are minted from mining. This mining is different than any other commodity. Let me explain. If the price of gold increases as dramatically as the price of Bitcoin has in the last decade, gold miners are going to get creative. We will have more resources pushed into extraction. We will have people looking at asteroid mining for gold. The supply will increase as we mine more and the price will come back into reality. We try to hold the US dollar as the world’s currency to retain the demand for dollars and we control supply by printing (more often) or burning money. If the price of oil spikes, we frack, we go offshore etc…

?

Think of Bitcoin mining as one mine and only one mine. The miners act like a co-op effort. If prices go up, more and more miners are incentivized to mine. The difference is: no matter how many miners and resources are poured into mining, the newly minted coins are constant. They will split the same pie and their proportional reward will decrement as more miners and resources are brought to the mine. The block is set up to mint new issuance every ten minutes. If we are throwing new resources into the mix and the reward is too fast, the system makes the problem harder for the next block until we reach equilibrium of ten minutes. This difficulty level is called “hashrate”. Hashrate continues to grow over time which has a benefit of pushing miners to find less expensive sources for power. I am not going to dive into this rabbit hole but hopefully you get the point. I know fish, I am oversimplifying but the point is: we cannot get more newly minted coins out of the one and only Bitcoin mine this year, no matter what we throw at it.

?

Float

?

Another unique aspect to Bitcoin is the float. I see a lot of traditional analysts looking at the total issued supply and current market capitalization to determine the impact of the new demand on price. The problem with this is twofold.

?

1)??? Loss: in the early days, people were buying pizza with Bitcoins. It was more for hobbyists than the institutional maturity you are beginning to see today. It is estimated that ~30% of the total supply has been lost. People have forgotten their private keys, lost their hardware wallet etc… It’s kind of like the bank where you had your safety deposit box was destroyed. You may have been insured but your renumeration is in dollars, not your grandmother’s jewels.

2)??? HODL: The other component not often discussed is the nature of the holders of Bitcoin. HODL is an acronym for “hold on for dear life”. In practice this means that the majority of the largest holders out there either never or seldom bring their wallets online to sell in the market.

?

You often hear that Bitcoin is a volatile asset. This is true and in large part, this is because of the “thin float”. Sure, people in the know (ahem, elected officials?) or people making a bet saw this increase in demand coming and they bought what they could find in the market ie: float available. As of this writing the 1yr increase in Bitcoin to USD is 157%. As demand increases, these “liquidity providers” will be able to provide some of this liquidity back to the new buyers.

?

Conclusion

?

This will take some time IMHO. ETF approval simplifies investment into the asset class. People can make an allocation with their wealth manager and most importantly, it is easy for him/her to book it in the back-office system, report on it and collect their management fees on assets. Funny enough, the most difficult thing about owning bitcoin for a wealth manager is the number of decimals in the instrument. Their back-office systems were not set up to handle it. Another rabbit hole which I will not dive down here. It will take time for people to begin to allocate to bitcoin but this new instrument will increase demand over the years, it will be backed by physical coin which will be bought in a market with limited float.

?

Cash