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What Do BTC Spot ETFs Mean for the NFT Space?

BY Lorepunk

January 05, 2024

Will they, or won’t they? Since autumn 2023, the entire crypto space has been waiting to hear whether the U.S. Securities and Exchange Commission will approve a Bitcoin spot exchange-traded fund.

As widespread reports say to expect a decision imminently, it’s worth thinking about what approval could mean for those of us who work every day in the NFT community. What is it, what impact could it have, and what can we do to get ready?

What Is It?

Simply put, a spot ETF is a fund in the normal, regulated market that buys and sells an asset “on the spot” at its current price. Right now, there is no way to do this directly with Bitcoin. Investors can buy futures ETFs for bitcoin right now—instruments that make a bet on the future price of BTC—but companies have been applying to the SEC for a BTC spot ETF for ten years and have been rejected every time.

Now, most analysts say that is about to change. A whole set of companies, most notably Blackrock, have been meeting with the SEC, and reports expect a decision as early as today (Jan. 5).

The majority of analysts believe at least one ETF will be approved; their view, well expressed by Bloomberg’s Eric Balchunas, is that it would be politically difficult for the SEC to flatly refuse all the applications at this point. Other views do exist—notably, Matrixport’s assessment that all the applications are missing an important requirement and will be initially rejected. This report tanked the market on Jan. 3, and it’s still jittery as of this writing on Jan. 5th.

What Happens Next?

What happens once an ETF starts trading? For the last several months, the crypto markets have been rallying based on the assumption that the price of bitcoin will boom once an ETF is approved. According to this assumption, once the average investor and massive institutions can buy native Bitcoin at that day’s prices, demand will boom, and prices increase.

This isn’t necessarily the case, though. The big whales that have driven Bitcoin prices up need to take some profits. “Buy the rumor, sell the news,” the old saying goes — and there is a chance that is what will happen.

It will depend on the size of the traditional market’s appetite for the ETF — and, looking at spot ETF offerings for other assets, that could be in the tens of billions of dollars or much smaller. When bitcoin futures ETFs debuted, the price of BTC went to $69,000 in the first few days — then tanked into a deep bear a month later.

So, no, it is not guaranteed that the approval announcement will send our bags to Valhalla — but the fundamentals are easy to get excited about. Bitcoin spot ETFs make it as straightforward for investors to buy the stuff as it is to get Apple shares. There are no seedphrases, hardware wallets, dodgy exchanges, or hackers for a crypto-newbie investor to think about—just profit and loss. Whether “number goes up” immediately after approval or not, an approved and traded BTC spot ETF makes it easy, from that day forward, for liquidity to enter the space.

What About NFTs?

Will that liquidity flow to us in NFT land? nft now reached out to OSF, an artist, trader, and investor who has been thinking about what BTC spot ETFs could mean for the NFT space. “If an ETF gets approved, the hope is that it creates more demand for Bitcoin, buoys crypto. If crypto goes higher, it creates a wealth effect which creates more demand for NFTs. That’s how I see it—there’s no direct link, but it’s derived demand to an extent,” he said.

A wealth effect is a change in spending that reflects a change in perceived wealth. When there’s more demand for Bitcoin, the holders feel wealthier. One quick effect could be a growth in the markets for digital collectibles. Indeed, excitement for the ETF could be one reason that Ordinals are enjoying popularity right now, even though many Bitcoiners hate them. At a larger scale, big investors could have more money and an appetite for risk, investing in companies and creators that are doing promising work in web3. 

“If an ETF gets approved, the hope is that it creates more demand for Bitcoin, buoys crypto. If crypto goes higher, it creates a wealth effect which creates more demand for NFTs.”

OSF

Analyst Tyler Did It is focused on Ordinals for this reason. “In the short term, BTC ETF approval likely means volatility, which is historically bad for NFTs. I could see a temporary impact on the Ordinals market if BTC moves too violently either way.
Mid-to-long term, though, all the extra eyes and attention can only be a net positive for the NFT ecosystem on Bitcoin. It’s in its infancy, and I expect it to develop and grow substantially in the next 12-36 months,” he told us.

Artist, collector, podcaster, and CryptoPunk holder OG_crookedwest sees a somewhat mixed but generally positive outcome for NFTs if the ETF is approved.

“I think [an approval] is super bullish for Layer 1 [chains], on NFTs, I think positive but mixed impact,” he told nft now. “I think it helps Layer 1 and helps the very best artists and projects, but will result in further concentration in fewer projects and artists. In ETH, you have seen institutional funds that acquire NFTs — 6529 and Flamingo DAO as well as many others — and new funds will come in, which is bullish,” he said.

“In the short term, BTC ETF approval likely means volatility, which is historically bad for NFTs…
Mid-to-long term, though, all the extra eyes and attention can only be a net positive for the NFT ecosystem on Bitcoin.”

TYLER DID IT

To OG_crookedwest, institutional entry into the crypto space makes us safer. “ETF means asset manager/bank involvement, and proper regulatory and political connections to get frameworks in place to operate. More institutional investment is safer for all,” he said. 

He also thinks the benefit could spread to chains beyond Bitcoin. “I think institutions can own BTC like they own gold—so then they will look at ETH and use a dcf on cash flows to model. So, these two chains will likely both be held (they are 68 percent of crypto market cap),” he continued.

One big concern for us who work here every day could be that increased demand for a Layer 1 chain can mean higher fees. “I think ETH gas will go up, and ETH would [then become] the institutional layer,” he said. While he is less bullish about L2s, he sees SOL and other chains as a promising alternative for those fleeing higher fees.

“I think it helps Layer 1 and helps the very best artists and projects, but will result in further concentration in fewer projects and artists.”

OG_CROOKEDWEST

Ledger Chief Experience Officer Ian Rogers doesn’t see a close link between the ETF and the NFT space.

“Personally I haven’t been thinking of a connection between the markets,” he told nft now. “I think they are pretty disconnected. Apart from myself, Micky Malka, and Raoul Pal, I don’t know many hardcore Bitcoiners who also collect.  I can name many more who aren’t fond of NFTs on BTC or any other chain. The “communities” seem different from one another. Danny Huuep and OnChainMonkey are doing the most to bridge this gap,” he said.

Another potential impact is a cultural one. When Bitcoin becomes accessible and desirable, crypto as a whole could gain legitimacy and attention—which is incredibly important in an era when it is subject to political attack and still shaking off the reputational damage caused by fraudsters like Sam Bankman-Fried.

“I don’t know many hardcore Bitcoiners who also collect.  I can name many more who aren’t fond of NFTs on BTC or any other chain. The ‘communities’ seem different from one another.”

IAN C ROGERS

Another potential impact is a cultural one. When Bitcoin becomes accessible and desirable, crypto as a whole could gain legitimacy and attention—which is incredibly important in an era when it is subject to political attack and still shaking off the reputational damage caused by fraudsters like Sam Bankman-Fried.

Increased legitimacy has a big effect over time: people thinking about their careers consider the crypto space, including in NFTs. What great artists, storytellers, engineers, designers, and leaders will come here because they see crypto as legitimate?

Getting Ready

What can we do to get ready? Part of it is being ourselves, just as we are. Wealth effects drive people to authenticity, and what we create is desirable because of its unique nature.

That doesn’t mean that we should ignore the news, warned OSF. “I would spend some time understanding exactly what an ETF is, what its impact on the crypto space is, and how crypto and NFTs are correlated. It’s not an obvious connection, and there’s no right or wrong answer there either as there are a lot of factors at play, but understanding those factors is important,” he told us.

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