Analysts are busy estimating how far the Bitcoin price could rise after Bitcoin spot ETFs get approval from the US SEC. While the price rise seems inevitable, it is difficult to foresee how Bitcoin spot ETFs impact the “price volatility” of BTC.

Bitcoin spot ETFs enable a large number of retail investors to access Bitcoin. This diversification of investors reduces the whale influence, resulting in reduced price volatility and increased liquidity. We will discuss more on how Bitcoin spot ETFs impact the price volatility, in this article.

Bitcoin Spot ETFs to Get the US SEC Approval

Bitcoin Spot ETFs are investment instruments that combine traditional spot exchange-traded fund methods with Bitcoin. They allow investors to take advantage of Bitcoin price movements without directly investing in Bitcoin.

BTC Spot ETFs are a great opportunity for retail investors who are hesitant to directly invest in Bitcoin and deal with the complexities of crypto wallets. Because, they offer a secured and regularized way of investment, eliminating all the risks that come with cryptocurrencies.

Around 13 major organizations including BlackRock, 21Shares, WisdomTree, Grayscale, and Ark Investment are awaiting Bitcoin Spot ETF approvals from the US SEC. There are clear signs to get a greenlight from the US SEC in early 2024.

Recently, popular investor and advisor Mike Alfred opined that there is a 98.7% chance for Bitcoin spot ETF approval. XRP lawyer John Deaton further strengthened the argument, agreeing to the estimation.

As we are on the verge of witnessing the approval of all Bitcoin spot ETFs, analysts started to forecast their impact on Bitcoin price and price volatility.

Bitcoin Spot ETFs’ Impact on Price Volatility

Bitcoin is a decentralized cryptocurrency but a small number of investors are holding large amounts of BTC. This is moving the Bitcoin market toward centralization even though its underlying technology is decentralized.

When Bitcoin whales, who hold large amounts of BTC, buy or sell more Bitcoins, they can influence its market price. This affects the price volatility of Bitcoin to a large extent. The introduction of Bitcoin spot ETFs have the potential to change this scenario by allowing more small investors to buy Bitcoin indirectly.

Once Bitcoin ETFs start trading on the market, the addressable market size of US Bitcoin ETFs could reach $14 trillion in the first year, as per Galaxy Digital estimations. The same value could go to as much as $39 trillion in the first three years. Galaxy Digital’s estimation gives an insight into how big the Bitcoin spot ETF market can be. And, this also implies more retail investors would enter the market along with institutional investors.

So, the answer to the question, can Bitcoin Spot ETFs reduce price volatility?, is a yes, theoretically. Bitcoin Spot ETFs help the Bitcoin market become mature, making its price stable by dropping price fluctuations.

Bitcoin Spot ETFs Impact on Liquidity

An increase in ETF investments raises the liquidity of their underlying assets in traditional markets. Liquidity is the ease at which an asset can be bought and sold at stable prices. The same scenario could repeat with Bitcoin Spot ETFs as well.

When Bitcoin spot ETFs go live on the market, it would open the possibility of investments to a wide range of investor base. This leads to increased trading activity, which in turn results in increased liquidity. Arbitrage traders play a crucial role here in boosting liquidity by executing large volume trades to make profits from small price differences.

Arbitrage traders compare prices of assets on different types of platforms. When they find out small price differences, they buy large volumes of the asset at lower price and sell them at higher price. This creates a win-win situation for themselves (with profits), and for the markets (by improving liquidity).

Conclusion

The anticipation of Bitcoin Spot ETF approvals is already raising investor interest. When retail investors flock to put their funds in BTC ETFs, the market will get diversified. Thus, institutional investors will have less power to manipulate Bitcoin prices. This will eventually result in less price volatility of Bitcoin, allowing its market to mature.

Bitcoin spot ETFs also hold the potential to improve liquidity of the market. With the involvement of arbitrage traders and the rising number of retail investors, the Bitcoin market can become less volatile and more liquid, opening further opportunities to enter the BTC market.