Spot Bitcoin ETF, or spot bitcoin exchange-traded fund, is an investment vehicle allowing ordinary investors to gain exposure to the price movements of bitcoin in their non-cryptocurrency brokerage accounts.
Unlike bitcoin futures ETFs, which invest in derivatives contracts based on bitcoin prices, a spot bitcoin ETF directly invests in actual bitcoins as the underlying asset.
A spot bitcoin ETF securely holds bitcoins in a digital vault managed by registered custodians. The purpose is to mirror the price of bitcoins in the crypto market, and the ETF directly owns the bitcoins rather than using derivatives.
The ETF buys bitcoins from holders or authorised cryptocurrency exchanges, stores them securely, and issues shares corresponding to the bitcoins it holds. Authorised participants (APs), typically large financial institutions, play a role in creating or redeeming ETF shares based on market demand.
ETF shares are available for public trading on traditional stock exchanges, and the share price should reflect the prevailing market price of bitcoin. Market makers facilitate liquidity by continuously offering to buy and sell shares of the ETF.
Regulatory approval for spot bitcoin ETFs is still pending, and it is considered a crucial step toward broader acceptance of bitcoin as an investable asset. The approval of spot bitcoin ETFs could potentially have a positive effect on bitcoin’s price.
Spot bitcoin ETFs offer a regulated and accessible way for mainstream investors to invest in bitcoin without the responsibilities and competence of managing a cryptocurrency wallet. But is it a good thing? What intentions inspired the revival of the spot bitcoin ETF cause, and what repercussions will confront the market should the SEC approve?
BlackRock Files For Spot Bitcoin ETF
BlackRock’s summer 2023 filing for a Bitcoin exchange-traded fund (ETF) has reignited market anticipation for the possibilities and implications of spot bitcoin ETFs.
BlackRock, a major investment giant, submitted an application to the Securities and Exchange Commission (SEC) for the creation of a bitcoin ETF in a groundbreaking move that could lead to the first such product in the US.
The application outlined cryptocurrency exchange Coinbase as the custodian for assets and pricing data, adding a level of credibility to the proposal. If approved, this ETF, named the iShares Bitcoin Trust, will be listed on the Nasdaq exchange, further establishing its potential significance in the financial markets.
While the SEC has approved Bitcoin futures ETFs, it denied multiple spot ETF applications for Bitcoin in the past. The iShares Bitcoin Trust would provide investors with a new avenue to gain exposure to Bitcoin’s price movements.
The SEC historically expressed reservations about spot-based ETFs, emphasising concerns about a ‘fragmented and unregulated’ nature of the spot market. This sentiment was highlighted in the SEC’s court battle with Grayscale over its plans to convert the Grayscale Bitcoin Trust from a futures-backed index to a spot-based index. The outcome of this legal dispute may influence the SEC’s decision regarding BlackRock’s application.
The regulatory approval of the iShares Bitcoin Trust would not only mark a significant development for BlackRock and Coinbase but also for the broader cryptocurrency market. It could potentially signal a shift in the SEC’s stance on spot-based ETFs and pave the way for more institutional investors to participate in the cryptocurrency space.
Spot Bitcoin, ETF: Looking Forward to Exactly What?
The rush and push to make spot bitcoin ETFs is all about making a significant amount of money investment firms stand to make by offering such a lucrative compromise to mainstream investors. In many ways, it may seem like the perfect solution to the changing tide of investor preferences and the evolving finance sector, otherwise threatening to drown everyone refusing to face the present future. What other appealing qualities does a spot bitcoin ETF possess:
- Accessibility and Convenience: Spot bitcoin ETFs make it more convenient and accessible for mainstream investors to gain exposure to Bitcoin without dealing with the technical complexities of managing cryptocurrency wallets or navigating cryptocurrency exchanges. This increased accessibility can attract a larger pool of investors.
- Lower Barriers to Entry: By providing a regulated investment vehicle, spot bitcoin ETFs lower the barriers to entry into the cryptocurrency market. This makes it easier for individuals who may be hesitant or unfamiliar with the intricacies of cryptocurrency investing to participate.
- Increased Liquidity: Spot bitcoin ETFs have the potential to enhance liquidity in the Bitcoin market, making it more attractive to investors. Higher liquidity can lead to more stable prices and reduced volatility, creating a more favourable environment for mainstream investors.
- Regulatory Approval and Credibility: The regulatory approval of spot bitcoin ETFs can enhance the credibility of these investment products. Mainstream investors often seek regulated and transparent investment options, and the approval of such ETFs by regulatory bodies can instil confidence.
- Potential for Strong Returns: Given the historical performance of Bitcoin, offering a product that allows investors to participate in its price movements can be appealing. Mainstream investment firms can capitalise on the potential for strong returns in the cryptocurrency market.
- Diversification for Portfolios: Mainstream investment firms may promote spot bitcoin ETFs as a way for investors to diversify their portfolios. This messaging aligns with traditional investment principles and can attract a broader audience.
As cryptocurrency becomes more powerful globally, the intersection of these factors makes the development and offering of spot bitcoin ETFs an attractive proposition for mainstream investment firms. But that’s not all.
Risks, And Are They Worth It?
Mainstream investment firms and individuals naturally couldn’t care less about preserving the integrity of Bitcoin or upholding market stability for the sake of cryptocurrency users. What unwanted repercussions could come about in the event that spot bitcoin ETFs are approved:
- Crypto Volatility: Bitcoin is known for its price volatility, with significant price fluctuations occurring over short periods. Spot bitcoin ETFs directly reflect these price movements, subjecting investors to the inherent volatility of the cryptocurrency market.The potential for rapid and unpredictable price changes can lead to substantial gains, but it also increases the risk of significant financial losses. Investors need to be prepared for the possibility of sharp price swings that can impact the value of their investments.
- Regulatory Uncertainty: The regulatory environment for cryptocurrencies, including Bitcoin, is still evolving. Spot bitcoin ETFs face uncertainties related to regulatory approval, and the lack of a clear regulatory framework may pose challenges.Regulatory uncertainties can create ambiguity regarding investor protections, market integrity, and adherence to compliance standards. Until a more comprehensive regulatory framework is established, there may be concerns about potential risks such as fraud, market manipulation, and the loss of assets.
- Security Risks: ETFs holding a significant amount of bitcoins become attractive targets for cybercriminals due to the digital nature of cryptocurrencies and the potential for large sums of value stored in these funds.Cybersecurity threats, including hacking attempts and unauthorised access, pose a risk to the security of the bitcoins held by the ETF. A successful cyberattack could result in the theft of substantial amounts of cryptocurrency, potentially impacting the fund’s stability and investor confidence.
- Management Fees: Spot bitcoin ETFs charge management fees to cover operational costs, including the acquisition, storage, and management of bitcoins. These fees can be higher than those associated with traditional investment vehicles.While management fees are a standard part of many investment products, higher fees in the context of spot bitcoin ETFs can impact overall returns. Investors need to weigh the potential returns against the costs associated with holding and managing bitcoins through the ETF.
The awaited spot bitcoin ETF is already being compared to the introduction of SPDR gold shares, as a lucrative inevitability for assets experiencing spiking institutional interests. While risky, spot bitcoin ETFs could enhance the adoption of bitcoin and add to market liquidity.
Spot Bitcoin ETF: An Inevitability
The push for spot bitcoin ETFs began over a decade ago, with Tyler and Cameron Winklevoss (of Facebook and Gemini fame) applying for the first spot bitcoin exchange-traded fund.
All applications have since been denied, regardless of how influential the applicants were.
In August 2023, The US District of Columbia Court of Appeals ruled in favour of Grayscale Investments, stating that the SEC was unjust in rejecting Grayscale’s application for a spot bitcoin ETF. This decision is pivotal for the cryptocurrency and asset management industries, challenging the SEC’s denial of Grayscale’s attempt to convert its Grayscale Bitcoin Trust into an ETF.
Concerns related to investor protection and the potential for market manipulation — the cited reasonings behind the SEC’s continued denial, may no longer be sufficient cause. While the agency continues to emphasise the need for proper surveillance-sharing agreements with regulated markets to prevent and detect market manipulation effectively, the SEC has also recently been called out for unwillingness to provide discernible regulatory frameworks. The agency’s recent courthouse losses may pave the last steps of the way.
Now, the inevitability of a spot bitcoin ETF looms over investment markets, seemingly in balance between the dated finance world and the current.