Why Crypto and Wall Street Crave Spot Bitcoin ETFs

1. What Are Bitcoin ETFs Like?

A $7 trillion industry, ETFs are part of a broader family of products known as exchange-traded products, although people often use “ETFs” to refer to all of them as they are by far the largest and most popular category . Both crypto-native companies and large Wall Street financial institutions are trying to launch some kind of ETF that actually contains Bitcoin, as opposed to the products that invest in Bitcoin futures. The SEC has not approved applications for these so-called spot Bitcoin ETFs, while several futures-backed crypto funds are already on the market. Futures-backed Bitcoin ETFs have been available to US clients since 2021. Issuers and investors are calling for spot Bitcoin ETFs to become equally accessible to retail and institutional investors in the US, a development believed to have the potential to boost participation in the cryptocurrency industry.

2. What is the difference between Bitcoin futures and spot Bitcoin?

Futures are contracts to buy or sell an asset at a specified price at a later date. They are widely used in many markets, such as oil, by investors who want to speculate on price movements without directly owning or taking possession of the underlying asset. As Bitcoin’s price fluctuates up or down according to direct trading, Bitcoin futures track the cryptocurrency’s spot price indirectly on exchanges such as the Chicago Mercantile Exchange. On the spot Bitcoin market, on the other hand, users buy and sell the actual digital currency through exchanges.

3. What was available so far?

The ProShares Bitcoin Strategy ETF became the first Bitcoin futures ETF available in the US, opening on October 19, 2021 amid strong demand, with over $900 million in shares changing hands on its first day. The largest Bitcoin ETP – the $1.5 billion Bitcoin Tracker EUR, listed on the Stockholm Stock Exchange – invests in swap contracts to mirror the cryptocurrency’s returns. The Purpose Bitcoin ETF (ticker BTCC), which debuted in Toronto in early 2021, invests directly in “physical/digital Bitcoin,” according to its publisher, Purpose Investments Inc. Meanwhile, several US investment funds track Bitcoin in a manner similar to ETFs, but with certain limitations. The Grayscale Bitcoin Trust (ticker GBTC) is physically backed, meaning it contains Bitcoin. Grayscale is trying to convert its trust into an ETF and is embroiled in a lawsuit with the SEC over the conversion, which the regulator is opposing. Grayscale says it expects a decision before the end of the year.

4. What happens now?

The world’s largest asset manager, BlackRock Inc., filed for a spot Bitcoin ETF in June, sparking a new wave of speculation that the long-elusive investment product might finally receive SEC approval. BlackRock’s filing, in turn, sparked a major rally in the crypto market and a flurry of similar ETF filings and new filings from issuers including Fidelity Investments and WisdomTree Inc.

5. Why have regulators shunned a Bitcoin ETF for so long?

In addition to their concerns about liquidity and manipulation, regulators have raised concerns that Bitcoin’s volatility could be too great for ordinary investors. loss of 64% by 2022. The SEC has also questioned whether funds would have the information needed to adequately value tokens like Bitcoin, including whether they can validate who owns the underlying coins. In 2021, SEC Chairman Gary Gensler testified before the Senate Banking Committee that the lack of regulatory oversight and oversight of crypto markets led to “concerns about the potential for fraud and manipulation.” In an effort to address some of the SEC’s concerns, BlackRock and other issuers following in its footsteps have proposed so-called surveillance-sharing agreements, a way to reduce the risk of market manipulation and fraud. Coinbase Inc., the only publicly traded, pure-play spot crypto exchange in the US, has become the preferred partner of ETF issuers for market surveillance.

6. What could the SEC process look like?

News broke on June 30 that the SEC had asked BlackRock, Fidelity and other issuers to update their filings with additional information. Crypto watchers saw the SEC’s request as a positive indicator that the process was progressing. The back and forth may continue, with some experts expecting final approval of at least one spot Bitcoin ETF by the end of the year. Others recommend caution, as this battlefield is already littered with corpses from about 30 previous attempts that failed to convince the SEC to give them a chance.

–With assistance from Claire Ballentine.

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