Why do both the cryptocurrency community and Wall Street desire a spot Bitcoin ETF?

Why do crypto community and Wall Street want a Bitcoin ETF?

Grayscale Investments LLC won a court ruling on August 29 to convert its Bitcoin trust GBTC into an ETF. Investors looking to bet on Bitcoin may soon have more options. Major financial companies including BlackRock, Fidelity, and Invesco have submitted applications to sell US “spot” ETFs that are directly linked to the amount of Bitcoin held. In the past, the US Securities and Exchange Commission (SEC) has often rejected these products, citing caution towards volatility and potential manipulation. However, the ruling by Grayscale Investments and the application filed by BlackRock indicate that the cryptocurrency industry has gained the upper hand.

1. What is a Bitcoin ETF like?

ETFs are a $7 trillion industry and are part of a broader range of products known as exchange-traded products, although people often use “ETF” to refer to all of these products because they are the largest and most popular category so far. Both crypto-native companies and Wall Street major financial institutions are attempting to launch an ETF that actually holds Bitcoin, rather than a product that invests in Bitcoin futures. Since 2021, US customers have been able to use futures-backed Bitcoin ETFs, but the SEC has not yet approved any applications for so-called spot Bitcoin ETFs. Issuers and investors are advocating for the availability of spot Bitcoin ETFs to both retail and institutional investors in the US, a development that is seen as potentially greatly expanding 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 in the future. They are widely used by investors in many markets, such as oil, who want to speculate on price movements without directly owning or possessing the underlying asset. With Bitcoin’s price fluctuating based on direct trading, Bitcoin futures indirectly track the spot price of cryptocurrencies on exchanges like the Chicago Mercantile Exchange. In contrast, in the spot Bitcoin market, users buy and sell actual digital currencies through exchanges.

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3. What Bitcoin ETFs existed before?

The ProShares Bitcoin Strategy ETF (BITO) was the first Bitcoin futures ETF in the US, opening for trading on October 19, 2021, with strong demand. The Purpose Bitcoin ETF (BTCC) made its debut in Toronto in early 2021, with its issuer Purpose Investments stating that it directly invests in “physical/digital Bitcoin.” Meanwhile, some US investment trust companies have been focusing on Bitcoin in a manner similar to ETFs, but with certain limitations. The Grayscale Bitcoin Trust (GBTC) has physical backing, meaning it holds Bitcoin. Grayscale Investments sued the SEC in an attempt to convert GBTC into an ETF; this is the situation in which Grayscale Investments won a crucial legal battle in August.

4. What is the situation with spot Bitcoin ETFs?

The world’s largest asset management company, BlackRock, submitted an application for a spot Bitcoin ETF in June, sparking speculation about whether this long-awaited investment product will ultimately be approved by the SEC. In turn, BlackRock’s application led to a significant increase in the cryptocurrency market and a series of similar ETF applications, including re-submissions from issuers such as Fidelity Investments and WisdomTree. Grayscale Investments has long believed that converting GBTC into an ETF will help unlock billions of dollars in value for GBTC investors. The SEC can request a review by all judges of the Washington D.C. Circuit Court of Appeals or the U.S. Supreme Court to challenge the court’s ruling in August.

5. Why have regulatory agencies been avoiding Bitcoin ETFs for so long?

In addition to concerns about liquidity and manipulation, regulatory agencies have also expressed concerns that Bitcoin’s volatility may be too extreme for ordinary investors: Bitcoin saw an annual return of 305% in 2020 and then rose another 60% in 2021, only to fall 64% in 2022. The SEC also questions whether fund companies have sufficient information to evaluate tokens such as Bitcoin, including whether they can verify who owns the underlying coins. In 2021, SEC Chairman Gary Gensler testified before the Senate Banking Committee, stating that the lack of regulation and oversight in the crypto market leads to “concerns about the potential for fraud and manipulation.” To address some of the SEC’s concerns, BlackRock and other issuers following its lead have proposed a so-called surveillance sharing agreement, which is a method to mitigate market manipulation and fraud risks. Coinbase, the only publicly traded pure spot cryptocurrency exchange in the United States, has become the preferred market surveillance partner for ETF issuers.

6. What might the process be like for the U.S. Securities and Exchange Commission?

Some experts expect that by the end of this year, at least one spot Bitcoin ETF will be approved, while others advise caution due to the approximately 30 failed attempts on the battlefield that have failed to convince the SEC. Analysts are now closely watching for any potential developments in the process of Grayscale Investments’ GBTC conversion.