Spot Bitcoin ETF: Towards an institutional adoption ?
Alexis Hebrard
October 19, 2023
Tokenomics
On June 15, 2023, the world's largest investment firm, BlackRock, filed for a Spot Bitcoin ETF. This announcement carries significant weight, given that BlackRock manages a portfolio of assets exceeding 9.7 trillion dollars and wields substantial influence in the financial sector.
But why is this news so important when Bitcoin Futures ETFs have been in existence since 2021?
The main difference lies in the fact that a Bitcoin Futures ETF doesn't directly own or manage bitcoins, while a Spot ETF is directly exposed to its underlying asset. This exposure allows investors to be directly linked to the value of Bitcoin. To fully grasp the difference, let me explain how they function:
A Futures ETF doesn't buy Bitcoin directly, instead it invests in Bitcoin futures contracts. These contracts represent commitments to buy or sell bitcoins at a predetermined price on a specific future date. The ETF's value is directly tied to the performance of these contracts rather than Bitcoin itself. Specifically, when you invest in a Bitcoin Futures ETF, you're betting on the future price movement of Bitcoin according to the terms of these contracts.
For example, imagine a Bitcoin futures contract expiring in a month. This contract stipulates that the buyer must acquire one Bitcoin at a price of $30,000 at the end of the month, regardless of the market price at that time. If, at the contract's expiration, the Bitcoin price is higher than $30,000, say, at $35,000, the contract buyer profits. By purchasing the Bitcoin for $30,000 and having it worth $35,000 on the market, they gain $5,000 (before transaction or brokerage fees).
This form of ETF has its limitations because investors can only interact with Bitcoin through futures contracts, which are time-limited and purely speculative. Moreover, these contracts aren't backed by actual Bitcoins, so when investing in a futures contract, the investor doesn't own any Bitcoin. The contract is only settled by the fund at its maturity, distributing profits or losses. Thus, through a Futures ETF, investors are only exposed to Bitcoin price fluctuations and not the actual asset itself.
Unlike futures contracts, a Bitcoin Spot ETF is directly linked to the current price of Bitcoin. If you were to invest in a Bitcoin Spot ETF, the fund would actually purchase Bitcoins at the current market price and hold them in reserve. As an investor, you wouldn't directly own the Bitcoins, but you'd have a share in the assets held by the fund. Therefore, the value of your investment would rise or fall according to the current Bitcoin price.
Such ETFs offer a relatively simple and convenient way for investors to gain exposure to Bitcoin without managing wallets or private keys and without worrying about the security issues associated with holding Bitcoin directly.
Spot ETFs have the potential to significantly influence the cryptocurrency world because each institutional investment would involve buying BTC on the market. This is why we've recently seen BlackRock accumulate a substantial amount of Bitcoin before submitting its application to the SEC. (Cointribune, GBTC/Spot ETF or Bitcoin: Which One to Choose?, 2023).
The introduction of the first Spot ETF is a major change in the cryptocurrency world. However, it's important to note that there are currently no Spot ETFs on the market, as they have all been rejected by the U.S. Securities and Exchange Commission (SEC), which regulates financial markets in the United States. To provide a comparison, the first gold-based Spot ETF was created in 2003, making gold much more accessible to financial markets, and its adoption steadily grew in its early years.
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So far, the U.S. SEC has shown greater openness toward Bitcoin Futures ETFs compared to Spot ETFs due to concerns related to regulation and market manipulation.
First, Bitcoin futures contracts are traded on regulated markets, notably the Chicago Mercantile Exchange (CME), which provides a level of oversight and transparency that the SEC deems acceptable. According to the SEC, this regulated environment is seen as less susceptible to manipulation than the Bitcoin spot market, which is spread across multiple global cryptocurrency exchanges, each with its own rules and levels of transparency. Additionally, ETF futures contracts are overseen by the Commodity Futures Trading Commission (CFTC), a regulatory body, which reassures the SEC due to strong regulation.
For the SEC, the price volatility of Bitcoin's spot market is a hindrance to adoption because these fluctuations can result from various factors, such as the influence of major holders in the market or manipulations on less-regulated stock exchanges. This raises concerns within the SEC, whose role is to protect small investors from such risks.
As mentioned earlier, BlackRock recently filed for a Spot Bitcoin ETF. Following this announcement, many competing asset management firms rushed to file their own ETFs, including:
The race for an ETF approval is now in full swing.
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But when will the SEC make a decision? The first significant deadline was between September 2 and September 4, 2023. For this deadline, the SEC has already made its decision and postponed it for all the applications. The subsequent dates are spread between January 2024 and March 2024, so the SEC will have to make a decision sooner or later.
If one of them gets approved, there's a good chance that others will follow suit. This could potentially open the door to a larger number of institutional and individual investors looking to invest in Bitcoin without having to physically purchase and store the cryptocurrency, potentially having a significant impact on the Bitcoin market by increasing demand.
On October 16, a false rumor about the approval of a spot Bitcoin ETF in the United States briefly sent the price of Bitcoin soaring.
This rumor, spread by the Cointelegraph media outlet, caused a surge in Bitcoin's price, triggering volatility throughout the sector and resulting in liquidations of over $100 million.
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A BlackRock spokesperson later announced to various media outlets that the rumor was false, stating that "BlackRock's iShares Spot Bitcoin application is still under review by the SEC".
Thus, Bitcoin's price promptly returned to normal levels after a period of high volatility.
According to Coinglass data, $105 million worth of positions were liquidated during this hour, including $73 million of sell positions and $32 million of buy positions.
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This event demonstrates that the approval of a Bitcoin ETF is highly anticipated by financial markets. BlackRock CEO Larry Fink even commented:
"Monday's events only underscore the world's need and desire for a spot Bitcoin ETF, especially in the context of ongoing international turmoil. [...] It's just an example of pent-up interest in cryptocurrency. I think today's rally is more of a flight to quality."
With a better understanding of how these two types of ETFs work, it's clear that the introduction of a Bitcoin Spot ETF will have an effect on financial markets. However, it's impossible to predict the exact impact of such an ETF approval on the markets with certainty. Nevertheless, one thing is for sure: January 14, 2024, is a date we should mark on our calendars!
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