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TradFi Holdouts – Brokerage Firms Not Offering Spot Bitcoin ETF Trading, and Why.

Major brokerages like Vanguard are not offering spot Bitcoin ETF trading. Why? Explore reasons for TradFi's cautious approach to crypto exposure.

After a decade of anticipation and regulatory hurdles, the U.S. Securities and Exchange Commission (SEC) approved the first-ever spot Bitcoin Exchange Traded Funds (ETFs) in January 2024. This historic decision marked a turning point for the cryptocurrency industry and the traditional financial world. Even so, some prominent holdouts of brokerage firms are limiting or not offering bitcoin ETF trading to their clients.

Before, investors seeking exposure to Bitcoin relied primarily on futures-based ETFs, which track the price of Bitcoin futures contracts rather than holding actual bitcoin. On the other hand, spot ETFs directly hold the underlying asset, making them a more accurate and transparent way to gain bitcoin exposure.

In the first three days of trading, just under $900 M flowed into Bitcoin ETF funds from brokerages like BlackRock Bitcoin ETF, Fidelity Bitcoin ETF, Franklin Templeton, and Ivesco.

Let’s look at some background on ETFs and go over an update on the recent ruling.

What is an Exchange Traded Fund (ETF)

There are two types of ETFs – traditional and spot. Casual market watchers may not realize that there were traditional crypto-related ETFs before January’s SEC ruling.

A traditional ETF is an investment fund that trades like a stock on a stock exchange. Think of it like a basket of different investments like stocks, bonds, or even commodities, all bundled into a single share.

Here are some key features of traditional ETFs:

  • Trading like a stock. You can buy and sell ETF shares throughout the trading day, just like buying or selling individual stocks.
  • Diversification. ETFs offer instant diversification because they enable buying a small piece of multiple investments simultaneously, which helps spread the risk.
  • Variety of options. ETFs are available for almost any asset class, from broad market trackers like the S&P 500 to niche themes like technology or clean energy.
  • Lower fees. ETFs typically have lower fees than actively managed mutual funds, which can further enhance your returns over time.
  • Fluctuation. ETFs are subject to market fluctuations, so their prices can go up or down like individual stocks.
  • Variable considerations. The specific risks and returns of an ETF will depend on tits underlying assets

January’s SEC ruling means some firms can now offer spot Bitcoin ETFs.

So why are regulators nervous about a spot Bitcoin ETF? While spot and traditional ETFs share some similarities, they differ in two crucial aspects: the underlying asset and how they track its price.

A spot ETF holds the actual asset it represents. So, a Bitcoin spot ETF holds actual Bitcoin. A spot ETF also aims to reflect the current market price of the underlying asset as closely as possible. This parallel creates a direct link between the ETF’s performance and the underlying asset’s performance.

Regulators are worried that spot ETF’s performance will tie Bitcoin’s volatility too closely.

The Significance of the Spot Bitcoin ETF Approval

Risk concerns aside, the approval is a significant step forward on several fronts, including:

  • Institutional Recognition. Spot ETFs validate Bitcoin’s legitimacy, potentially attracting big players like investment firms and pension funds to launch and compete to be the best Bitcoin ETFs.
  • Retail Access. ETFs offer everyday investors a familiar, regulated on-ramp for potentially boosting market participation.
  • Increased Liquidity. More investors mean smoother price discovery and potentially less volatility.
  • Potential Bitcoin Price Impact. New capital from ETFs could push Bitcoin’s price upwards.

However, it’s important to remember that these ETFs are still new, and the long-term implications are still unknown. While large firms like BlackRock and GrayScale moved swiftly to offer access to their clients, other major brokerage firms are biding their time.

SEC Reservations About Bitcoin ETFs

It’s important to note that the decision to approve spot Bitcoin ETFs was not unanimous. Chairman Gensler wrote, “While we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse bitcoin.” He and Republican Commissioners Hester Pierce and Mark Uyeda provided the 3-2 majority needed to pass.

Democrat members Caroline Crenshaw and Jaime Lizarraga voted against the proposal. Commissioner Crenshaw mentioned concerns about the volatility and potential for crypto fraud and fears that the ETFs could expose retail investors to undue financial harm.

Why Some Brokerage Firms Are Not Offering Bitcoin ETFs

While the green light for spot Bitcoin ETFs sparked a lot of excitement, some prominent brokerage firms are opting for a more cautious approach. As of late January, the following firms are either limiting Bitcoin ETF trading to select clients or not offering it at all.

  • Vanguard. Committed to offering “building blocks of a well-balanced portfolio,” the second largest provider of ETFs doesn’t look to be launching a spot Bitcoin Vanguard ETF ticker anytime soon. Executives cited Bitcoin’s volatility and lack of alignment with their “broad diversification principles.” Check out the Vanguard Bitcoin ETF Reddit threads if you want more discussion.
  • Merrill Lynch. In early January, emphasizing investor protection, the firm said they plan to offer the spot Bitcoin ETF to “eligible” clients. One report said that as of January 22, the option was still unavailable. Concerns about Bitcoin’s suitability for less experienced investors weighed heavily in their decision.
  • UBS Group AG. UBS also reportedly offers several spot Bitcoin ETFs to select wealth management clients with brokerage accounts who approach it unsolicitedly.
  • Edward Jones. Does not offer a way to purchase cryptocurrency-related funds (ETFs) or exchange-traded notes (ETNs) that own cryptocurrencies directly.

These examples illustrate the diversity of reasons behind major firms’ cautious stance. Let’s look at some background as to why.

TradFi Concerns About Spot Bitcoin Exchange Traded Funds

While the prospect of increased participation and potential price benefits are evident, there are several reasons some brokerages are holding off for now, such as:

Internal Risk Aversion

  • Some firms might have stricter internal risk tolerance policies regarding volatile assets like Bitcoin.
  • Concerns about potential price manipulation or regulatory crackdowns.
  • Lack of familiarity or comfort with cryptocurrency markets.

Investor Protection Concerns

  • Focus on protecting less sophisticated investors from the inherent risks of Bitcoin (volatility, scams, etc.).
  • A belief is that spot Bitcoin ETFs are complex and unsuitable for some investors.
  • Concerns about lack of investor education and potential for financial harm.

Technical and Operational Challenges

  • Integrating new asset classes like Bitcoin into existing systems can be complex and time-consuming.
  • Concerns about custody solutions and security for storing these highly valuable assets.
  • Potential challenges with clearing and settlement processes for spot Bitcoin ETFs.

Strategic Considerations

  • Some firms might not see spot Bitcoin ETFs as strategically aligned with their target clientele or brand image.
  • Potential competition with other brokerage firms already offering spot Bitcoin ETFs.
  • Waiting to see how the market develops and regulations evolve before committing.

What Is the Impact of Brokerage Firms Not Offering Spot Bitcoin ETF Trading?

The decision of some prominent brokerage firms to hold back from offering spot Bitcoin ETFs has potential pros and cons for investor access and market adoption.

Investors who rely on these specific brokerage firms will have fewer avenues to gain exposure to Bitcoin, potentially hindering their participation in the market. The concentration of power is another concern. If spot Bitcoin ETFs become concentrated among a small group of firms, the potential for market manipulation and reduced competition increases.

Finally, the absence of familiar brokerage channels could contribute to the perception of Bitcoin as risky or inaccessible, further dampening adoption.

Moving Ahead

The SEC approval was a significant milestone in the journey toward widespread crypto adoption. With prominent players like Vanguard taking a slower approach, it remains unknown if (or when) crypto investing will become truly mainstream.

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Disclaimer: This material has been prepared for informational purposes only and is not intended to provide tax, legal, or financial advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.

Kala Philo