Traditional investors that want to invest in Bitcoin are limited to exchange-traded funds (ETFs) using futures contracts to provide exposure rather than holding actual cryptocurrency. But unfortunately, these futures-based funds don’t always follow Bitcoin prices due to factors like “roll yield” and incur more trading costs than a buy-and-hold fund.
The SEC argues that spot Bitcoin funds could be vulnerable to fraud and market manipulation while existing proposals haven’t been clear and comprehensive enough to disclose risks to investors. But a growing chorus of asset managers – including the ETF giant BlackRock – have been vying to introduce the first spot Bitcoin ETF.
These asset managers argue that a spot Bitcoin ETF could help protect investors by enabling them to invest via a regulated vehicle rather than being forced to buy and sell via exchanges. In addition, the spot ETFs could provide lower costs and an easier-to-understand risk profile compared to futures-based Bitcoin ETFs.
In this article, we’ll examine BlackRock’s proposal, the SEC’s recent response, and when to expect a spot Bitcoin ETF.
A Brief History
The Winklevoss twins tried to create a Bitcoin ETF back in March 2017, when the cryptocurrency traded at around $100. After making a few attempts to launch a fund, it became clear the SEC considered the asset too risky for retail investors, and they abandoned their attempts. Several other asset managers met a similar fate.
In October 2021, the first Bitcoin ETF hit the market with a bang, providing exposure through Bitcoin futures contracts. The ProShares Bitcoin Strategy ETF (BITO) reached $1 billion in assets in just two days – faster than any other ETF. But just weeks later, Bitcoin prices peaked and the fund experienced massive outflows.
While several futures-based Bitcoin ETFs have launched since then, a spot Bitcoin ETF has been elusive. BlackRock, Fidelity, and other large asset managers joined the fray, filing applications with the SEC in recent months. And these efforts have sent Bitcoin prices sharply higher over the past couple of weeks despite weakness in altcoins.
BlackRock’s Proposal
BlackRock, the world’s largest asset manager, filed for a spot Bitcoin ETF on June 15, 2023. The move comes after the asset manager launched a spot Bitcoin private trust for institutional clients last year. According to the SEC filing, BlackRock’s iShares Bitcoin Trust would use Coinbase’s Coinbase Custody as its custodian.
According to Reuters, BlackRock hopes to clear remaining SEC roadblocks through an arrangement with Nasdaq, which said it would enter into a surveillance-sharing agreement with a bitcoin spot trading exchange to supplement its own surveillance program. These efforts aim to mitigate the potential for any market manipulation.
However, the move comes just weeks after the SEC filed a lawsuit against Coinbase, alleging that it’s operating as an unregistered securities exchange, broker, and clearing agency. The regulator also charged the company for the unregistered offer and sale of securities in connection with its staking-as-a-service program.
Other asset managers are also attempting to launch their own spot Bitcoin ETFs. In addition to filings by Fidelity and other large asset managers, Grayscale Investments LLC sued the SEC recently, saying it acted arbitrarily in rejecting its proposal to convert its flagship trust into an ETF following approvals for futures-based funds.
The SEC’s Response
The SEC told the Nasdaq, which filed the Bitcoin ETF application on behalf of BlackRock, that they weren’t “sufficiently clear and comprehensive,” according to Bloomberg. But the agency would welcome revisions and updates from the asset manager and an eventual refiling of the application taking into account the SEC’s feedback.
The Nasdaq is reportedly working on providing new information that would meet the SEC’s threshold for approval. After revising and refiling their application, the SEC would take public comments on the amendments and eventually give a firm yes or no decision for approval based on their comfort level with the new applications.
Interestingly, the denial comes a week after the agency approved the first leveraged Bitcoin futures ETF – the Volatility Shares 2X Bitcoin Strategy ETF (BITX) – that launched on the CBOE. Many ETFs also provide ancillary exposure to companies involved in the crypto space, such as Bitcoin miners or mining-related hardware manufacturers.
Impact on Bitcoin Prices
BlackRock and Fidelity’s moves sent Bitcoin prices sharply higher as traders speculated that a spot ETF could widen exposure to the cryptocurrency. While traditional investors can already access Bitcoin exposure, there’s no direct tie between their purchases and the spot Bitcoin market, so their impact is somewhat muted.
While the SEC’s recent rejection sent prices a bit lower, many crypto enthusiasts seem confident that the involvement of the world’s largest asset manager signals that spot Bitcoin ETFs will eventually become a reality. That has kept Bitcoin prices elevated throughout June despite the fact that the SEC has become increasingly aggressive on enforcement.
The Bottom Line
Bitcoin ETFs have existed for several years, but spot funds remain elusive. While the SEC has hesitated to approve them, there’s a growing appetite to hold Bitcoin directly without incurring roll yield or experiencing contango/backwardation conditions. And large asset managers like BlackRock could be getting close to approval.
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