More than 10 years after the first application, and with 13 hopefuls still in the running, the US Securities and Exchange Commission (SEC) is today expected to approve multiple spot Bitcoin ETFs for launch this year. But what impact will spot have on the institutional crypto space – and how is the buy-side ready to react to the news. Genuine game-changer, or just another flash in the pan?
While the cryptocurrency has seen some institutional adoption, there has been regulator pushback, particularly in the US under the stewardship of Gary Gensler, who came into office with a remit to tame the wild west of digital assets.
The SEC has not yet approved ETFs that directly hold cryptocurrencies, citing concerns around fraud and market manipulation (a purported SEC post on X, formerly Twitter, the night before the expected decision was in fact a hack). But a spot ETF could offer exposure to the digital asset with the added bonus of regulatory protections. Nonetheless, institutional asset managers are instinctively wary of cryptocurrencies and, despite some moves into the space in recent years, remain so considering events such as the FTX bankruptcy, as well as the absence of effective or common regulatory standards, according to State Street’s 2022-2023 Digital Assets and Investment Study.
However, the opportunity is substantial — Bitcoin was the best performing major asset in 2023 on both an absolute and risk-adjusted basis. Last year saw Bitcoin up more than 172%, correcting less than 20%, and net capital inflows into BTC, ETH and stablecoins, reflecting an ascendant Bitcoin dominance, according to Glassnode, a blockchain data firm. Former chairman of the US Commodity Futures Trading Commission (CFTC) and original architect of the US crypto derivatives market, Chris Giancarlo, believes “spot Bitcoin ETFs could be worth US$100 billion by next year”.
Firms have been seeking approval from the SEC for spot bitcoin ETFs since around 2014 and fourteen firms including BlackRock (which declined to comment for this piece citing SEC filing rules), Fidelity and WisdomTree submitted applications for spot bitcoin ETFs last year. BlackRock have announced Jane Street and JP Morgan as their brokers for the new ETF should it be approved. The asset manager said on 9 January it will cut around 3% of its workforce, roughly 600 roles, reflecting a changing industry, according to reports.
Asset manager Valkyrie was among the first companies to file its final S-1 amendment before the 10 January deadline. Valkyrie was followed by WisdomTree, BlackRock, VanEck, Invesco and Galaxy, Grayscale, ARK Invest, 21Shares, Fidelity, Bitwise and Franklin Templeton.
Spot Bitcoin ETFs in local currencies have been approved in Europe — Jacobi Asset Management listed its spot Bitcoin ETF on Euronext Amsterdam in August 2023. Jacobi CEO Martin Bednall told BEST EXECUTION that the firm had discussions with a number of regulators, and they had similar concerns around the specific safety and security of the assets, and counterparty risks as well as general concerns around the functioning of the crypto markets.
However, institutional investors’ feedback has been very positive. “They like the fact they now have access to a regulated vehicle that holds the Bitcoin and addresses the environmental concerns of Bitcoin that they can trade and hold in their existing infrastructure.”
“Many institutional investors are still unsure about investing in crypto, but our ETF gives them the perfect product when they decide to make that first allocation to Bitcoin,” Bednall added. US neighbour Canada was the first country to approve a spot Bitcoin ETF and notably, the vehicle saw AUM surge 60% over 2023, indicating the type of opportunities US approval of a Bitcoin spot ETF represents.
David Newns, head of SIX Digital Exchange, believes a Bitcoin spot ETF would represent a growing acceptance by the mainstream financial services industry of the cryptocurrency.
“The 12 US spot Bitcoin ETF applications currently submitted to the SEC confirm what we see in the market as the growing institutionalisation of cryptocurrencies,” he explained to BEST EXECUTION. “They will provide a familiar instrument model to buy side participants – offered by the large Institutional Issuers, such as BlackRock and Fidelity – with regulatory oversight.”
“We think that the trend towards institutionalisation will be the hallmark of the new chapter in the adoption of digital assets, a chapter characterised by a demand for services provided by trusted counterparties where investor safety is paramount. By satisfying this demand, we can expect new capital inflows and a diversification of participants in the digital asset ecosystem which will represent a major step forward in its evolution,” Newns added.
So, why has the regulator been so slow? It’s been 10 years since the first spot Bitcoin ETF application. Many economic and political arguments have been put forward, both for and against, with SEC chair Gensler walking a fine line between protecting consumers, market integrity and the opportunities that digital assets represent to financial services.
However, slowly but surely, it seems the tide is turning. In August, Grayscale Investments, manager of the world’s biggest crypto fund, won its appeal against the SEC over its intention to convert its Grayscale Bitcoin Trust (GBTC) to an Exchange Traded Fund (ETF).
Could this be a sign, as big players such as BlackRock, the world’s largest asset manager with $9 trillion AUM, get stuck in, that Bitcoin may finally receive the stamp of approval from the SEC? BlackRock’s record of getting ETFs approved by the SEC is reportedly 575-1, a 99% success rate. Its application for a Bitcoin spot ETF was submitted 15 June 2023 and the price of Bitcoin increased by almost a fifth over the next week, as a result.
But what will the buy-side think of this momentous move by the US regulator; while some buy-side firms are prepared and enthusiastic, others seem less ready to engage — and are European asset managers ready to take advantage of the opportunities that a US dollar spot ETF might offer? Valerie Noel, global head of trading at Syz Group, believes that a spot Bitcoin ETF would be welcomed as a new method of diversification, and allocate a portion of their funds to Bitcoin in a more regulated and safer manner, Syz Group head of trading Valérie Noël believes.
Speaking to BEST EXECUTION, she noted that: “Some might remain cautious due to the inherent volatility and regulatory uncertainties of cryptocurrencies. High-net-worth individuals and retail investors might find this as an attractive option to gain exposure to Bitcoin. The perceived safety and simplicity of an ETF could appeal to those who are not tech-savvy or who prefer traditional investment vehicles,” Noël added.
The approval of a Bitcoin spot ETF could also pave the way for a broader institutional acceptance of cryptocurrency-related financial products and services, as well as a wider product set – including more ETFs based on other cryptocurrencies, crypto-based mutual funds, and other derivative products.
Syz Group’s Noël said the potential approval of a Bitcoin spot ETF by the SEC is “a significant event” in the world of finance and could have several implications.
“The approval of a Bitcoin spot ETF by the SEC could be a transformative event for Bitcoin and the broader cryptocurrency market. It could increase investor participation, lead to more regulated financial products, and influence the future regulatory landscape for cryptocurrencies. However, it’s also important to remain aware of the risks involved, including market volatility and regulatory uncertainties,” Noël added.
“A spot Bitcoin ETF would provide more legitimacy to Bitcoin as an investment asset, potentially attracting more institutional and private investors who may have been hesitant to invest directly in cryptocurrencies. It simplifies the investment process as investors can buy the ETF through traditional investment channels, without needing to deal with the complexities of cryptocurrency exchanges, wallets and private keys.”
“The approval could lead to an increase in Bitcoin’s price, as it would likely trigger a wave of new investments from investors who were waiting for a more regulated and familiar investment vehicle. However, this could also lead to increased volatility in the short term as markets adjust,” Noël added.
Spot crypto ETFs buy cryptocurrencies and securitise them. Investors buy and sell shares just like a traditional ETF but in a spot crypto ETF, the fund can issue and redeem shares, offering retail and other investors more liquidity in the crypto market and a chance to gain exposure to these assets. Spot ETFs directly track the price of bitcoin, offering investors exposure to its price movements without owning the asset directly.
SEC approval could also drive greater interest in Europe for cryptocurrency ETFs, in addition to the existing ETPs, as listed on SIX Group and other European Exchanges, for example. The first European Spot Bitcoin ETF is already live, having been launched by Jacobi Asset Management on Euronext Amsterdam in August 2023. “Furthermore, SEC approval and successful launches by the issuers will likely then lead to applications from similar providers for ETH ETFs later this year,” Newns believes.
The introduction of a bitcoin spot ETF is expected to impact bitcoin’s price due to increased accessibility and liquidity. There have been a number of attempts to profit from Bitcoin’s price volatility – between October 2022 and October 2023, the SEC received more than 3,500 crypto-related fund applications. Coupled with bitcoin’s finite supply, this demand is likely to drive prices up. A spot ETF would enable investors to gain exposure to bitcoin’s price movements through an approved investment vehicle, appealing to a broader range of investors. BlackRock has set a fee of 0.30% on its spot ETF, while VanEck said it plans to charge a 0.25% fee. ARK 21Shares Bitcoin ETF lowered its planned fee to 0.25% from 0.80%. The tussle over fees could represent a competitive race to the bottom as firms vie for customers.
Zach Pandl, managing director of research at Grayscale, told BEST EXECUTION that these wider trends could bode well for a mooted Bitcoin spot ETF. “Bitcoin and gold were both higher in Q4 2023, as Fed officials signalled that rate hikes were over. If the central bank cuts rates in 2024, effectively ending “quantitative tightening”, investors can expect further gains in store-of-value assets that compete with the US dollar, such as Bitcoin and gold.
“Bitcoin was the best performing major asset in 2023 on both an absolute and risk-adjusted basis. Now that it may soon be available in the United States as a spot Bitcoin ETF, it will be increasingly difficult for investors and financial advisors to ignore,” Pandl believes.
A Bitcoin spot ETF will pave the way for other cryptocurrency spot ETFs in the US, Pandl agrees. “Ethereum underperformed Bitcoin in 2023 with a gain of ‘only’ 80%. But there are strong tailwinds for Ethereum expected in H1 2024, and we expect to see some new technical upgrades to the network that should support user adoption, and progress on the potential for US spot Ethereum ETFs. Grayscale Research believes the future is bright for Ethereum, the second largest digital asset.”
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