1. What do Bitcoin ETFs look like?
ETFs, a $7 trillion industry, are part of a broader family of products known as exchange-traded products, though people frequently use “ETFs” to refer to all of them since they are by far the largest and most popular category. Crypto-native firms and major Wall Street financial institutions alike are trying to launch a kind of ETF that actually holds Bitcoin, as opposed to the products that invest in Bitcoin futures. The SEC hasn’t approved any applications for these so-called spot Bitcoin ETFs, whereas multiple futures-backed crypto funds already exist in the market. Futures-backed Bitcoin ETFs have been available to US customers since 2021. Issuers and investors are advocating for spot Bitcoin ETFs to be similarly accessible to retail and institutional investors in the US, a development that’s perceived as having the potential to greatly broaden participation in the cryptocurrency industry.
2. What’s the difference between Bitcoin futures and spot Bitcoin?
Futures are contracts to buy or sell an asset at a specified price at a later date. They are widely used in many markets, like oil, by investors who want to speculate on price movements without having to own or take possession of the underlying asset directly. As the price of Bitcoin swings up or down according to direct trading, Bitcoin futures track the cryptocurrency’s spot price indirectly on exchanges like the Chicago Mercantile Exchange. In the spot Bitcoin market, by contrast, users buy and sell the actual digital currency via exchanges.
3. What’s been available before now?
The ProShares Bitcoin Strategy ETF became the first Bitcoin futures ETF available in the US, opening on Oct. 19, 2021, to strong demand: More than $900 million in shares changed hands in its first day. The largest Bitcoin ETP — the $1.5 billion Bitcoin Tracker EUR, listed on the Stockholm Stock Exchange — invests in swap contracts to mirror the cryptocurrency’s returns. The Purpose Bitcoin ETF (ticker BTCC), which made its debut in Toronto in early 2021, invests directly in “physical/digital Bitcoin,” its issuer, Purpose Investments Inc., said. Meanwhile, several US investment trusts have been following Bitcoin in a manner that’s similar to ETFs but with certain restrictions. The Grayscale Bitcoin Trust (ticker GBTC) is physically backed, meaning that it holds Bitcoin. Grayscale is trying to convert its trust into an ETF and is embroiled in a lawsuit with the SEC over the conversion, which the regulator opposes. Grayscale says it expects a decision before the end of the year.
4. What’s happening now?
The world’s biggest asset manager, BlackRock Inc., filed an application for a spot Bitcoin ETF in June, kicking off a fresh wave of speculation that the long-illusive investment product would finally get SEC approval. BlackRock’s application, in turn, led to a major crypto market rally and a flurry of similar ETF applications and resubmissions from issuers including Fidelity Investments and WisdomTree Inc.
5. Why did regulators shun a Bitcoin ETF for so long?
In addition to their worries about liquidity and manipulation, regulators have expressed concern that Bitcoin’s volatility might be too intense for ordinary investors — Bitcoin’s last three full-year returns were gains of 305% in 2020, up another 60% in 2021, followed by a loss of 64% in 2022. The SEC has also questioned whether funds would have the information necessary to adequately value tokens like Bitcoin, including whether they can validate who owns the underlying coins. In 2021, SEC Chairman Gary Gensler testified to the Senate Banking Committee that the lack of regulatory oversight and surveillance in crypto markets led to “concerns about the potential for fraud and manipulation.” In an attempt to allay some of the SEC’s concerns, BlackRock and other issuers following in its footsteps have proposed so-called surveillance-sharing agreements, a way to mitigate the risk of market manipulation and fraud. Coinbase Inc., the only publicly traded, pure-play spot crypto exchange in the US, has emerged as ETF issuers’ market surveillance partner of choice.
6. What might the SEC’s process look like?
On June 30, news broke that the SEC had asked BlackRock, Fidelity and other issuers to amend their filings with additional information. Crypto watchers saw the SEC’s request as a positive indicator that the process was moving along. The back-and-forth may continue, with some experts expecting an ultimate approval of at least one spot Bitcoin ETF by the end of the year. Others advise caution, as this battlefield is already littered with corpses of around 30 prior attempts that failed to persuade the SEC to give them a chance.
–With assistance from Claire Ballentine.
More stories like this are available on bloomberg.com
