Recently, an archive Gary Genslercurrent boss the SEC, reappeared on Twitter. As you may know, he is no stranger to the world of cryptocurrencies. Before becoming president of the American Financial Markets Authority, he taught fundamentals of blockchain at MIT and was also close to Changpeng Zhao, the current CEO of Binance, whom he would have met several times. We hear him express his incomprehension over the fact that there is still no spot ETF on Bitcoin. Quite curious, right? In any case, for JP Morgan, one of the largest American investment banks, things are rather clear. A Spot Bitcoin ETF is only a matter of time, and we could even see it arriving before Christmas.
And we have to tell you that everyone seems to have been waiting for this ETF for a while. Well yes, every time Bitcoin Bullrun, this narrative is on the table. But hey, this time, there are reasons to think that it’s the right one.
Hold on to your seat belts because today we are going to take a good dose of opium and see what we can expect from the approval of a Spot ETF on Bitcoin.
Bitcoin in the USA: the desire of institutional investors
First, let’s lay the foundations. As you may know, in the United States, there are not fifty ways to be exposed to Bitcoin price when you are a institutional, that is to say an entity regulated by law. Oh well yes, if you think that the big fish go through exchanges, think again. Of course, nothing prevents, in theory, big funds from knocking on Coinbase’s door and handing them a big suitcase of cash.
I say in theory, because in practice, these are not the kind of entities that invest a few thousand dollars in Bitcoin. In reality, they have millionor even billion to buy on behalf of their customers, and sometimes for themselves. And that, well, that poses a problem, since in concrete terms, it means that they cannot use the market route.
Indeed, there is simply not sufficient liquidity, it would certainly cause a hell of a green candle, but also a slippage from hell.
You realize that for these actors, going through the same routes as the
retail, that is to say you and me, it is just not possible, so they have to borrow
other paths, for example, using what are called financial products.
And for Bitcoin, roughly speaking, there are two. THE AND Fand the Trust. We will start with the simplest, the trust.
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Between ETF and Trust, Bitcoin balances
What is a Trust?
This is the name given to a slegal structure which has the mission of holding assets on behalf of its clients. Then, it is cut into parts and these are distributed to customers. You have probably already heard of Grayscale and its GBTCwell it’s a trust.
It’s quite a classic structure, what you have to remember is that for this type of financial product, in general, the management fees are rather high and that by buying this, you are not really buying Bitcoin , but we’ll come back to that.
Futures ETFs
Okay let’s move on to ETFs now. Already, there are two types.
First, theETF with indirect exposurewhich is also called synthetic, is a financial product that will use derivatives to replicate the performance of a specific asset.
What this means is that when you invest in this type of ETF, you are purchasing a financial product that is based on contracts. It can be future contractsor else optionsfor example, but remember that there is not really the underlying behind it.
For example, if you purchase a ETF Futures for oil, well the company that issues the ETF does not physically own hundreds of barrels of oil.
Several of these ETFs already exist for Bitcoin, and even for Ether, particularly in the United States.
But hey, you understand, at this stage, the main risk of these products is counterparty risk. Clearly, you trust the company and you know full well that it does not have any physical Bitcoin. If the company goes bankrupt, or if there is a problem, you will only have your eyes to cry.
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Spot ETFs
Therefore, what interests us here is rather the Spot ETF. And a spot ETF, unlike the synthetic ETF, it has direct exposure. He actually owns the underlying asset. In other words, if an ETF spot for Bitcoin is worth say 10 billion dollarsso in theory the company behind the ETF will need to own $10 billion worth of Bitcoin.
Moreover, it is interesting to note that there already exist Spot ETFs on Bitcoin, especially in Canada.
There, if you have followed, you will have the impression that a trust and an ETF, ultimately, are a bit the same, right? Well… Not quite.
The main difference is that on ETFs there is what is called a creation and redemption mechanism. We’re not going to go into detail, because it’s a bit abrupt, but basically, it allows an ETF to be more precise in tracking the performance of the underlying.
If the price of Bitcoin is at $20,000, then the price of the ETF will also be in those waters. For the trust well… it depends.
Remember the Grayscale GBTC, for example, this one is trading at a discount of around 17%. Bulk, buy bitcoin at Grayscale, you pay 17% less than the market price. This discount even reached almost 50% at the end of 2022. Yes yes, 50%. Clearly, when Bitcoin had fallen to around $16,000, you virtually had the possibility of getting it for $8,000 at Grayscale.
Why virtually? Well, remember, it’s a trust, so if you buy GBTC, you don’t really own Bitcoin. Instead, you have a little piece of paper where it says that you own shares of Grayscale which own Bitcoins. It’s not quite the same.
In short, if we summarize, trusts are expensive, they don’t track the performance of the underlying asset very well, and what’s more, they have counterparty risk.
Futures ETFs follow the price of the underlying a little better, but the counterparty risk is indeed present, since the issuer of the ETF does not directly own the asset.
So the Holy Grail would be a spot ETF? Not sure
There are still many gray areas about what form this type of financial product will take if it eventually arrives on Bitcoin. Well, everyone kind of agrees that it’s more a question of “when” than “if” at this point.
Please note that the approval rate for BlackRock ETFs by the SEC is still 575 to… one. Yes yes, out of all of BlackRock’s requests concerning this type of financial product, they were only rejected once.
But therefore, regarding these famous gray areas, tell yourself that in theory, the underlying must be purchased by the issuer of the ETF, of course, but these large funds will probably use intermediaries. For example for the ETF offered by BlackRock, the intermediary would be none other than… Coinbase.
Besides, a little subtlety, the famous BlackRock Spot ETF is in fact a trust. Yes yes, in the legal sense of the term, it is indeed a trust, but one which should have mechanisms similar to an ETF, and therefore which will be traded as such.
The Spot Bitcoin ETF, a systemic risk for the ecosystem?
There are also some fears who were raised about the arrival of this financial product, particularly on a Bitcoin takeover by institutional investors and increased manipulation of its price.
Some also point out that a Spot Bitcoin ETF could represent a systemic risk for the protocol, in particular by diluting its values of sovereignty and decentralization.
And yes, if you buy Bitcoin from BlackRock, you will not really have your coins in your possession, safe in your personal wallet.
Instead, you trust Blackrock to do the job and not sell you some sort of BlackRock Bitcoin that wouldn’t be worth much.
For the little anecdote, in the request for BlackRock for its ETF, they stipulate that in the event of a hard fork of Bitcoin, that is to say separation of the chain, they reserve the right to choose which blockchain will be the real blockchain, the real Bitcoin. Weird, right?
Well, that said, we are talking about BlackRock, but in reality, there are several files pending on the SEC’s desks, at least 8, each with specific deadlines. Moreover, they drag their feet a little and only push back the dates.
The next deadlines take place, for the majority, at the beginning of 2024 and, as you see in the table, we are not at the first deadline at all.
Come on, are you ready for a little dose of hope? We’re going to talk price.
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Will the Spot Bitcoin ETF in the USA propel the price of BTC?
It is true that the approval of a Spot ETF could literally cause the price of Bitcoin to explode upwards, for several reasons.
First of all, it would irremediably provoke a speculative wave. We saw this clearly when the queen of cryptocurrencies pumped almost 10% with the sole announcement of the listing of the BlackRock ETF at the Depository Trust & Clearing Corporation.
Moreover, for Eric Balchuna, analyst specializing in ETFs from Bloomberg, this listing shows that theBlackrock ETF is indeed on fire.
Then, we must say to ourselves that theilliquidity of the Bitcoin market is at an all-time-high, and it’s not going to get better. Already because of halvingbut also because exchanges are drying up slowly but surely.
In short, there are less and less Bitcoin available, and it is not so much a question of price here, but a question of quantity. It must be understood that even the biggest companies in the world could never acquire as much Bitcoin as we make Microstrategythe price may be lower, but the quantity of Bitcoin available is really lower.
On the other hand, if a spot Bitcoin ETF is approved, it will indeed generate a wave of demand to buy Bitcoin. And, at that point, if the quantity is restricted, then the justice of the peace becomes the price.
This is why this type of financial product is eagerly awaited on Bitcoin. The illiquidity of the market coupled with the characteristics of the queen of cryptos and, the halving approachingthis risks causing a shock of supply and demand that is rather interesting to observe.
And then we can add a layer, remember that the first financial product of this kind launched on gold dates from 2004.
In just 5 years, the price of gold has increased by almost 500%. Well, against a backdrop of economic crisis, but still.
Anyway the approval of a Spot Bitcoin ETF would make things much simpler for big funds, in addition to giving enormous legitimacy to the invention of Satoshi Nakamoto.
In any case, the approval of a first spot Bitcoin ETF seems imminent and this risks truly opening the floodgates for institutional investors to position themselves on this market.
It remains to be seen how all this will materialize and what the consequences will be for the protocol.
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