Original author: PSE Trading Intern@JohnHol
After the SEC rejected multiple applications for Bitcoin spot ETFs in recent years, in August this year, the SEC and Grayscale lost their case regarding the rejection of converting GBTC into a Bitcoin spot ETF. At the same time, BlackRock, the worlds largest asset management institution, and several other institutions submitted an application for a Bitcoin spot ETF to the SEC. Bitcoin spot ETFs are coming unstoppably.
What is a Bitcoin Spot ETF?
A cryptoasset exchange-traded fund (ETF) refers to an exchange-traded fund that tracks the price of one or more cryptoassets by investing in cryptoassets or related instruments. The currently widely discussed Bitcoin ETF is an ETF that tracks the price of Bitcoin, which mainly includes Bitcoin futures ETF and Bitcoin spot ETF. The main difference is that the underlying asset corresponding to the Bitcoin futures ETF shares purchased by investors is Bitcoin futures contracts, while the underlying asset corresponding to the Bitcoin spot ETF shares is Bitcoin.
The biggest feature of ETF compared with ordinary public funds is that it can trade fund shares on traditional stock exchanges like stocks, which means that if the Bitcoin spot ETF passes, investors do not need to go through complicated processes - such as downloading a wallet Plug-in, create a public-private key pair or trade through a centralized exchange - instead of purchasing ETF shares directly, you can directly enjoy the rate of return of Bitcoin. These processes are not difficult for those who are familiar with them, but there is still a threshold for investors who do not understand crypto assets at all. The Bitcoin Spot ETF lowers this threshold and gives these investors, especially institutions, Financial instruments that are familiar to investors and the security of legal protection.
How Bitcoin ETF works, taking Bitcoin spot ETF as an example, first the issuer will purchase Bitcoin assets, either directly from Bitcoin holders, or through a centralized exchange. These assets are stored in Bitcoin wallets with multiple protection measures, such as cold wallets. Second, the issuer creates fund shares, and the value of these shares closely follows the price fluctuations of Bitcoin. In this process, Authorized Participants (Authorized Participants) are responsible for the creation and redemption of fund shares. They are usually large financial institutions and often act as secondary market makers. Investors can buy or sell fund shares on a traditional stock exchange, just like trading stocks. In addition, authorized traders also need to arbitrage the price difference when there is a premium or discount on fund shares to ensure that the price of fund shares is consistent with the cost of Bitcoin.
The first Bitcoin ETF is ProShares Bitcoin Strategy ETF (BITO), a Bitcoin futures ETF that traded on the Chicago Mercantile Exchange in October 2021. However, currently the SEC has not approved any Bitcoin spot ETF.
The first financial instrument to create shares based on Bitcoin was the Grayscale Bitcoin Trust (GBTC), which debuted in 2013 and was officially publicly traded in 2015. In January 2020, GBTC was approved for registration by the SEC. Passed, becoming the first crypto asset investment tool that complies with SEC standards. However, GBTC is not an exchange-traded fund, but a closed-end fund that trades through over-the-counter exchanges. Although GBTC fund shares allow investors to obtain Bitcoin income without directly holding Bitcoin, as a closed-end fund, the price of GBTC fund shares depends on the supply and demand relationship in the secondary market and is not related to Fund holdings correspond to Bitcoin. Therefore, there is often a price difference between the value of GBTC shares and the value of Bitcoin positions.
GBTC has been actively communicating with the SEC, hoping to convert it into a Bitcoin spot ETF, but it has not been approved. It was not until August 2023 that things turned around. The Washington, D.C. Circuit Court of Appeals ruled that the SEC was wrong to reject GBTCs application to convert into ETFs. The SEC needed to re-examine the application, but the SEC did not appeal this ruling. Such a ruling does not mean that the SEC must approve GBTC’s application, but it sends extremely positive news to the market.
SEC Approval Process
To put it simply, an institution submits relevant materials for an ETF application to the SEC. After the SEC confirms it, it publishes a 19 b-4 document in the Federal Register. After that, the SEC will enter a 240-day approval process, and on the 45th and 90th days , publicly respond to the application results on the 180th or 240th day or announce the postponement to the next date.
The SEC has long expressed concerns about the lack of regulation of the cryptocurrency market, which was the main reason for its rejection of the crypto-asset ETF application. In previous reasons for rejection, the SEC insisted that the lack of regulation and supervision of the cryptocurrency market, the lack of necessary information transparency, the difficulty in ensuring asset security and other factors have led to concerns about potential fraud and manipulation and emphasized that the market needs to fully information sharing and supervision.
After the SEC lost its lawsuit against Grayscale, the court ruled that the SEC can no longer use potential fraud and manipulation as a reason to refuse the approval of the Bitcoin spot ETF, but the SEC may still find other reasons to refuse the approval of the Bitcoin spot ETF.
Bitcoin spot ETF application status
In addition to Grayscale, which has been applying, many institutions applied to the SEC for Bitcoin spot ETFs in 2023. For example, BlackRock applied for iShares Bitcoin Trust, Fidelity applied for Wise Origin Bitcoin Trust, Ark Invest applied for ARK 21 Shares Bitcoin ETF, and so on. It is worth noting that most of these institutions are not applying to the SEC for the first time. After several years of fighting with the SEC, they submitted Bitcoin spot ETF applications to the SEC again at almost the same time this year, including the first time. Apply to BlackRock. BlackRock is famous for issuing index tracking funds. Its flagship product iShares has a market share of nearly 50% in the US ETF market. Its success rate in applying for ETFs is close to 100%. This is also an important factor why the market believes that the Bitcoin spot ETF will pass next year.
Moreover, these institutions represented by BlackRock have fully adjusted their strategies. In order to alleviate the concerns of the SEC, BlackRock and other institutions have proposed Surveillance-Sharing Agreements, which is a way to mitigate market manipulation and fraud. risk approach. Oversight sharing agreement iscryptocurrency exchangeAn agreement with a market regulator that allows both parties to share transaction data and information to monitor transactions. If suspicious trading data or information appears, this information will be pushed to regulators, ETF issuers and cryptocurrency exchanges at the same time. BlackRock and Ark Invest have both chosen Coinbase Custody Trust Company as their Bitcoin custodian and Bank of New York Mellon as their cash custodian.
Judging from past situations, the SEC usually does not approve Bitcoin spot ETFs in advance and chooses to announce the results on the final approval date. Currently, the closest to the final approval date is the ARK 21 Shares Bitcoin ETF applied by Ark Invest, which will be The results will be given on January 10, 2024, and the final approval date for BlackRock and the remaining institutions will be March 15, 2024. According to sources quoted by Reuters, discussions between the SEC and asset managers applying for Bitcoin spot ETFs have gone deep into key technical details, including regulatory arrangements, subscription and redemption mechanisms. This suggests that the SEC may approve these products soon. We may see the adoption of a Bitcoin spot ETF as early as January 10 next year.
The market impact of Bitcoin spot ETFs
Taking gold spot ETFs as a guide, on March 28, 2003, the first gold spot ETF, ETFS Physical Gold, was approved in Australia. Later, on November 18, 2004, the worlds largest gold spot ETF, SPDR Gold Trust, was approved. The United States was approved. This has a huge impact on the global gold market. Over the next ten years, gold prices rose from $332/ounce to $1,600/ounce.
Before the launch of gold spot ETFs, it was difficult for investors to directly invest in gold. Investors often could only gain exposure to gold by purchasing gold bars. However, such low liquidity and efficiency discouraged many investors. The adoption of gold spot ETFs allows investors to gain exposure to gold without owning it and trade it as easily as stocks. Through gold spot ETFs, many asset management institutions have included gold in their asset portfolios, which has injected huge amounts of liquidity into the gold market and contributed to the rapid rise in gold prices over the next ten years.
In a sense, Bitcoin, known as digital gold, has many similarities with gold. Bitcoin is regarded by mainstream financial markets as a familiar asset with hedging properties, risk-avoiding properties, and diversification. Therefore, even considering its volatility There are also a large number of asset managers willing to include Bitcoin in their asset portfolios. However, due to compliance and approval process restrictions, mainstream asset management institutions cannot directly hold Bitcoin. What the market urgently needs is a compliant financial instrument to help investors overcome these difficulties, which is the essential reason why Bitcoin spot ETFs have been promoted.
The Bitcoin spot ETF will become the largest bridge connecting mainstream asset management institutions with a scale of approximately US$50 trillion and Bitcoin with a market capitalization of less than US$1 trillion. It will inject trillions of liquidity into Bitcoin. Bitcoin spot ETFs have the following potential market impacts:
Increase direct investment in Bitcoin: A Bitcoin spot ETF would attract mainstream investors in financial markets. Bitcoin has always been restricted by high learning costs and a lack of financial tools, which has resulted in the mainstream asset management industry lacking effective investment channels to invest in Bitcoin. Such institutional investors are unable to provide direct investment to customers due to compliance and approval process restrictions. Services for Bitcoin or other cryptocurrencies. The arrival of Bitcoin spot ETFs gives mainstream investors, especially institutional investors, a familiar financial tool to gain exposure to Bitcoin.
Enhance Bitcoin’s legal recognition: Bitcoin spot ETFs will further enhance Bitcoin’s status in the mainstream financial system. Traditional asset management institutions are often unable to hold Bitcoin directly or buy from centralized exchanges due to legal reasons. Bitcoin spot ETFs can solve this problem because through Bitcoin spot ETFs, asset managers will be able to provide investors with legally protected assets. This can promote the mainstream market’s legal recognition of Bitcoin and enhance the mainstream market’s confidence in Bitcoin.
Expand asset management institutions’ asset portfolios: Bitcoin spot ETFs will provide asset management institutions with a more diversified asset portfolio. Compared with the financial instruments provided by existing Bitcoin futures ETFs and trust institutions, Bitcoin spot ETFs can provide direct exposure to Bitcoin on the one hand, and can reduce the price difference between the share value and the reserve Bitcoin on the other hand. This is a better financial tool for asset managers looking to participate in the Bitcoin market.
Looking ahead to the future of Bitcoin
After more than ten years of development, Bitcoin’s recognition in the mainstream financial market has continued to increase. Under the continuous push of investors and asset institutions, regulatory agencies, although reluctant, still need to legally recognize the value of crypto assets like Bitcoin, thereby opening the door to Bitcoin for mainstream asset management institutions.
The passage of the Bitcoin Spot ETF is only the beginning of mainstream financial markets entering the crypto market. Since this year, global regulatory authorities are actively establishing a regulatory framework for the crypto market. It should be noted that the actions of regulatory authorities will not affect the censorship resistance of crypto assets. sex, which is determined by the degree of decentralization of cryptography and crypto-assets. On the contrary, the actions of the regulatory authorities can eliminate scams disguised under the appearance of technology in the encryption market for investors, and clear obstacles and establish regulations for mainstream financial institutions to enter the encryption market.
The European Union has made great progress in establishing a regulatory framework for the encryption industry this year. The European Commission has been establishing a regulatory framework for the encryption industry since 2018, and voted to adopt MICA (Markets in Crypto-Assets Regulation) on April 20 this year. Currently the most comprehensive regulatory framework for the crypto industry in the world. The EU hopes to take advantage of the regulatory vacuum in the U.S. crypto market to establish a comprehensive regulatory framework and create legal certainty for large technology companies and asset managers to enter the crypto market, thereby playing a leading role in regulating cryptocurrencies globally.
Compared with the Bitcoin Spot ETF, which aims to create a financial instrument for investing in Bitcoin, MICA is more ambitious and aims to pave the way for all institutions to directly invest in or participate in the crypto market.
The market generally expects that with the launch of the Bitcoin spot ETF and the Bitcoin halving, coupled with the end of the Federal Reserves interest rate hike cycle, the market value of Bitcoin will usher in an unprecedented increase. But from a long-term perspective, this may be just the beginning. The passage of the Bitcoin Spot ETF will undoubtedly be a major turning point in the history of Bitcoin and even the world’s finance. In the future, we will see the regulatory framework continue to be implemented around the world. Bitcoin It will be deeply integrated with mainstream financial markets and become the digital gold recognized by everyone.
Reference link
https://www.investopedia.com/spot-bitcoin-etfs-8358373
https://cn.tokeninsight.com/zh/tokenwiki/all/bitcoin-spot-etf-when-will-be-the-approval-date
