- A spot bitcoin ETF could potentially come to market this year after the SEC recently approved a futures-based bitcoin ETF filed under the ’33 Act.
- ETF experts from Grayscale and Bitwise explain why that may be the case despite the SEC’s history of rejecting spot bitcoin ETF applications.
- They also share why the recent race to launch short bitcoin futures ETFs is a good thing for the market.
After the launch of the first US bitcoin futures ETF in October propelled the largest cryptocurrency to an all-time high of nearly $ 69,000 and saw more than $ 1 billion inflows to the fund in just two days, the potential approval of a spot bitcoin ETF this year has become a critical catalyst not only for the price of bitcoin but also for the asset managers with skin in the game.
The high-stakes race to launch the first spot bitcoin ETF has been heating up recently with the approval of the Teucrium Bitcoin Futures Fund, which was filed under the Securities Act of 1933. Prior to this, the Securities and Exchange Commission has only allowed futures -based bitcoin ETFs filed under the Investment Company Act of 1940 to come to market. To date, the regulatory agency has denied all applications for a spot bitcoin ETF, which would fall under the ’33 Act.
In all the approval and denial orders, the SEC staff has consistently made the point that the ’40 Act structure provides additional protections to investors versus the ’33 Act structure. By approving the ’33 Act product, the SEC is essentially sending a message to the market that they have become more comfortable with the structure that would underpin a physically-backed bitcoin ETF, according to Dave LaValle, global head of ETFs at Grayscale Investments.
“That ’33 Act approval for Teucrium Bitcoin Futures Fund was a big deal because it really shows us and shows the market that the SEC has gotten comfortable with the structure of the ’33 Act versus ’40 Act from an investor protection perspective,” LaValle , a 20-year ETF veteran who served as the CEO of Alerian, told Insider in an interview.
In previous denial orders, the SEC also raised concerns about the prospect of fraudulent and manipulative acts in the underlying market and the lack of surveillance-sharing agreements with a regulated market of significant size related to bitcoin.
“For those concerns, we go back to our initial point, which is the underlying bitcoin spot market is inextricably tied to the bitcoin futures market. Therefore, if you are comfortable with the futures market, you must be comfortable with the underlying market,” he said.
Grayscale Investments, which runs the world’s largest bitcoin fund – the $ 26 billion Grayscale Bitcoin Trust (GBTC), filed to convert GBTC into a bitcoin spot ETF in October.
Since March last year, the trust has been trading at a discount. This means that GBTC investors, who are subject to a six-month lockup period, are effectively losing money compared to those buying bitcoin directly in the open market.
By converting GBTC into an ETF, the fund would become open-ended, allowing for market makers to arbitrage against the premium or discount. This process typically keeps ETFs trading in line with their true value; unlike ETFs, trusts are unable to redeem shares to adjust for varying demand levels. As such, the expectation is that the conversion would close GBTC’s discount, which was 21.69% as of Monday, according to YCharts.
In July, the SEC is expected to decide on not only Grayscale’s filing, but also Bitwise Asset Management’s application for a spot bitcoin ETF about a week earlier.
Matt Hougan, an ETF industry veteran and chief investment officer of the $ 1.2 billion crypto asset manager, said he is “hopeful” about the SEC’s decision after the firm submitted over 200 pages of academic research answering questions about what they can do to prevent manipulation and how the CME futures market relates to the spot market.
Still, the asset manager that launches the first physically-backed bitcoin ETF is likely to get the lion’s share of investor inflows, as was the case with the bitcoin futures ETFs. The first such fund to come to market – the ProShares Bitcoin Strategy ETF (BITO) – has $ 1.1 billion in assets under management as of Tuesday, while the second futures-based bitcoin ETF – the Valkyrie Bitcoin Strategy ETF (BTF) – oversees $ 42.6 million.
“In the ETF space,
matters, so first-mover advantage matters, “Hougan told Insider in an interview.” Obviously, we are hopeful that we get that first-mover advantage, but I do think in crypto specifically, it also matters the firm you are working with, the relationship that people have, it’s an area where trust matters a lot. “
To be sure, the SEC has shown no willingness to approve a bitcoin spot ETF so far. And some experts view the agency’s greenlighting of the Teucrium Bitcoin Futures Fund as another step in the process, not necessarily a big milestone.
“We are moving down the continuum. It removed one question, but it doesn’t remove all of the questions and some of that is still outlined in the filing and some of the original statements,” Ben Slavin, global head of ETFs, asset servicing at BNY Mellon, told Insider in an interview.
The more the merrier
Amid the asset managers’ intense push for a spot bitcoin ETF, the race among issuers to launch the first short bitcoin futures ETF is also underway.
Asset managers including Direxion, ProShares, and AXS Investments have all filed for ETFs that are meant to deliver the inverse performance of bitcoin futures. Pending SEC’s approval, the funds could begin trading as soon as June.
While some investors view growing short interest in bitcoin as part of the reason why the price of the largest cryptocurrency has been struggling, ETF experts believe that the approval of more crypto exchange-traded products could only make the market more efficient.
“Reverse ETFs are generally valuable tools for investors. People want to gain short exposure and sometimes it’s cheaper and easier in an inverse ETF than it is to short a long ETF,” Hougan said. “The more ways people can safely access the bitcoin market and the crypto market, the more liquid and efficient those markets become, and that’s good for all investors.”
Grayscale’s LaValle echoes this sentiment: “The more investors, the more exposures, the more complex that ecosystem becomes and the better liquidity profile there is. What will that do is that it will reduce spreads and it will have a better opportunity for investors to efficiently seek their exposure. “