July 27, 2023

Activity around another US market-based bitcoin spot-ETF signals crypto optimism


There have been plans to establish a bitcoin spot exchange traded fund (ETF) ever since the early days of cryptocurrency. Over the years, the US market has been tiptoeing around prospects of having a spot ETF finally approved by any of the number of applicants throughout the years. BlackRock is the latest contender. It is one of the largest and most influential asset management firms in the world. Founded in 1988, BlackRock offers a wide range of investment and financial services to institutional clients, including pension funds, corporations, governments, and individuals. Thus their latest foray into the area of managing bitcoin exchange traded fund has stirred market activity as it may presage a positive outlook to overall cryptocurrency industry.

Initially, private companies offered shares of the funds that aim to hold physical BTC. However, these funds are only available to a specific group of broker clients and thus are not actively traded. Bitcoin futures contracts were approved in the US already in 2017. Today, Switzerland, several German exchanges, Sweden, and Canada among other offer spot exchange traded products that are linked to bitcoin. In the US, only future ETFs are available, however. Futures based products differ from spot or physically backed exchange traded products. The difference: the latter involves physical purchase and storage of bitcoin, thereby impacting the overall spot market, while the former operates without physical storage and entails relatively expensive maintenance, which is not advantageous for long-term investors.

ETFs essentially provide investors with access to an asset without the risk of storing it; with a clear and well-known broker/bank reference system and transparently regulated management. However, institutions have long been investing in cryptocurrencies, privately or through existing derivative exchange products. Often, the decentralised nature of cryptocurrencies gave institutions, that diversified into cryptocurrencies, an unprecedented options to avoid, for example, liquidity shortages in the fiat system, maintain payrolls to employees and alike.
Spot ETFs are desirable as they visibly increase demand for Bitcoin as a physical asset, and, consequently, would raise the price in the spot market. Each ETF share is issued against a physically purchased and securely stored asset in the open market. To maintain liquidity, authorised market participants are also required to hold a sufficient portion of the asset in their inventory to ensure uninterrupted circulation, according to the ETF issuer’s prospectus. Thus, the approval of a physical or spot ETF in a large and active market like the US would undoubtedly signal a positive trajectory for Bitcoin price, largely due to increased physical demand.
The question of whether the American regulator will follow suit and allow spot ETF listing in the market is both technical and politically charged. Technically, today’s spot exchanges are well-developed, with one of the largest being the regulated NASDAQ market participant itself – Coinbase. Its prices and internal spot market operations are already monitored, making it a reliable price reference point for ETF derivatives. BlackRock also clarified this in their amended application in July 2023. Up until now, the US regulator has rejected all spot bitcoin ETF applications under the pretext that neither took sufficient precautions to prevent fraudulent and manipulative practices in order to protect investors and the public interest.
Politically, America thus has not been able to fully embrace the new asset class. Decentralised and outside the authority of any financial regulator, spot bitcoin is neither an investment contract, nor a commodity. It is a monetary system, without any single one authority. Investing in bitcoin is both anyone’s civil right and an opportunity for everyone to safeguard at least a portion of their assets against fiat currency investments, which are subject to interest rate volatility and inflation risks – thus bitcoin was born. Therefore, only by sheer pressure exuded by market participants, it is quite possible that the US regulator will eventually allow bitcoin spot ETFs. An to us, it will present an opportunity to participate in the demand for this unprecedented asset, realising that blockchain might indeed be the future of the financial system globally.

Link to original in Latvian: https://infogram.com/liza-aizupiete-par-bitcoin-etf-1hd12yxkgpz5x6k