Speculation that a spot-based Bitcoin exchange-traded fund could be approved is reaching fever pitch, with crypto trading firm NYDIG estimating that it could unleash $30 billion in new demand for the token.
The hype comes as BlackRock (ticker: BLK), the world's largest asset manager, filed an application last month to launch an ETF that would directly own Bitcoin. It was soon joined by companies such as Fidelity, WisdomTree (WT) and Invesco (IVZ).
The Securities and Exchange Commission has denied similar requests in the past, but BlackRock and the others may have found a way to assuage the agency's concerns by including new fraud oversight agreements.
Judges are also expected to issue a ruling soon in a closely watched lawsuit between the SEC and Grayscale Investments, which sued the agency over its rejection of efforts to convert the Grayscale Bitcoin Trust (GBTC) into an ETF. A favorable ruling for Grayscale could make it harder for the agency to keep ETF applications at bay.
But even if a spot Bitcoin ETF is approved, there is reason to doubt that it will be the game-changer announced by token developers.
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The bullish case, as described by NYDIG, compares the potential demand for a Bitcoin ETF to funds holding gold. Crypto investors have argued for years that Bitcoin is replacing the precious metal. Although it has no industrial use like gold, it has a limited supply and is considered insurance against disaster should the dollar-based monetary system implode.
With that in mind, NYDIG in a report last week noted that gold ETFs have around $210.8 billion in assets under management, while Bitcoin funds have around $28.8 billion invested. Bitcoin is more volatile than gold, and after accounting for investors requiring fewer tokens to gain equivalent risk exposure, NYDIG said there would be nearly $30 billion in additional demand for a spot Bitcoin ETF.
That extra $30 billion would no doubt be a boon to token prices, but there are many reasons to doubt that the approval of a spot Bitcoin ETF would bring such a boon.
One reason is that most investors who think Bitcoin prices will rise already have plenty of ways to gain exposure to the token. Retail investors and financial advisors have been buying bitcoin for years through crypto trading platforms such as Coinbase (COIN) and traditional companies such as Fidelity and WisdomTree
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have recently incorporated crypto trading into their own offerings.
Although the SEC has not approved a bitcoin ETF based on spot prices, it has approved funds based on bitcoin futures, such as
ProShares Bitcoin Strategy ETF
(BITO), which has approximately $1 billion in assets. Several more billions of dollars are in regulated spot Bitcoin ETFs in other countries. In the United States, the Grayscale Bitcoin Trust
,
which trades as a closed-end fund, has nearly $19 billion under management.
All this to say that a spot Bitcoin ETF could be cheaper and more efficient than existing options, but could end up attracting investors from other products rather than increasing overall demand.
“There is this belief that a spot Bitcoin ETF will drive up the price of Bitcoin, and I wonder if that will really be the case,” said Stuart Barton, chief investment officer at Volatility Shares.
Volatility Shares late last month shocked some crypto and ETF executives when it was able to launch the
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2x ETF Bitcoin Strategy
(BITX), which uses futures contracts to try to give investors exposure to twice the daily movement of the token's price. These leveraged funds are considered risky, especially when tied to volatile assets such as Bitcoin, and executives have argued that the SEC was reckless in approving the fund while blocking spot Bitcoin ETFs.
Barton said bringing the ETF to market wasn't as much work as people think, noting that Bitcoin futures have been around for years.
Regarding unleveraged Bitcoin exposure, Barton says, “The real question is, why do so many people think a spot Bitcoin ETF will be so much better than a futures-based ETF?”
Email Joe Light at [email protected]