- A spot bitcoin ETF could potentially hit the 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 this may be the case despite the SEC’s history of rejecting spot bitcoin ETF applications.
- They also explain why the recent run to launch short-term bitcoin ETFs is a good thing for the market.
Following the launch of the first US bitcoin futures ETF in October, the largest cryptocurrency hit an all-time high of nearly $69,000 and saw over $1 billion in inflows into the fund in just two days, the potential approval of a bitcoin spot ETF this year has become a critical catalyst not only for the price of bitcoin but also for asset managers with skin in the game.
The high-stakes race to launch the first cash bitcoin ETF recently intensified with the approval of the Teucrium Bitcoin Futures Fund, which was filed under the Securities Act of 1933. Previously, the Securities and Exchange Commission only allowed than futures contracts. -based on bitcoin ETFs filed under the Investment Companies Act of 1940 to come to market. To date, the regulatory agency has denied all applications for spot bitcoin ETFs, which would fall under the ’33 Act.
In all approval and denial orders, SEC staff have consistently emphasized that the structure of Bill ’40 provides additional protections for investors over the structure of Bill ’33. By approving the ’33 Act product, the SEC is essentially sending the message to the market that it has become more comfortable with the structure that would underpin a physical-backed bitcoin ETF, according to Dave LaValle, global head of ETFs at Grayscale Investments. .
“This Bill ’33 approval for Teucrium Bitcoin Futures Fund was a big deal because it really shows us and the market that the SEC has become familiar with the structure of Bill ’33 versus Bill ’40 from point from an investor protection standpoint,” LaValle, a 20-year ETF veteran who served as CEO of Alerian, told Insider in an interview.
In previous denial orders, the SEC has also raised concerns about the prospect of fraudulent acts and manipulation in the underlying market and the absence of surveillance sharing agreements with a regulated market of significant size related to bitcoin.
“For these concerns, we go back to our original point, which is that the underlying bitcoin cash market is inextricably linked to the bitcoin futures market. Therefore, if you are comfortable with the futures market, you need to be comfortable with the underlying market,” he said.
Grayscale Investments, which manages the largest bitcoin fund in the world – the $26 billion Grayscale Bitcoin Trust (GBTC), filed an application to convert GBTC into a spot bitcoin ETF in October.
Since March of last year, the trust has been trading at a discount. This means that GBTC investors, who are subject to a six-month lock-up period, are effectively losing money compared to those who buy bitcoin directly on the open market.
By converting GBTC into an ETF, the fund would become open-ended, allowing market makers to arbitrate against the premium or discount. This process generally keeps ETFs trading in line with their true value; unlike ETFs, trusts cannot redeem stocks to accommodate varying levels of demand. As such, the conversion is expected to close out GBTC’s discount, which was 21.69% on Monday, according to YCharts.
In July, the SEC is expected to rule not only on Grayscale’s filing, but also on Bitwise Asset Management’s request 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 was “hopeful” about the SEC’s decision after the company 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 bitcoin futures ETFs. The first such fund to hit the market – the ProShares Bitcoin Strategy ETF (BITO) – had $1.1 billion in assets under management on 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 hope we get that first-mover advantage, but I think in crypto specifically, the company that you work is also important, the relationship that people have, that’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 see the agency’s green light for the Teucrium Bitcoin Futures Fund as another step in the process, not necessarily a milestone.
“We are moving along the continuum. It removed one question, but it does not remove all questions and some of them are still described in the dossier and some of the original statements,” said Ben Slavin, global head of ETFs, asset maintenance at BNY Mellon, Insider said in an interview.
More the merrier, the merrier
Amid intense pressure from asset managers for a bitcoin spot ETF, the race among issuers to launch the first short-term bitcoin ETF is also underway.
Asset managers including Direxion, ProShares and AXS Investments have all filed applications for ETFs that claim to offer the inverse performance of bitcoin futures. Pending SEC approval, the funds could begin trading as early as June.
While some investors see the growing interest in bitcoin as one of the reasons the price of the biggest cryptocurrency has struggled, ETF experts believe the approval of a more large number of exchange-traded products could only make the market more efficient.
“Inverse ETFs in general are valuable tools for investors. People want to get short exposure and sometimes it’s cheaper and easier in an inverse ETF than selling a long ETF,” Hougan said. “The more people can safely access the bitcoin market and the crypto market, the more liquid and efficient these markets become, and that’s good for all investors.”
Grayscale’s LaValle echoes this sentiment: “The more investors, the more exposure, the more complex this ecosystem becomes and the better the liquidity profile. seek their exposure.”