The Bitcoin ETF is overhyped, but still matters
Optimism among crypto traders increased drastically after the world’s largest management investment company, BlackRock, applied for the launch of the first spot exchange-traded fund (ETF) in the United States. Investor sentiment was reflected in the price of the first cryptocurrency — the Bitcoin exceeded the $30,000 mark.
On June 29, Fidelity Investments also filed for a Bitcoin ETF. Fidelity manages more than $11 trillion in assets for 42 million clients.
In this article, we are going to analyze and describe a well known and actively promoted for several years thesis: that the Bitcoin ETF will create fundamentally new conditions for the growth of Bitcoin price by attracting institutional investors to the market.
What is a Bitcoin ETF?
An ETF is an exchange-traded fund that holds securities based on an index, sector, commodity or other asset. A share (unit) of an ETF is a registered security, which confirms its holder’s indirect right to the corresponding part of the fund’s assets.
In its SEC filing, BlackRock asked for the permission to sell Bitcoin through a mechanism called the iShares Bitcoin Trust, which is a spot fund. A spot Bitcoin ETF involves buying the actual Bitcoin on the market. Futures-based ETFs differ from spot funds in that they offer investors access to futures contracts rather than to an asset.
The brief history of the Bitcoin ETF
Dozens of asset managers applied for the launch of a spot Bitcoin ETF. The first of them were the Winklevoss twins, who submitted their first application back in 2014, when bitcoin was trading below $1,000. While approving futures-based ETFs on Bitcoin, the SEC accepted none of the spot ones, explaining refusals by the fact that the cryptocurrency is traded on unregulated exchanges. The agency always says that it can’t provide investors with assurances that the market is free from fraud and manipulation.
BlackRock’s application is notable because almost all the company’s attempts to launch ETFs for other assets have been successful. In other words: BlackRock files the ETF to get it accepted, period.
The Bitcoin ETF narrative and what is wrong with that
There has been an actively promoted narrative in all Western media over the past few years that with the arrival of “institutional investors” to the market, Bitcoin will see unforgettable growth, and precisely the launch of the Bitcoin ETF will open the door for them to invest directly in the cryptocurrency. Even institutions like JPMorgan and BlackRock publicly supported this view.
A lot of noise comes from the head of ARK Kathy Wood, who suggests that companies that want to invest in cryptocurrencies typically allocate about 2.5% of their portfolio to them, and in the case of BlackRock, this amount can be about $1 trillion, which, she estimates, can lead to at least a two-fold increase in the price of BTC. Moreover, taking into account the fact that there are only about 3 million really liquid bitcoins on the market, she considers that a two-fold increase in prices is not the limit given the demand for $1 trillion.
The problem is that institutions that wanted to get into the crypto space are already here. For example, BlackRock has had over-the-counter (OTC) cryptocurrency purchase channels and its own private trust in partnership with Coinbase exchange since August 2022. Fidelity has similar resources: the company has had its own OTC-desk and cryptocurrency platform Fidelity Crypto for several years.
And even successful spot Bitcoin ETF filling won’t bring more institutions into the space. For filing companies, ETFs are primarily about making money on fees for holding the asset. For that reason, Bitcoin as an asset is less interesting to institutional investors than it is to retail investors. That was evident in January 2022, when data on the holders of three existing BTC futures ETFs was released. The number of institutional holders in one of them, BITO by Proshares, was about 0.37%, and the other two had even less.
Why does the spot Bitcoin ETF actually matter?
The situation itself is more interesting by the fact that BlackRock chose to apply for the ETF during a period of tension in the regulatory field. This may suggest that the company is looking positively at the state of the industry in the medium to long term.
Most likely, we are in for another round of volatility on the news of the application process, not in the middle of some game changing event. The procedure is governed by specific deadlines, but as the periods of past years show, the SEC can make various adjustments and change the deadlines at any time. So, it does not make sense to be tied to specific dates: denials, postponements and approvals can happen at any time.
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