The big boys have finally arrived! The major talking point in the crypto-sphere in what feels like forever has been the filing of a multitude of Bitcoin spot ETFs by a number of large TradFi institutions, in particular the biggest and baddest of them all… BlackRock.
This came as a surprise to many, especially after BlackRock CEO, Larry Fink, has repeatedly given Bitcoin the middle finger in the past. It was only in 2018 that he stated that none of his clients were even remotely interested in crypto and that he couldn’t see any reason to take a closer look at the asset class. Oh, how the pendulum swings.
This newfound interest in Bitcoin by large institutions leaves us wanting answers to many questions. Questions like: What is the chance of a spot Bitcoin ETF being approved? Is this news bullish or bearish for the crypto market? What the hell’s an ETF, anyway?
We’re digging into all of the above, plus throwing in a few extra theories of our own, now let’s have at it.
What is an ETF?
Let’s start with the basics and the actual term itself – ‘ETF’, which stands for Exchange Traded Fund. An ETF aims to provide investors with a simple way to own an asset without having to go out and buy it themselves. Instead one can buy shares in the ETF and effectively own the underlying asset without the strains of self-custody.
This means investors could buy or sell Bitcoin without having to touch the blockchain and instead do it in the same way they would buy or sell any other shares in their brokerage accounts.
The custodian of the ETF has to own an equivalent amount of the underlying asset to match the amount of shares available in the fund and the price of the fund will track the price of that underlying asset. You may already see why this is a big deal when it comes to Bitcoin…
When it comes to Bitcoin, there are two main types of ETF. The first is called a Futures ETF, of which many already exist. These Futures ETFs track the price movements of Bitcoin futures contracts that represent an agreed price to buy or sell Bitcoin at a future date.
It’s for this reason that they’ve struggled to give accurate price representations in the past and therefore the idea of a spot BTC ETF is much more appealing, which leads us to ETF type two – the spot ETF.
A spot ETF is backed 1-1 by Bitcoin and gives a much more accurate representation of price, it’ll also likely provide cheaper fees than a futures-based ETF. It’s worth noting that Canada already has a few different BTC spot ETFs listed like the $BTCC, with that chart on show below.
Now, technically speaking the BlackRock iShares Bitcoin Fund is actually a trust, but unlike Grayscale’s Bitcoin Trust, it allows redemptions so it functions the same way as would a spot ETF. Grayscale has been attempting to convert its Bitcoin Trust to a spot ETF for some time now but has faced constant rejection by the SEC.
So, what is the chance of a spot BTC ETF being approved?
It’s not just BlackRock that has jumped on the ETF bandwagon lately. Other large traditional institutions have all joined in on the fun with the hopes of being approved themselves. These firms include:
- Fidelity ($4.5 trillion under management)
- Invesco ($1.49 trillion under management)
- Wisdom Tree ($87 billion under management)
- Valkyrie ($1 billion under management)
Obviously, BlackRock has been the main talking point given they’re largest and most influential of all, with a cool $9 trillion of assets under management (AuM). About $50 billion worth of Bitcoin is currently sitting on exchanges, so BlackRock could easily swallow them all up with a tiny 0.5% allocation of its overall AuM!
BlackRock has a very solid track record of ETF approval, so far 575 ETF applications have been given the green light with only one being rejected. This puts the odds of them getting the go-ahead on a spot BTC ETF pretty high.
There are, however, some drawbacks, the biggest of which comes in the form of the SEC and their reasons for denying previous spot ETFs, being fraud and price manipulation. BlackRock is looking to solve these problems by signing a Surveillance Sharing Agreement in cooperation with NASDAQ that requires the monitoring of trading activity and customer information.
It’s worth noting that previous applications for spot ETFs have also agreed to such terms but have still been rejected. The big difference this time is that it’s BlackRock, who may just have an IOU up their sleeve after helping bail out the US economy and banks in recent times.
Another issue is the current stance of the SEC towards crypto. Giga grub Gary Gensler hasn’t exactly been crypto’s biggest fan-boy of late and has been busy launching a full-scale attack against many exchanges and protocols. Interestingly enough one of the exchanges in Gary’s regulatory grasp is Coinbase, which just so happens to be BlackRock’s choice of custodian to hold the Bitcoin needed to run the spot ETF… Strange to say the least.
The use of Coinbase as the custodian is not so surprising considering the exchange already has an existing relationship with BlackRock and is the cleanest of all the major exchanges currently in existence.
The SEC has approved a variety of futures-based Bitcoin ETFs in the past and has recently given a leveraged futures ETF the go-ahead, so the idea of a spot ETF getting the thumbs up is not so far-fetched.
Once the application has been made, the SEC has 45 days to either approve, reject or extend the approval. This would mean the verdict should be known by August 12. If they choose to extend the verdict, they can do so for a maximum of 240 days, meaning the latest we’ll know if this is happening or not will be February 23 2024.
So, Bullish or Bearish?
Let’s start with the good news
A spot Bitcoin ETF approval for BlackRock would most likely mean approval for all the other firms who have put forward applications. It would, at the very least, provide a blueprint for other firms to follow in order to gain approval at some stage in the future. Approval means that these firms will have to start loading up on Bitcoin to back their financial products.
Explained in simple terms… Numba go up!
It would also mean that these large TradFi firms would likely start shilling their products to normies. This, in turn, could paint a more positive picture of crypto as a whole to the wider population and TradFi-loving boomers. The question here is whether this positive sentiment would encourage them to go out and buy other crypto projects outside of the ETF itself.
The fact that Coinbase is likely to be the custodian for many of these ETFs could also be a bullish catalyst for the company’s stock, which has been pretty beaten up as of late. I can see the sun shining off Brian’s bald head already
Now to the not-so-good news
The timing of these ETF filings is nothing short of fishy. They came directly after the SEC launched a full-scale warfare campaign against many major exchanges and protocols. You could speculate that in order for the concerns around price manipulation to be dealt with, the SEC would have to destroy the likes of Binance and possibly even Tether, who have been touted as the main manipulators of Bitcoin’s price.
It just so happens that Tether has been doing extremely well lately, and their profits even have exceeded those of BlackRock. Surely that’s not something that Larry is smiling about from his ivory TradFi tower?
Obviously, the attack on these major crypto players would be bad news for the overall market and the subsequent bearish price action might be exactly what these large TradFi firms are looking for in order to fill their bags.
This leads to the next point of the potential for some serious market FUD to occur in order for these big institutions to get in at a good price. Keep an eye out for this, don’t fall victim and sell your hard-earned bear market bags to the big boys!
Another potentially bearish catalyst could be the fact that these ETFs will be listed on traditional exchanges and therefore will suck liquidity out of crypto and into traditional finance. There are many pain points that these institutions could focus on in order to convince mum and pops that they should avoid using the blockchain and instead leave that up to the ‘experts’.
The fact that self-custody involves signing up to a major exchange, whose KYC is often stricter than your average stock broker, and using a crypto wallet, which is vulnerable to hacks, lost keys, and in general not the most user-friendly experience could be major points of persuasion.
This would result in bullish price action for Bitcoin but mean the rest of the crypto market could be left in its current PvP, low liquidity environment.
It may also be worth mentioning that Fidelity’s BTC futures ETF marked the top of the 2021 bull run after bringing in a whopping $1 billion of Bitcoin inflows in just a few days. The launch of a Bitcoin futures ETF on the Chicago Mercantile Exchange in 2017 was also a solid top signal.
If the spot ETF application were to be denied, then it goes without saying that we would most likely be stuck in Goblin Town for the foreseeable future.
However you see it, bullish or bearish, it goes without saying that these big players want a piece of the crypto pie. Approval of a spot ETF would be the entry they need to start scooping up sats and dominating the Bitcoin market. Even if the spot ETF is denied, these large firms have now shown their hand and will likely find another way to get in on the good times.
Bitcoin’s market cap currently sits around $586 billion, and when compared to that of gold at around $12.6 trillion, the room for growth becomes very apparent. The biggest concern will lie around Bitcoin becoming another largely TradFi manipulated marketplace, like that of gold, and therefore stifling its true growth potential.
Either way, it is now a matter of when not if these big players will start stacking satoshis and one can merely aim to use them as exit liquidity and not be fudded out of future glory for degenkind.
- This article was written by defi_gaz, a long-time crypto enthusiast who has spent too much time diving down various DeFi rabbit holes. He should probably just take a full-time role at the Mcdonald’s checkout, but his love for crypto means he is now stuck here for life.