BlackRock's Bitcoin ETF How does it work, what are its benefits and opportunities
BlackRock's Bitcoin ETF How does it work, what are its benefits and opportunities
A Bitcoin ETF is a financial product that allows investors to gain exposure to the price movements of Bitcoin without directly owning the cryptocurrency. Bitcoin ETFs track the performance of Bitcoin as an underlying asset.
Investors who purchase Bitcoin ETFs are, in essence, purchasing shares or units of the fund that uses Bitcoin as the underlying asset. The value of the ETF aims to mirror the performance of Bitcoin by giving investors an alternative method to invest in Bitcoin without having to set up and maintain a digital wallet or use cryptocurrency exchanges.
One of the main advantages of a Bitcoin ETF is that it offers a regulated and well-known investment structure. It allows investors to track changes in Bitcoin price within the confines of established financial markets, while also accessing the liquidity and transparency of ETFs.
Since a Bitcoin ETF usually owns a basket of Bitcoins rather than a single unit, investing in one can have certain advantages, such as diversification. It also allows daily trading of shares, similar to other publicly traded securities.
However, it is crucial to remember that the availability of Bitcoin ETFs may vary depending on jurisdiction and legal framework. Before making any investment selection, investors should carefully analyze issues such as fees, tracking sensitivity, and the ETF's custody regulations.
BlackRock, the world's largest fund manager, filed for a spot Bitcoin ETF on June 15, 2023. The U.S. Securities and Exchange Commission (SEC) filed lawsuits against Coinbase and Binance — two major crypto exchanges. BlackRock's iShares arm is seeking approval for the iShares Bitcoin Trust, a dot Bitcoin ETF.
On January 10, 2024, the SEC approved BlackRock's spot Bitcoin ETF, iShares Bitcoin Trust (IBIT), along with 10 other ETFs. IBIT is designed to reduce barriers and operational complexities, providing a direct path for investors ranging from asset managers to financial advisors to engage with BTC.
The ETF plans to use custody services offered by cryptocurrency exchange Coinbase. According to the official filing, BlackRock aims to track Bitcoin prices using the CME CF Bitcoin Reference Rate, which collects information from trusted cryptocurrency exchanges around the world. Kraken's subsidiary CF Benchmarks is responsible for collecting price information.
In addition to considering investment potential, it is important to evaluate a spot Bitcoin ETF's position within current offerings in the US market. Grantor trusts, futures-based ETFs, and Bitcoin-adjacent equity funds are the three main types of funds available in the Bitcoin ETF market, as explained below:
Grantor trusts owned actual Bitcoin, but often traded at a premium or discount.
Futures-based ETFs invest in Bitcoin futures contracts rather than the cryptocurrency itself and are subject to tracking errors.
Bitcoin-adjacent equity funds focus on companies in the Bitcoin and cryptocurrency sectors rather than direct Bitcoin investment.
Introducing a point Bitcoin ETF like the one proposed by BlackRock would create a different fourth category because it doesn't fit the existing options.
Futures-based Bitcoin ETFs, unlike spot-based Bitcoin ETFs, aim to track the price of Bitcoin as closely as possible, but there are some key differences in their approach.
First, futures-based ETFs frequently have front-month futures contracts that must be rolled over each month, incurring extra expenses. Additionally, futures contracts have expiration dates and require constant management and repositioning by portfolio managers.
To prevent market manipulation, futures exchanges such as the Chicago Mercantile Exchange (CME) have also introduced position restrictions on futures contracts. Once position limits are reached, portfolio managers of futures-based Bitcoin ETFs are required to purchase longer-dated futures contracts to comply with the restrictions. This enables the fund to continue to manage their position within the regulatory framework and avoid concentration risks.
However, these variances affect how Bitcoin's price is tracked and can cause changes in the spot market. For example, the contract's accuracy in tracking the spot market decreases as time passes until expiration.
Unlike existing options, BlackRock's spot Bitcoin ETF is expected to offer better price tracking and potentially lower fees. iShares, managed by BlackRock, will impose a 0.25% sponsor fee for its Bitcoin investment product IBIT, with an annual waiver that reduces the fee to 0.12% on the first $5 billion in assets under management (AUM).
The sponsor fee is a fee incurred by BlackRock to manage the iShares Bitcoin Trust, cover operational costs, and AUM represents the total value of IBIT assets. IShares Delaware Trust Sponsor LLC serves as sponsor with support from BlackRock Investments LLC, both affiliates of BlackRock Inc.
Coinbase Custody Trust Company LLC serves as custodian of Bitcoin, independent of BlackRock Inc. In particular, the sponsor is not responsible for losses resulting from the loss, theft, destruction or compromise of the trust's BTC.
For investors in the cryptocurrency market, the launch of BlackRock's spot Bitcoin ETF could result in several positive improvements, including more accurate tracking of Bitcoin values and possibly more affordable investment options, which could improve the overall investor experience.
The launch of the BlackRock Bitcoin ETF could have a significant impact on the cryptocurrency industry. Here are a few possible effects:
increasing adoption
BlackRock's involvement in the cryptocurrency industry through an ETF could further attract institutional and retail investors. It could increase Bitcoin's legitimacy as a form of investment and attract more traditional investors to the market.
Liquidity and price impact
An ETF could provide investors with a regulated and accessible way to gain exposure to Bitcoin without directly purchasing and storing the digital currency. This could increase Bitcoin market liquidity and impact its price, as demand for ETF shares will reflect investor sentiment.
Regulatory attention and investor protection
BlackRock's submission and approval for a Bitcoin ETF attracts regulatory attention and underscores the importance of clear rules and safety nets for the cryptocurrency industry. The involvement of a renowned financial institution in providing a regulated investment vehicle highlights how important it is to have clear frameworks that put investor protection first.
These innovations have the potential to provide an open and safe environment for investors while undergoing regulatory evaluation that will ultimately aid the long-term stability and expansion of the market.
Market risk and volatility
Although Bitcoin ETF will increase market liquidity and mainstream participation, it may also increase market risk and volatility. Flash selling or large institutional investments could affect Bitcoin's price because ETFs are subject to market fluctuations.
BlackRock's iShares Bitcoin Trust (IBIT) trade,
BlackRock's iShares Bitcoin Trust (IBIT) is traded on Nasdaq. Investors looking to trade IBIT should start by opening an account with a brokerage firm that offers access to securities traded on Nasdaq. They should thoroughly research the trust before investing, learning its composition, correlation with the value of Bitcoin, associated risks and associated fees.
Interested investors, after funding their brokerage account, can place an order to buy shares in IBIT by choosing between a market order that allows them to buy at the current price, and a limit order that will allow them to set a specific price for the purchase.
When investors decide to sell their shares in IBIT, the process reflects purchases. Despite the benefits provided by IBIT, it is crucial to monitor one's investments, given the volatile nature of Bitcoin and general market conditions.
It is also important to note that shares of the trust do not represent guaranteed deposits or obligations by BlackRock Inc or its affiliates and do not have insurance from organizations such as the Federal Deposit Insurance Corporation. Additionally, investors should be aware of the tax implications of their transactions and ensure that their portfolios are compatible with their investment strategies and risk tolerance to avoid significant losses.
