Introduction to Spot Bitcoin ETFs
An Exchange-Traded Fund (ETF), in simple terms, is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and generally aligns with an index, offering broad market exposure, low expense ratios, and the capability for daily trading.
Now, when it comes to Bitcoin ETFs, there are two flavors in the mix: Spot Bitcoin ETFs and Bitcoin Futures ETFs.
A Spot Bitcoin ETF directly holds the Bitcoin asset. When you invest in such an ETF, the funds are utilized to buy Bitcoin. As a result, the performance of the ETF ideally mimics the performance of Bitcoin itself. It’s like having a share of a pot, where the pot directly contains Bitcoin.
On the other hand, a Bitcoin Futures ETF doesn’t buy Bitcoin per se. Instead, it invests in Bitcoin futures contracts. In essence, it’s a bet on the price of Bitcoin in the future. The ETF will rise or fall based on the performance of these futures contracts, not the direct performance of Bitcoin.

Historical Context

Bitcoin, with its meteoric rise and increasing mainstream acceptance, quickly caught the attention of investors and brokers. The remarkable trend of escalating Bitcoin prices and its surging popularity signaled an evident opportunity for potential returns. As the cryptocurrency’s valuation soared into the thousands, it became increasingly inaccessible for the average retail investor to directly invest. This gave birth to the innovative idea of Bitcoin Exchange-Traded Funds (ETFs).
The journey towards actualizing Bitcoin ETFs was initiated with the Securities and Exchange Commission (SEC) receiving its first application in 2013, courtesy of the Winklevoss brothers. Their endeavor, however, faced rejection not once, but twice by 2018. Around the same time, other contenders emerged, such as the SolidX Bitcoin Fund, which eventually withdrew its proposal by 2019. Collaborative efforts like the VanEck SolidX Bitcoin Trust were also seen, with a filing in 2018, a withdrawal in 2019, and a refile in 2021.

Numerous other proposals followed. Bitwise, for instance, approached with their Bitcoin ETF Trust in 2019 but faced SEC rejection. Similar fates were met by proposals from Wilshire Phoenix and Chicago Board Options Exchange’s Global X Bitcoin Trust. Recent years have observed a surge in such filings, from prominent names like Valkyrie, Fidelity, and NYDIG. In 2022, while some like Skybridge Capital persisted with repeated filings, notable entities like Grayscale Investments expanded their collaborations. A momentous decision came when the SEC greenlit BlackRock’s private Spot trust in August 2022, marking a significant progression in the realm of Bitcoin ETFs.

Major Features of Spot Bitcoin ETFs

Accessibility for Retail Investors:

The primary allure of Bitcoin ETFs lies in their ability to democratize access to Bitcoin investments. With Bitcoin’s price soaring to unprecedented heights, direct investments have become prohibitive for many retail investors. Bitcoin ETFs offer a vehicle for these investors to gain exposure to Bitcoin’s price movements without the need to directly purchase, store, or manage the cryptocurrency. Essentially, they can invest in Bitcoin in a manner akin to buying shares of a stock, making the process more familiar and accessible.

Potential Increased Liquidity for Bitcoin:

The introduction of Bitcoin ETFs can significantly impact the liquidity of the cryptocurrency market. As more retail and institutional investors pour into Bitcoin via ETFs, trading volumes could increase, resulting in a more liquid market. Greater liquidity often leads to reduced price volatility and tighter bid-ask spreads, fostering a healthier trading environment and potentially stabilizing Bitcoin’s notorious price swings.

Opening Doors for Institutional Investment:

One of the most anticipated effects of Bitcoin ETFs is the potential influx of institutional investors. Many institutional entities, bound by regulatory and internal guidelines, have been hesitant to directly engage with cryptocurrencies. ETFs, being a familiar investment structure, offer a more palatable entry point. A Bitcoin ETF provides institutions with a regulated pathway to invest in Bitcoin, potentially channeling substantial capital into the market.

Criticisms and Concerns

Despite the enthusiasm, Bitcoin ETFs are not without their detractors. Critics argue that such funds might oversimplify the complexities and risks associated with cryptocurrency investments.

Market Manipulation Fears:

One of the primary apprehensions surrounding Bitcoin ETFs is the potential for market manipulation. The cryptocurrency market, being relatively nascent, lacks the depth and regulation seen in traditional financial markets. There’s a concern that large players, sometimes referred to as “whales”, could exploit the ETF structure to manipulate Bitcoin prices to their advantage, especially given the disparities in liquidity and trading volume across various cryptocurrency exchanges.

Potential for Increased Volatility:

While many proponents argue that Bitcoin ETFs could lead to reduced volatility due to increased liquidity, there’s an opposing viewpoint that suggests the opposite. The infusion of retail and institutional investors, who might react hastily to short-term market movements, combined with Bitcoin’s already notorious volatility, could lead to even sharper price fluctuations. Such erratic market behavior could deter more conservative investors and undermine the perceived legitimacy of the cryptocurrency market.

How Spot ETFs Might Impact the Actual Demand for Bitcoin:

Spot Bitcoin ETFs represent a double-edged sword in terms of actual Bitcoin demand. On one hand, by offering exposure to Bitcoin’s price movements without the need to buy Bitcoin directly, these ETFs might reduce the demand for the physical holding of the cryptocurrency. Conversely, given that spot ETFs hold actual Bitcoins to back their shares, increased adoption of these ETFs by investors could necessitate the purchase of larger Bitcoin quantities by the ETF providers, potentially driving up demand and, subsequently, its price. The real impact remains to be seen and will depend on the balance of these dynamics as the adoption of Bitcoin ETFs progresses.

The SEC Delay and Recent Trends in Potential Approval of a Spot Bitcoin ETF

BlackRock’s Stance:

In a move that shocked many, BlackRock, the world’s largest asset manager boasting over $9 trillion in assets under management, filed for a Bitcoin spot ETF in June 2023. Opting for Coinbase as their crypto custodian and BNY Mellon as their cash custodian, BlackRock’s entry into the ETF space marked a significant pivot. Bloomberg’s Senior ETF analyst, Eric Balchunas, highlighted BlackRock’s impressive track record with the SEC, stating that they’ve previously challenged the SEC numerous times regarding ETF approvals, securing a win ratio of 575–1. But this venture into the crypto world wasn’t smooth. Soon after the filing, the SEC voiced concerns, leading BlackRock to swiftly refile with the inclusion of a surveillance agreement with Coinbase.

WisdomTree’s Journey:

Already having launched a Bitcoin ETF on Switzerland’s SIX stock exchange in 2019, WisdomTree became a U.S. Bitcoin ETF aspirant in March 2021. Unfortunately, their journey with the SEC was marked by delays. Following rejections in late 2021, WisdomTree was undeterred and filed anew in mid-2023, aligning with the momentum created by BlackRock’s filing.

Invesco’s Play:

Invesco and Galaxy Digital took their shot with the Invesco Galaxy Bitcoin ETF filing in 2021. As a reputable ETF provider in the U.S., Invesco believed their history in the ETF sector could sway the SEC. After BlackRock’s filing in 2023, Invesco and Galaxy Digital were prompted to reapply.

Valkyrie’s Approach:

Joining the race in January 2021, Valkyrie proposed a Bitcoin ETF relying on the Chicago Mercantile Exchange’s reference price for Bitcoin. After a series of delays and a rejection by the SEC in 2021, Valkyrie emerged victorious in 2022 with an approved Bitcoin Mining ETF. They didn’t stop there; in June 2023, another application for a Bitcoin spot ETF was submitted, adding Coinbase as their surveillance-sharing partner a month later.

Ark Invest’s Ambition:

Under the leadership of Cathie Wood, Ark Invest sought the Ark21Shares ETF in 2021. After two rejections, Ark Invest filed its third application in 2023, introducing a surveillance-sharing arrangement akin to BlackRock’s.

VanEck’s Persistence:

One of the pioneers in the Bitcoin ETF space, VanEck first attempted to launch a Bitcoin ETF in 2018. Their journey with the SEC has been marked by withdrawals, rejections, and continuous efforts. Their latest filing in June 2023 awaits the SEC’s final decision.

Fidelity’s Determination:

Fidelity, a titan in the investment realm, introduced the Wise Origin Bitcoin Trust in March 2021. While their initial application was rejected in January 2022, Fidelity remained undaunted. Refiling in June 2023, Fidelity named Coinbase as their surveillance-sharing partner, and their application now sits alongside BlackRock’s for consideration.
In a recent move, the U.S. Securities and Exchange Commission (SEC) has once again deferred its decision regarding several prominent Bitcoin exchange-traded fund (ETF) applications. On September 28, the SEC publicized this postponement for significant players like BlackRock, Bitwise, Invesco Galaxy Digital, and Valkyrie. Notably, this becomes the second such delay within a month for these ETF contenders. As per the SEC, they are actively reviewing these applications in line with Section 19(b)(2)(B) of the Securities Exchange Act of 1934 and are still in the process of gathering public feedback. Originally, the final verdict on these ETF applications was slated for between October 16 and 19. Yet, in anticipation of a probable government shutdown, the SEC hastened its announcement. With government funding set to cease, leading to a temporary closure of several federal agencies including the SEC.
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