The introduction of a spot-based Bitcoin (BTC) exchange-traded fund (ETF) has the potential to make the asset more accessible to individual investors and mutual funds. Unlike a futures-based Bitcoin ETF, a spot-based ETF involves the actual purchase of BTC. However, the approval of the first Bitcoin ETF may not necessarily be a bullish event.
Regulatory Hurdles and the Role of Spot Bitcoin ETFs
Over the years, the United States Securities and Exchange Commission (SEC) has consistently rejected Bitcoin ETF applications, including the recent denial of the VanEck Bitcoin Trust. The SEC’s reasoning behind the rejections is the lack of a comprehensive surveillance-sharing agreement with a regulated market of significant size related to spot Bitcoin. Regulators are cautious about releasing a more equitable and transparent Bitcoin product.
Investors are now considering whether the bids from ARK Invest and BlackRock to launch spot Bitcoin ETFs could be the solution to Grayscale’s Bitcoin Trust (GBTC), an investment vehicle with shares traded on the stock exchange. Interestingly, the announcement of BlackRock’s ETF filing led to a significant increase in the GBTC “premium,” reaching its best levels in months.
Potential Negative Consequences
While the potential approval of a spot Bitcoin ETF may initially seem bullish, it could have negative consequences for the BTC price, at least in the short term. An ETF is a form of security that holds diverse underlying investments, similar to a mutual fund. Buying an ETF grants the investor direct ownership of the fund’s contents, resulting in different tax consequences compared to holding futures contracts or leveraged positions.
Despite the rejection of Bitcoin spot ETFs, similar products have been available for decades for various assets such as bonds, global currencies, gold, Chinese equities, real estate, and oil. The Grayscale Bitcoin Trust, an investment fund with $18.4 billion of assets under management, is currently trading at a discount of around -30% compared to its Bitcoin holdings. This discount is likely justified as the instrument lacks the tools to allow arbitrage.
Grayscale’s GBTC, classified as a closed-end fund, does not have freely created shares or a redemption plan, leading to large price differences compared to the fund’s actual Bitcoin holdings. On the other hand, an ETF gives the market maker the ability to issue and redeem shares, resulting in a typically small premium or discount.
The Impact on GBTC and the Potential for Conversion
GBTC charges a set 2% annual administrative fee, which may explain the discount given the SEC’s consistent rejection of appeals from fund managers. ETFs typically trade at par with net assets, unlike GBTC. For example, the Purpose Bitcoin ETF held a $5.63 net asset value per share on June 27, and the shares closed at $5.65 on the Toronto Stock Exchange.
If the SEC grants Grayscale permission to convert its GBTC Trust to a bonafide Bitcoin ETF, the share price discount versus its contents will eventually trend to zero as redemptions and arbitrage opportunities arise. In this scenario, a considerable amount of BTC could enter the market as investors will finally be able to exit their position at par.
However, the question remains: how much of the $18 billion in GBTC will flow into other Bitcoin-related instruments or get sold on exchanges? Regardless, there is a good chance that the approval of a spot Bitcoin ETF will result in significant sell-pressure from Grayscale’s GBTC conversion as BTC that has been locked for three to eight years reenters the market.
The potential approval of a spot Bitcoin ETF has both positive and negative implications for the market. While it may make Bitcoin more accessible to individual investors and mutual funds, it could also lead to short-term negative consequences for the BTC price. The conversion of Grayscale’s GBTC Trust to an ETF could result in significant sell-pressure, but it also presents an opportunity for investors to exit their positions at par. Overall, the impact of a spot Bitcoin ETF on the market remains uncertain, and its approval would mark a significant milestone in the cryptocurrency industry.
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