Given the problems facing the crypto industry over the last year, from the failure of FTX to a brutal bear market and the SEC’s decision to sue key players, you could be forgiven for assuming that institutional investors would wind back their involvement.
But the opposite has happened. The SEC is reviewing several applications for spot Bitcoin ETFs from a range of major investment firms, including the world’s largest asset manager, BlackRock.
Many firms have sought approval for spot ETFs focused on Bitcoin in the past, with all ending in failure. The SEC rejected the applications due to the potential for manipulation in the underlying market. But the entrance of BlackRock on the scene, quickly followed by requests from Fidelity, Invesco and others, could mark a turning point.
BlackRock, a mega filer of ETFs, has only ever had one application rejected in the past. While it may take time to make the regulator comfortable, the firm has the experience and resources to see the process through and make spot Bitcoin ETFs in the US a reality.
Larry Fink’s changing views
Larry Fink, BlackRock founder and CEO, once a cryptocurrency skeptic, has now declared himself a true believer. Speaking to Fox Business in July, he described blockchain as a ‘fantastic’ technology and Bitcoin as ‘digitizing gold’. Fink said he was ‘skeptical because… it was heavily used for, let’s say, illicit activities’. But investors can now use Bitcoin ‘as a hedge against inflation, as a hedge against the onerous problems of any one country or the devaluation of your currency’.
He added that the asset manager wants to make crypto investing cheaper and easier for investors. ‘We’re a believer in the digitization of products,’ he said. ‘ETFs was a big revolution from the mutual fund industry. It’s really taking over the mutual fund industry. And we do believe that if we can create more tokenization of assets and securities, and that’s what bitcoin is, it can revolutionize finance [again].’
Experts disagree on the impact a spot Bitcoin ETF would have on demand for the asset. NYDIG, a crypto-focused financial services firm, has estimated that a spot ETF could lead to $30 bn of additional demand.
‘The bullish argument for a spot ETF is that even though significant funds have already been invested in Bitcoin funds, the existing options for investors have several drawbacks that an ETF would alleviate,’ writes the firm in a research note. These benefits include investor protections, the brand recognition of BlackRock and iShares, ease of tax reporting and potentially lower costs, they say.
Bitcoin, crypto exchanges, ETFs
On the other hand, market commentators point out that there are already many ways to invest in Bitcoin, such as crypto exchanges and other types of ETFs. The SEC gave the green light to futures-based Bitcoin ETFs back in October 2021, on the basis that they provide more investor protection than the spot variety. The first fund to launch – the ProShares Bitcoin ETF – accumulated more than $1 bn assets in just two days.
There has been further innovation in the space. In June, fund provider Volatility Shares launched a 2x leveraged Bitcoin ETF, offering investors the chance to double down on the asset’s huge swings in price.
‘There’s this belief that a spot Bitcoin ETF will push the price of Bitcoin up, [but] I wonder if that will really be the case,’ Stuart Barton, chief investment officer at Volatility Shares, told Barron’s.
For now, attention sits firmly on the SEC and whether it will approve the latest applications. A key point of contention is whether the markets that list the products are able to monitor for any manipulative behavior. To address this issue, Nasdaq and the Chicago Board Options Exchange, where the funds would be traded, have said they will enter into a surveillance sharing arrangement with Coinbase.
It remains to be seen if that is enough to satisfy the SEC. (It doesn’t help that the regulator is currently suing Coinbase over other matters.) But, regardless of the immediate outcome, the institutionalization of crypto assets is set to continue.
