Bitcoin Spot ETF Coming Soon?

Bitcoin Spot ETF Coming Soon?

The Bitcoin spot ETF is expected to pass, sparking heated discussions in the market. According to the timetable of 21Shares Bitcoin ETF, perhaps the first Bitcoin spot ETF will be born on August 11. However, some people think that the SEC may be more willing to let BlackRock’s iShares Bitcoin Trust become the first approved bitcoin spot ETF.

1. What is an ETF?

ETF stands for Exchange-Traded Fund. An exchange-traded fund (ETF) is an investment vehicle that tracks the price of an asset, security, or index. ETFs pool investors’ money with the aim of achieving the same return as the underlying asset.

In recent years, many companies in the industry have been working hard to apply for Bitcoin ETFs. Bitcoin ETF is divided into: Bitcoin Spot ETF (Bitcoin Spot ETF) and Bitcoin Futures ETF (Bitcoin Futures ETF). A bitcoin spot ETF tracks the market price of BTC in real time, while a bitcoin futures ETF tracks the price of a bitcoin futures contract.

According to the definition of the SEC official website, Bitcoin futures ETF is a standardized agreement for buying and selling a specific amount of Bitcoin at a specified price on a specific date in the future. At present, the SEC has approved four bitcoin futures ETFs. Since Bitcoin futures ETFs do not directly invest in Bitcoin, this is not the most ideal way to invest in Bitcoin.

Therefore, the industry has been eager for the launch of a Bitcoin spot ETF.

2. The development status of Bitcoin ETF

Registering bitcoin ETFs with the SEC has been a challenge, especially for bitcoin spot ETFs. To date, the SEC has not approved any applications for such spot ETFs due to concerns about potential fraud or manipulation in the spot market. In contrast, the SEC has approved six bitcoin ETFs for futures trading.

　　1. 6 Bitcoin futures ETFs approved by the SEC

Previously, the SEC mainly approved the following six bitcoin futures ETFs:

　　Proshares (BITO) : Proshares Bitcoin Strategy ETF, symbol BITO, currently has $997 million in assets under management. It was approved by the SEC on October 18, 2021 and traded on the NYSE Arca Exchange. In BITO’s fund investment strategy, it is clearly written “The fund invests primarily in bitcoin futures contracts. The fund does not invest directly in bitcoin.” The ETF was very popular when it debuted, and its transaction volume exceeded $1 billion.

　　Proshares (BITI) : Proshares Short Bitcoin ETF, code BITI, currently has $139 million in assets under management. Launched in June 2022, it is currently the only Bitcoin short ETF approved by the SEC.

　Valkyrie (BTF) : The Valkyrie Bitcoin Strategy ETF is traded on Nasdaq under the symbol BTF and currently has $31 million in assets. Approved for establishment on October 21, 2021. Custodian (custodian) is US Bank. The Valkyrie ETF is classified as a “non-diversified” fund under the Investment Company Act of 1940. VanEck (XBTF): VanEck Bitcoin Strategy ETF is traded on Cboe BZX Exchange under the code XBTF, with a current asset size of $46.5 million. Established on November 15, 2021, this ETF has a unique advantage. It is a C-corporation (C-corp), which is different from other ETFs (registered as investment corporations), which is a tax-efficient structure ( tax-efficient structure), because C-corporations are not required to distribute long-term capital gains as dividends to investors. For investors, this approach may result in lower taxable distributions, leaving more money to invest in the fund.

　　Simplify (MAXI) : The Simplify Bitcoin Strategy PLUS Inc ETF launched in September 2022 and trades on Nasdaq. Since this ETF uses three strategies (Bitcoin Futures, Income, and Option overlay) to achieve the investment goals of the ETF, and from its actual allocation, it mainly allocates US treasury bonds, so compared with the previous three Bitcoin futures ETFs, MAXI is not well known in the industry. The current asset management scale is 25 million US dollars.

　Global X (BITS) : The Global X Blockchain & Bitcoin Strategy ETF was launched in November 2021, and the current asset management scale is US$10 million. The ETF features 50% investment in CME Bitcoin futures contracts and 50% investment in shares of its sister ETF (Global X Blockchain ETF, BKCH). This BKCH ETF has a range of blockchain stocks including MARA, COIN, HUT CN, RIOT, APLD, BTBT and more. It basically covers the stocks of mainstream digital asset mines, cryptocurrency exchanges and blockchain development companies currently listed on Nasdaq. Since the ETF does not invest in all bitcoin futures, it is not well-known in the industry.

In addition to these 6 Bitcoin futures ETFs approved by the SEC, there are some Bitcoin futures ETFs that are not approved by the SEC, or Bitcoin futures ETFs from other countries, and even spot ETFs. For example: Hashdex Bitcoin Futures ETF traded on NYSE Arca exchange approved by CFTC; CSOP BTC futures ETF traded on Hong Kong Stock Exchange; Purpose BTC spot ETF traded on Toronto Stock Exchange, 3iQ BTC spot ETF, Horizons BTC leverages ETF, etc.

　　2. How far is it to the listing of Bitcoin spot ETF?

The bitcoin spot ETFs rejected by the SEC in history mainly include:

As can be seen from the table, the SEC has rejected dozens of Bitcoin spot ETF applications in the past few years. In all cases, the SEC has three main grounds for rejection:

1. The applications fail to demonstrate that the ETFs “are designed to prevent fraudulent and manipulative practices”;

2. These applications fail to demonstrate that these ETFs “are designed to protect investors and the public interest”;

3. Issuer filings for these applications are insufficient and lack necessary information.

The bitcoin spot ETFs that are currently being queued for approval mainly include the following:

During this period, the applicants of the bitcoin spot ETF that received the most market attention were mainly BlackRock and Fidelity.

BlackRock

BlackRock, the world’s largest asset management company, applied for a bitcoin spot ETF on June 15, and recently resubmitted the application. The new filing mentions listing Coinbase as a collaborative marketplace for a “Surveillance-sharing agreement . ”

BlackRock’s iShares Bitcoin Trust, if approved, would trade on Nasdaq and use Coinbase Custody as its cryptocurrency custodian and Bank of New York Mellon as its cash custodian , adopting Coinbase, Inc. As an SSA co-op marketplace.

Whether this iShares Bitcoin Trust belongs to ETF or Trust is controversial in the industry. However, there is one key difference between the iShares Bitcoin Trust applied by BlackRock and the GBTC issued by Grayscale – it is more flexible, can be redeemed, and there are authorized participants (AP) – this is critical, and it can avoid the long-term premium like GBTC or discounted. (Authorized participants, namely Authorized Participants, one of the main participants in ETF subscription and redemption)

　　Fidelity Investments

Wise Origin Bitcoin Trust is a spot bitcoin exchange fund managed by Fidelity. In its proposal to the SEC, it previously applied to list the ETF on the BZX exchange under CBOE . Recently, it also added the designation of Coinbase as a monitoring sharing agreement. The cooperative market also vaguely stated that “a custodian authorized by the New York Department of Financial Services will be responsible for the trust’s Bitcoin custody.

3. Factors that may affect the application results of Bitcoin spot ETF

　　1. Monitoring sharing agreement

Surveillance-sharing agreement. According to the definition of the SEC: monitoring sharing agreements are characterized by the agreement providing for the sharing of information about market trading activity, clearing activity, and customer identity; the parties to the agreement have a reasonable ability to obtain and provide the requested information; and any existing rules, laws Neither party nor practice prevents a party from obtaining or providing this information to the other party.

Take the Wise Origin Bitcoin Trust applied by Fedelity as an example. In the document submitted by CBOE BZX on June 30th to propose the listing and trading of Wise Origin Bitcoin Trust, it clearly stated that “The Exchange is expecting to enter into a surveillance-sharing agreement with Coinbase, Inc.” content. (Reminder, the content about SSA is on pages 68-69 of this 194-page document).

In this rule filing, with respect to a surveillance sharing agreement, it is anticipated that the spot BTC SSA will feature a surveillance sharing agreement between two members of the ISG, which will enable the exchange to The way information is shared within ISG, which obtains data on spot bitcoin transactions taking place on Coinbase as part of its plan to monitor ETFs. If the exchange and Coinbase come to such an agreement, the exchange will include the spot BTC SSA in its market monitoring plan before allowing shares to be traded. This spot BTC SSA, combined with information provided by ISG in relation to CME Bitcoin futures, which the exchange believes represents a sizable regulated market in its own right, will further strengthen the exchange’s ability to detect and deter market manipulation.

All in all, monitoring sharing protocols helps detect and deter misconduct, prevents fraud and manipulation, and protects investors and the public interest. At present, many people in the industry believe that this may be the most critical change in determining the approval of Bitcoin spot ETF.

　2. Several key roles related to Bitcoin spot ETF

When applying for a bitcoin spot ETF, there are several key roles: sponsor Sponsor, exchange Exchange, trustee Trustee, cash custodian Cash Custodian, cryptocurrency (i.e. Bitcoin) custodian Bitcoin Custodian, authorized participants Authorized Participants, Monitor the sharing agreement market SSA.

According to observations, in terms of listing exchanges, BlackRock and Valkyrie chose NASDAQ, ARK/21Shares, Invesco, WisdomTree, VanEck, and Fidelity chose CBOE BZX, and Bitwise chose NYSE Arca. In terms of cash custodians, they basically choose large banks in the United States, such as Bank of New York Mellon. The choice of cash custodians should not be the key to deciding whether the ETF is approved or not; in terms of cryptocurrency custodians, it may be more important, perhaps Coinbase Custody It is the choice that the SEC likes; authorized participants AP is also very important, which is the key to maintaining the balance of supply and demand and liquidity of ETFs; the SSA market helps to detect misconduct, prevent fraud and manipulation, and may be considered by the SEC one of its most central roles.

Whether these roles are well prepared, and whether each role has been fulfilled by a company that can meet the requirements of the SEC may have a great impact on the smooth launch of the Bitcoin spot ETF.