The introduction of a spot-based Bitcoin (BTC) exchange-traded fund (ETF) has the potential to increase accessibility to individual investors and mutual funds, providing them with the opportunity to invest in the asset. Unlike a futures-based Bitcoin ETF, a spot-based ETF involves the actual purchase of BTC.
However, the approval of the first Bitcoin ETF does not guarantee a bullish outcome. Historically, the U.S. Securities and Exchange Commission (SEC) has rejected every Bitcoin ETF application, including the recent denial of the VanEck Bitcoin Trust on March 10, 2023. The SEC cited the absence of a “comprehensive surveillance-sharing agreement with a regulated market of significant size related to spot Bitcoin” as the reason for the rejection. This hesitation from regulators showcases their reluctance to release a Bitcoin product that is believed to offer more fairness and transparency.
Investors are now questioning whether the spot Bitcoin ETF bids from ARK Investment and BlackRock could provide a solution to Grayscale’s Bitcoin Trust (GBTC), an investment vehicle with shares traded on the stock exchange. Interestingly, the premium for GBTC saw a significant increase after BlackRock announced its ETF filing.
While the approval of a spot Bitcoin ETF may initially seem bullish, it can potentially have negative consequences for the price of BTC in the short term. It is important to understand what an ETF is and how it functions. An ETF is a type of security that holds diverse underlying investments such as commodities, stocks, and bonds. It resembles a mutual fund as the issuer pools and manages the assets. Familiar examples of ETFs include SPY, which tracks the S&P 500 index, and is managed by State Street. Holding an ETF grants investors direct ownership of the fund’s contents, resulting in different tax consequences compared to futures contracts or leveraged positions.
While Bitcoin spot ETFs continue to face rejection, similar products have been available for decades for various assets such as bonds, global currencies, gold, and equities. However, BTC-specific investment trusts like Grayscale’s GBTC often trade at a discount to their actual Bitcoin holdings due to certain limitations. GBTC is classified as a closed-end fund with limited available shares and lacks tools to facilitate arbitrage. On the other hand, ETFs typically trade at par with their net assets, offering the market maker the ability to issue and redeem shares, resulting in a smaller premium or discount.
The GBTC discount currently stands at -30%, which is likely justified given the fund’s administrative fee of 2% and the SEC’s consistent rejection of Bitcoin ETF appeals. In contrast, ETFs like the Purpose Bitcoin ETF and the ProShares Bitcoin Strategy ETF trade closer to their net asset values.
While market sentiment improved somewhat after BlackRock filed to launch a Bitcoin spot price ETF, it is worth noting that GBTC investors have been affected negatively due to Grayscale’s lack of action. If the SEC grants permission to Grayscale to convert its GBTC Trust into a legitimate Bitcoin ETF, the share price discount versus its contents is expected to trend towards zero as redemption and arbitrage opportunities arise. This has the potential to introduce a considerable amount of BTC into the market, as investors will finally have the opportunity to exit their positions at par. The question then becomes how much of the $18 billion in GBTC will flow into other Bitcoin-related instruments or be sold on exchanges.
In conclusion, the introduction of a spot Bitcoin ETF would provide increased accessibility for investors, but its approval may lead to significant sell-pressure from Grayscale’s GBTC conversion. This could result in BTC that has been locked for several years reentering the market. It is important to note that this article is for general information purposes only and should not be taken as legal or investment advice. The views expressed here are solely the author’s and do not necessarily reflect those of Cointelegraph.
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