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Supporting the approval of a Bitcoin Exchange Traded Fund (ETF) by US regulators doesn’t mean you have to invest in Bitcoin yourself. You may disagree with others putting their money into cryptocurrency, but still advocate for the Securities and Exchange Commission (SEC) to allow it. Let’s not take things to extremes, but you understand the idea.
Over the past decade, the SEC has consistently rejected applications for a spot Bitcoin ETF, which directly holds Bitcoin instead of investing in Bitcoin price derivatives. However, a recent court ruling seems to have changed the situation. A judge ruled that the SEC acted unreasonably by denying the request of the Grayscale Bitcoin Trust to convert into an ETF, especially considering that futures-based Bitcoin funds already exist.
This ruling has increased excitement about spot Bitcoin ETFs, particularly since BlackRock, the largest fund manager globally, applied to launch its own spot Bitcoin ETF in June. Crypto enthusiasts speculated that well-connected BlackRock would not make such a request unless it knew that the regulator’s stance was softening.
BlackRock has specific plans to address the SEC’s concerns about market manipulation. Their application includes a “surveillance-sharing” arrangement with a crypto exchange, and other asset managers, such as Cathie Wood’s Ark, have amended their pending Bitcoin ETF applications to replicate this plan. The news of BlackRock’s application in June led to a 20% increase in the Bitcoin price within a week. Additionally, Grayscale’s court victory on Tuesday contributed to a 7% increase, as traders anticipate a wave of new buyers with the launch of an ETF.
Personally, I’m growing tired of the 15-year search for a use for the Bitcoin blockchain beyond speculative trading on its price. It’s disheartening to witness a generation of young people being enticed into cryptocurrency trading instead of learning long-term investment strategies for building wealth. It’s infuriating to see the proliferation of “decentralized finance” products that are often just Ponzi schemes masquerading as legitimate investments. Despite numerous failures, it’s astonishing that the “value” of Bitcoin and other cryptocurrencies remains above $1 trillion.
However, I don’t disagree with BlackRock CEO Larry Fink’s recent perspective that Bitcoin is an “international asset” for investors to use as an alternative to gold or traditional currencies like the euro or sterling. BlackRock’s spot Bitcoin ETF will likely have lower fees compared to existing futures-based funds in the US and provide a more reliable way to track the Bitcoin price, unlike the Grayscale Bitcoin Trust, which has experienced significant fluctuations. The benefits of protecting those already involved in cryptocurrency outweigh the risk of attracting more participants.
Currently, traders have plenty of cryptocurrency investment options on US exchanges, including Bitcoin funds that use derivatives for leverage or stock funds that include highly speculative companies with cryptocurrency or blockchain investments. In comparison, a spot Bitcoin fund seems relatively straightforward.
ETFs, in general, contain a wide range of questionable investment ideas, especially as actively managed funds enter the market alongside index trackers. Some funds have closed down when investment trends fade, such as the Punk Subversive Metaverse ETF and the AdvisorShares Drone Technology ETF. Even BlackRock isn’t immune to failures, as seen last year when they shut down several underperforming ETFs from the iShares Evolved brand.
It’s unclear whether a spot Bitcoin ETF will significantly expand the market at this point. According to JPMorgan strategist Nikolaos Panigirtzoglou, a BlackRock launch is more likely to divert liquidity from other products, such as Bitcoin futures. Spot Bitcoin funds already exist outside the US but have not attracted significant investor interest. For instance, the two-and-a-half-year-old Purpose Bitcoin ETF in Canada only has $600 million in assets, and Bitcoin funds globally have not experienced substantial inflows since mid-2021. While spot Bitcoin ETFs may be a harmless addition to the US market, the SEC might be late to the game.
Stephen Foley is the FT’s US accounting editor. Follow Stephen on Twitter @StephenFoley
This article is part of FT Wealth, a section providing in-depth coverage of philanthropy, entrepreneurs, family offices, as well as alternative and impact investment.
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