An approved spot bitcoin ETF could be ‘one of the largest launches in history’

Though prospects for a spot bitcoin ETF hitting the US market remain uncertain, industry watchers say an SEC-approved launch would likely be among the largest ever.

Spot bitcoin products could spur investors to re-allocate billions of dollars from Grayscale Investments’ Bitcoin Trust (GBTC), Canadian bitcoin ETFs and other crypto offerings.

Bloomberg Intelligence analyst James Seyffart said during a July 5 ETF Prime podcast — hosted by Nate Geraci, president of The ETF Store — that a spot bitcoin ETF “could be the largest, if not one of the largest, launches in history.”

Excluding climate-focused ETFs that have launched with ample seed capital, which Seyffart said don’t truly exhibit “grassroots demand,” the ProShares Bitcoin Strategy ETF (BITO) was among the most successful out of the gate.

The fund — which launched in October 2021 and holds bitcoin futures contracts traded on the Chicago Mercantile Exchange (CME) — grew to more than $1 billion in assets under management in its first two days.

But a physically backed ETF meets a greater number of due diligence requirements than BITO, according to James Butterfill, head of research at CoinShares — as it provides bankruptcy protection for the fund issuer and closely tracks the bitcoin price.

It’s reasonable, as a result, to anticipate significantly higher demand for a spot bitcoin ETF, particularly if launched by an asset management giant like BlackRock, he told Blockworks.

“There are a significant number of clients who are waiting for their competitors to venture into bitcoin first, to avoid tarnishing their own reputation by being the pioneers,” Butterfill said. “If Blackrock were to issue an ETF, it would likely eliminate a considerable amount of the perceived negative connotation attached to crypto, potentially leading to significantly higher early investment inflows than what Proshares saw in 2021.”

A reshuffling of assets out of GBTC?

Assets within crypto investment products last week hit $37 billion, according to CoinShares data — its highest level since June 2022.

Those assets could see a reshuffling after the approval of one or more spot bitcoin ETFs.

“There’s US money that is in these Canadian ETFs,” Seyffart said. “There’s US institutional money in other areas that might come back if a spot bitcoin ETF gets approved, not to mention all the issues with Grayscale and GBTC.”

Dave Nadig, a financial futurist at data firm VettaFi, said during the ETF Prime podcast that investors in the trust could seek to sell their GBTC shares and reinvest those in a spot bitcoin ETF, if it were approved.

“There’s $20 billion trapped in a completely broken pink-sheet trust called GBTC,” Nadig said. “I think half of that money shows up in a spot bitcoin ETP complex within two weeks.”

A spot bitcoin ETF would see an initial explosion of interest, according to Geraci, noting that such a launch could “shatter” previous high marks set by other successful ETFs, such as BITO.

“There’s a lot of pent-up demand here,” he said. “This allows financial advisers and even institutional investors to access bitcoin via traditional financial services rails. It’s a bridge between the traditional finance world and crypto.”

An April 2022 survey by Nasdaq found 72% of financial advisers would be more likely to invest client assets in crypto if a spot bitcoin ETF were offered in the US.

Thirty-two percent of financial professionals cited “lack of easily accessible investment vehicles like ETFs and mutual funds” as a barrier to crypto allocation, according to a January report by Bitwise and VettaFi.

Approvals all at once? And who wins the assets?

There are currently eight active spot bitcoin ETF filings, Seyffart pointed out.

Podcast participants named Global X, First Trust and Charles Schwab as others that could look to launch their own.

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Seyffart said the SEC should approve the proposals at the same time, noting that letting BlackRock launch first would be “a really bad look.”

If multiple spot bitcoin ETFs are able to come to market all at once, factors such as brand, capital markets depth and institutional volume are likely to be crucial, according to Nadig.

He laid out a scenario, for example, where BlackRock, Valkyrie and Bitwise launch on the same day.

“Which one of those do you think is going to be able to call up institutions and say we’d really love to get a lot of volume in the first four days,” Nadig said. “It’s going to be BlackRock — they have those relationships. That initial volume is probably what pushes a leader to the front.”

Still, Butterfill said, the anticipated high number of spot bitcoin ETF issuances could “water down” any one fund’s asset gathering potential.

The exchange that would list the winning product — such as Nasdaq, NYSE or Cboe — arguably has more to gain than the issuer of that fund, Nadig said.

“Exchanges primarily get paid on volume, not assets,” Nadig said. “So even if this fund got launched and only ever had $1 billion in it, it would still probably be one of the most traded ETFs of all time.”

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