Ben Strack

The slim chance of a US bitcoin ETF getting approved likely just got slimmer, analysts said, as high crypto market volatility spurred by FTX’s ongoing struggles persists.



Grayscale Investments’ Bitcoin Trust (GBTC) is trading at a larger discount than ever before, reaching a record of roughly 41% Wednesday, according to <a href="https://ycharts.com/companies/GBTC/discount_or_premium_to_nav" target="_blank" rel="noreferrer noopener">YCharts</a> — up from about 36.5% the day before. 



James Seyffart, an ETF analyst for Bloomberg Intelligence, said the discount remained around that 41% level as of mid-day Thursday.



“Could possibly make the argument that this slows down the time before a bitcoin ETF gets approved or at least decreases the probability that ETF conversion happens anytime soon after this FTX collapse — causing the expansion of the discount,” Seyffart told Blockworks.



Bitcoin dropped below $16,000 yesterday but had rebounded to about 17,730, as of 12:30 p.m. ET Thursday — up about 4% in the last 24 hours.



Grayscale is suing the SEC for <a href="https://cms.blockworks.co/grayscale-sues-sec-over-rejection-of-proposed-spot-bitcoin-etf/" target="_blank" rel="noreferrer noopener">denying GBTC’s proposed conversion</a> to a spot bitcoin ETF in June. Grayscale Chief Legal Officer Craig Salm <a href="https://cms.blockworks.co/news/grayscale-lawsuit-moves-forward-as-gbtc-discount-widens/" target="_blank" rel="noreferrer noopener">previously told Blockworks</a> that GBTC’s discount could be fixed by overturning the SEC’s decision.



“The inherent mechanisms of all ETFs allow them to track the net asset value…so it would effectively eliminate premiums or discounts, and we continue to stand by that,” Salm said last month.&nbsp;



A Grayscale spokesperson did not immediately return a request for comment.



The SEC has denied many attempts by issuers to launch a bitcoin ETF in the US, while similar products have launched in Canada, Europe and Latin America. <a href="https://cms.blockworks.co/news/galaxy-brings-bitcoin-etf-to-brazil-with-tradfi-giant/" target="_blank" rel="noreferrer noopener">Galaxy Digital launched a bitcoin ETF in Brazil</a> Thursday via a partnership with Itaú Asset Management. 



Dave Nadig, a financial futurist at data company VettaFi, said the most likely reason for holding GBTC was because of potential upside of the discount closing due to crypto regulation clarity or the GBTC lawsuit.



“When the story became less ‘everyone’s selling bitcoin’ and more ‘wait a minute, are firms blowing up?’ the likelihood of positive, progressive regulation of crypto went down significantly,” Nadig told Blockworks.



<blockquote class="wp-block-quote">“Can you even imagine a world where the SEC, now, says ‘Oh OK, no problem, have a bitcoin ETF?’,” he said.</blockquote>



A spokesperson for the CFTC <a href="https://www.reuters.com/markets/currencies/cryptocurrencies-slide-concerns-over-ftx-exchange-rattle-markets-2022-11-08/" target="_blank" rel="noreferrer noopener">told Reuters</a> Tuesday that the regulator was monitoring Binance’s potential acquisition of FTX. Binance said Wednesday it decided to ditch its plan to buy the rival exchange due to “reports regarding mishandled customer funds and alleged US agency investigations.”



Nadig added that, ironically, he believes the ETF wrapper would be safer than bitcoin stored in a wallet on a centralized exchange like FTX, <a href="https://cms.blockworks.co/news/sbf-commits-to-radical-transparency-as-ftx-seeks-investment-capital/" target="_blank" rel="noreferrer noopener">which is seeking capital</a> to avoid further collapse. 



“But real world?” he said. “Crypto is momentary anathema, and thus regulators will react negatively for some time.”



Sumit Roy, an analyst at ETF.com, said too that the SEC could be even more critical of crypto going forward as sentiment in the crypto market has soured, dimming the chances of GBTC getting the green light to convert into an ETF.



“That could change if Grayscale prevails in its lawsuit against the SEC, but looking at the huge discount, investors clearly don&#8217;t have much faith that they will,” Roy added. “The discount could continue to grow to over 50% if the broader crypto market remains depressed.”



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Crypto Chaos Dims Prospects of US Bitcoin ETF: Analysts

<div id="highlights-block_623ddfe02ffb2" class="highlights">
 <ul>
 <li>The proposal to broaden the definition of an exchange could help spot bitcoin ETF approval by mid-2023, according to Bloomberg Intelligence analysts</li>
 <li>Bitwise Asset Management Chief Investment Officer Matt Hougan says there is a pathway to approve a spot bitcoin ETF without this change</li>
 </ul>
 
</div>



ETF issuers in the US continue vying to launch a fund that would invest in bitcoin directly, but Bloomberg Intelligence analysts predict one won’t be approved until crypto platforms are forced to comply with Securities and Exchange Commission (SEC) rules.



A rule change proposed by the SEC could be the key to a spot bitcoin ETF approval by the middle of 2023, Eric Balchunas and James Seyffart said in a research note published Thursday.&nbsp;



The SEC proposed to broaden the definition of an exchange in the Securities and Exchange Act of 1934 to include “systems that offer the use of non-firm trading interest and communication protocols to bring together buyers and sellers of securities,” according to a <a href="https://www.federalregister.gov/documents/2022/03/18/2022-01975/amendments-regarding-the-definition-of-exchange-and-alternative-trading-systems-atss-that-trade-us" target="_blank" rel="noreferrer noopener">January 26 filing</a>. 



“Expanding the definition of an exchange could eliminate the agency&#8217;s primary objection to the products by bringing cryptocurrency platforms under the SEC&#8217;s regulatory framework,” the Bloomberg Intelligence ETF analysts wrote.



The SEC most recently delayed its decision to rule on the proposed bitcoin ETFs by NYDIG and Global X earlier this month.



“The commission has consistently required that the listing exchange have a comprehensive surveillance-sharing agreement with a regulated market of significant size related to bitcoin, or demonstrate that other means to prevent fraudulent and manipulative acts and practices are sufficient to justify dispensing with the requisite surveillance-sharing agreement,” the SEC wrote in its March 10 decisions on the NYDIG and Global X applications. “The listing exchange has not met that requirement here.”



The SEC won’t approve a spot bitcoin ETF without new regulation or surveillance agreements between traditional and crypto exchanges, Balchunas and Seyffart explained.



“Traditional exchanges such as the NYSE would find it almost impossible to secure such accords with every exchange that offers bitcoin trading absent official regulation,” they added.&nbsp;



<blockquote class="wp-block-quote">“The proposal to broaden the definition of an exchange would force crypto platforms to comply with SEC rules, potentially satisfying the agency&#8217;s oversight concerns.”</blockquote>



The Bloomberg analysts expect the change to be finalized sometime between November 2022 and May 2023.



<h3 class="wp-block-heading">Fund groups weigh in&nbsp;</h3>



Leah Wald, CEO of Valkyrie Funds, said that based on her company’s interactions with regulators, it makes sense that this would be the final hurdle to overcome.



“They have said all along that they would be hesitant to put an unregulated product into a regulated fund wrapper,” she told Blockworks.



<blockquote class="wp-block-quote">“Bringing digital asset exchanges into the fold would remove that objection and likely clear the path for a spot bitcoin ETF.”</blockquote>



Wald said that while it is tough to predict when the SEC could approve such a fund, she does not expect the agency to do so before next summer.



But Matt Hougan, chief investment officer of Bitwise Asset Management, argued that while the redefinition of an exchange could have big implications, there is a pathway to approve a bitcoin ETF without this change.



The SEC&#8217;s rules do not require that the market for the underlying spot commodity be regulated and subject to surveillance agreements prior to approving an exchange-traded product (ETP), he explained. Instead, the agency requires that there is a “regulated market of significant size&#8221; that can be surveilled as a way of gaining proxy surveillance of the market as a whole.



“We and other applicants believe that the CME bitcoin futures market is a ‘regulated market of significant size,’ and believe we have demonstrated this in our applications,” Hougan told Blockworks.



<blockquote class="wp-block-quote">“I continue to think the SEC can and will approve a bitcoin ETF prior to redefining what an exchange is.”</blockquote>



Valkyrie and <a href="https://cms.blockworks.co/bitwise-tries-once-more-for-spot-bitcoin-etp/" target="_blank" rel="noreferrer noopener">Bitwise</a> are among the swathe of issuers that have not been able to get their proposed bitcoin ETPs approved. The SEC, however, has approved several ETFs investing in bitcoin futures contracts, including one from Valkyrie.



Executives at several fund groups <a href="https://cms.blockworks.co/will-bidens-executive-order-speed-up-spot-bitcoin-etf-approval/" target="_blank" rel="noreferrer noopener">recently told Blockworks</a> they thought President Biden’s <a href="https://cms.blockworks.co/whos-in-charge-of-what-breaking-down-the-crypto-executive-order/" target="_blank" rel="noreferrer noopener">executive order</a> on digital assets could be a bullish indicator for spot bitcoin ETF approval.



Grayscale Investments is trying to convert its Bitcoin Trust (GBTC) to an ETF. <a href="https://cms.blockworks.co/support-for-spot-bitcoin-etf-revs-up-as-agency-holds-course/" target="_blank" rel="noreferrer noopener">Public comments</a> have rolled in from investors and crypto companies executives, many of which supporting the move. The SEC is expected to rule on the conversion by July, after a 240-day review period.



The biggest impact of the redefinition of an exchange, if it occurs, would be on the prospects for non-bitcoin crypto ETFs, Hougan said.&nbsp;



“If Coinbase were regulated and if it could have surveillance techniques in place,” he noted, “you could build ETPs on a wide variety of crypto assets, or crypto index ETFs.



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Is a Change to ‘Exchange’ Definition Key to Bitcoin ETF Approval?

<div id="highlights-block_61d72c54a5e0d" class="highlights">
 <ul>
 <li>The metaverse is currently a challenging environment to invest in, according to ETF Trends Managing Editor Lara Crigger</li>
 <li>VanEck’s Gold and Bitcoin Strategy ETF is a unique product to keep an eye on, industry watchers say</li>
 </ul>
 
</div>



Several more metaverse ETFs will likely become available to US investors this year, industry professionals said, though the prospect of spot bitcoin and ether futures products remain less clear.&nbsp;



Fund managers <a href="https://www.sec.gov/Archives/edgar/data/0001364608/000144554621006106/etf2_485a.htm" target="_blank" rel="noreferrer noopener">First Trust</a> and <a href="https://cms.blockworks.co/proshares-files-for-metaverse-etf/" target="_blank" rel="noreferrer noopener">ProShares</a> filed for metaverse ETFs last month. The filings followed <a href="https://www.sec.gov/Archives/edgar/data/1650149/000089418921007293/subversivecombined485adocs.htm" target="_blank" rel="noreferrer noopener">Subversive Capital’s plans</a> — disclosed in October — to launch a metaverse ETF with the planned ticker PUNK.



There are already a few metaverse-focused ETFs trading in the US. Roundhill Investments’ Roundhill Ball Metaverse ETF (META), which launched in June, has roughly $950 million in assets, according to ETF.com. Exchange Traded Concepts launched the Fount Metaverse ETF (MTVR) in October, and that fund has about $14 million in assets.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;



Though more people seem to be realizing that digital assets and digital infrastructure is the way of the future, the metaverse is “a little thin on the ground when it comes to investability,” according to Lara Crigger, managing editor of <a href="https://www.etftrends.com/" target="_blank" rel="noreferrer noopener">ETF Trends</a>.



“I don’t really know that the industry has the bandwidth to support more than one of these funds, or maybe one or two,” she said during a Jan. 4 <a href="https://etfprime.com" target="_blank" rel="noreferrer noopener">ETF Prime podcast</a> hosted by The ETF Store President Nate Geraci.



<blockquote class="wp-block-quote">“Maybe in a few years the picture’s going to look different, but for now I think you’re going to see a lot of crossover in holdings among these funds and a lot of non-pure-play names in the portfolios.”</blockquote>



META’s top five holdings are NVIDIA, Meta Platforms (formerly known as Facebook), Roblox, Microsoft and Unity Software. Tech behemoths Apple and Amazon are also within the top 10 holdings.&nbsp;



Meanwhile, Apple is MTVR’s number one holding with a 14.7% weighting, according to ETF.com. Meta Platforms is second at 6.4%, followed by Alphabet, Pearl Abyss and Kakao Games.



<h3 class="wp-block-heading">Spot bitcoin versus ether futures</h3>



Crigger and Geraci said they don’t expect the US Securities and Exchange Commission (SEC) to approve a spot bitcoin ETF in 2022.



Though Bloomberg Intelligence Analyst James Seyffart agreed during the podcast that a spot bitcoin ETF in the US is unlikely this year, he noted that the SEC’s rulings on other types of ETFs could signal the fate of such products.



The SEC approved several bitcoin futures ETFs in 2021 that were filed under the Investment Company Act of 1940. These were exempt from the 19b-4 process, Seyffart noted, which puts the onus on the applicant to allay the concerns of the SEC&#8217;s Division of Trading and Markets.



But the agency will likely rule in April on futures-based bitcoin products from <a href="https://teucrium.com/" target="_blank" rel="noreferrer noopener">Teucrium</a> and <a href="https://cms.blockworks.co/?s=valkyrie" target="_blank" rel="noreferrer noopener">Valkyrie Investments</a>, which were filed under the Securities Act of 1933 — the regulation under which spot bitcoin ETFs are filed.&nbsp;



The SEC has <a href="https://cms.blockworks.co/sec-rejects-vanecks-proposed-spot-bitcoin-etf/" target="_blank" rel="noreferrer noopener">denied proposed spot bitcoin ETFs </a>in recent months, citing that bitcoin markets lack surveillance and may be subject to manipulation.



“What this does is it kind of opens the SEC to a form of attack,” Seyffart said of the upcoming rulings on the proposed products by Teucrium and Valkyrie. “They kind of have to make a decision here. They’ve been very iffy on their reasoning, and they haven’t defined what a market of significant size is.”



Grayscale Investments <a href="https://cms.blockworks.co/grayscale-files-to-convert-its-bitcoin-trust-into-an-etf/" target="_blank" rel="noreferrer noopener">filed to convert</a> the Grayscale Bitcoin Trust (GBTC) to an ETF. The firm subsequently <a href="https://cms.blockworks.co/grayscale-attorneys-argue-sec-for-spot-bitcoin-etf-approval/" target="_blank" rel="noreferrer noopener">argued in a letter</a> that the approval of bitcoin futures-based ETFs, but not spot ETFs like GBTC, is “arbitrary and capricious.” Such rulings violate the Administrative Procedure Act (APA), the letter states, which requires federal agencies to treat “like situations alike.”



<blockquote class="wp-block-quote">“If Grayscale is denied in the beginning of July…to convert GBTC, I could see Grayscale filing an APA lawsuit to try to go there,” Seyffart said. “Maybe the SEC decides they don’t want to deal with that.”</blockquote>



Seyffart also reiterated <a href="https://cms.blockworks.co/when-could-an-ethereum-futures-etf-hit-the-us-market/" target="_blank" rel="noreferrer noopener">his stance</a> to Geraci during the podcast that he expects an ether futures-based ETF to gain approval before a spot bitcoin fund.&nbsp;



Derivatives marketplace CME Group launched ether futures in February, citing an increased institutional demand for transparent, exchange-listed crypto derivatives. CME Group introduced bitcoin futures in December 2017.



Geraci agreed with Seyffart, noting, “I just think for consistency, the SEC is going to have a bit of a more difficult time not approving that after approving the CME-traded bitcoin futures ETFs.”



<h3 class="wp-block-heading">Other crypto-related ETFs on the way in 2022</h3>



Grayscale <a href="https://cms.blockworks.co/grayscale-seeks-to-launch-its-first-equity-etf/" target="_blank" rel="noreferrer noopener">filed in November to launch</a> its first equity ETF. The proposed Future of Finance ETF (GFOF) would track an index consisting of US and non-U.S. equity securities involved in the advancement of the digital economy.



“I believe that the most exciting thing about the digital economy is how early it still is,” Grayscale CEO Michael Sonnenshein said in <a href="https://grayscale.com/2022-h1-ceo-investor-letter/" target="_blank" rel="noreferrer noopener">an investor letter</a> published on Thursday.&nbsp;



Another product likely to be approved in the coming months is the VanEck Gold and Bitcoin Strategy ETF. The firm revealed in a <a href="https://www.sec.gov/Archives/edgar/data/1137360/000113736021001182/vvtgoldandbitcoinstrategye.htm" target="_blank" rel="noreferrer noopener">Dec. 17 disclosure</a> that the planned actively managed offering would invest in gold and bitcoin futures contracts, gold-linked instruments, and exchange-traded products that provide exposure to gold or bitcoin.



“[People say] that bitcoin’s going to replace gold or bitcoin is the new gold or people hold bitcoin for the same reason that they hold gold, and I don’t think that’s true always,” Crigger said. “I think it’s interesting that they would pair those two together.”



Geraci added that VanEck could have difficulty marketing the product.&nbsp;



“Gold bugs and the bitcoin maxis tend to go at each other’s throats,” he said. “Who are you marketing to here?”



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What Crypto-related ETFs Could Hit the US Market in 2022?

<div id="highlights-block_61c36e84b351b" class="highlights">
 <ul>
 <li>The ProShares Bitcoin Strategy ETF (BITO) underperformed spot bitcoin by 2.34% from its launch on Oct. 19 to Dec. 21, according to Bloomberg Intelligence Analyst James Seyffart</li>
 <li>BITO’s December inflows total roughly $50 million so far, compared to $1.2 billion in October, FactSet data shows</li>
 </ul>
 
</div>



The underperformance of the US’s first bitcoin futures ETF relative to the crypto asset’s spot price in its first two months of trading limit the types of investors interested and ultimately its asset growth, according to industry professionals.&nbsp;



But offerings that include a smaller allocation to bitcoin futures contracts could see more demand in 2022, some argued, particularly among longer-term investors.



Bloomberg Intelligence ETF Analyst James Seyffart noted in a Twitter post on Wednesday that the ProShares Bitcoin Strategy ETF (BITO) underperformed spot bitcoin by 2.34% from its launch on Oct. 19 to Dec. 21.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">The first <a href="https://twitter.com/hashtag/Bitcoin?src=hash&amp;ref_src=twsrc%5Etfw">#Bitcoin</a> futures ETF &#8212; <a href="https://twitter.com/search?q=%24BITO&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$BITO</a> &#8212; is trailing spot by 2.34% with just about two months of data. Extrapolating that out: it will underperform spot by 13-14% in it&#39;s first year&#8230; <a href="https://t.co/2saAfp20u0">pic.twitter.com/2saAfp20u0</a>&mdash; James Seyffart (@JSeyff) <a href="https://twitter.com/JSeyff/status/1473652943689863173?ref_src=twsrc%5Etfw">December 22, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Extrapolated out over 12 months, Seyffart added, BITO would trail spot bitcoin by between 13 and 14% in its first year on the market.&nbsp;&nbsp;



“That’s a pretty big gap between bitcoin and your fund,” Bloomberg Intelligence ETF Analyst Eric Balchunas told Blockworks, noting that many financial advisors likely would not invest in the offering on behalf of clients. “That said, I think BITO is a great trading tool, and I think it will continue to be used for short-term exposure. It tracks great short-term, and its correlation is awesome.”



Though BITO was the first bitcoin futures ETF to launch in the US, the Valkyrie Bitcoin Strategy (BTF) launched three days later. It currently has about $55 million in assets under management, according to Valkyrie Investments’ website.



The VanEck Bitcoin Strategy ETF (XBTF) and the Global X Blockchain and Bitcoin Strategy ETF (BITS) launched in November. XBTF and BITS have $17 million and $9 million in assets, respectively.



Unlike the other three bitcoin futures products, BITS also invests in ​​US companies that directly own digital assets and may gain access to blockchain companies indirectly through ETFs.



Industry professionals <a href="https://cms.blockworks.co/a-futures-based-bitcoin-etf-could-be-suboptimal-heres-why/" target="_blank" rel="noreferrer noopener">have labeled roll costs</a> as one of several downsides to bitcoin futures ETFs. Maintaining a smaller allocation to bitcoin futures allows the firm to be “nimbler” to potentially find better value and reduce roll costs, Global X Research Analyst Matt Kunke <a href="https://cms.blockworks.co/global-x-offers-different-type-of-bitcoin-futures-etf/" target="_blank" rel="noreferrer noopener">told Blockworks last month</a>.



“I’m going to be watching it next year to see if it gets any looks,” Balchunas said of <a href="https://www.globalxetfs.com/introducing-bits-the-case-for-blockchain-equities-and-bitcoin-futures/" target="_blank" rel="noreferrer noopener">the Global X offering</a>.



<blockquote class="wp-block-quote">“BITS just seems like it’s one of those ETFs that could be palatable enough to an advisor given that small roll [cost], but at the same time have more kick than a blockchain stock ETF.”</blockquote>



<h3 class="wp-block-heading">Remaining demand for bitcoin futures ETF?</h3>



BITO notched inflows of more than $1.2 billion from its launch until the end of October, according to FactSet Data. Flows into the product have slowed, as they totaled $542 million in November and $50 million so far in December.&nbsp;



“Obviously it has completely plateaued, as all of the people who wanted to buy BITO have bought it basically,” Balchunas said. “Maybe those flows trickle in for the next couple months.”



Dave Nadig, CIO and director of research for ETF Trends and ETF Database, said that investors, particularly those who have invested in commodities, understand the deficiencies of futures versus spot.



“The funds really target a small Venn diagram of people who want crypto exposure on a fairly short-term basis but are unwilling or unable to access the crypto markets directly,” he told Blockworks. “I would not expect the [assets under management] to move significantly, as I suspect these funds will be trading vehicles.”



Though Nadig added he does not expect any new “plain-vanilla” bitcoin futures ETFs, other types of products, such as WisdomTree’s Enhanced Commodity Strategy Fund (GCC), could make allocations to bitcoin futures.



GCC, an actively managed ETF seeking to provide broad exposure to a diversified basket of commodities, <a href="https://cms.blockworks.co/wisdomtree-plans-to-launch-more-crypto-offerings-in-2022/" target="_blank" rel="noreferrer noopener">became the first ETF</a> to add bitcoin futures in October.



<h3 class="wp-block-heading">Still no spot bitcoin ETF</h3>



The US Securities and Exchange Commission (SEC) has rejected a variety of <a href="https://cms.blockworks.co/when-will-the-sec-approve-a-spot-bitcoin-etf/" target="_blank" rel="noreferrer noopener">spot bitcoin ETF proposals</a>, while regulators in Europe, Canada and other regions have allowed such products to trade.



“The SEC is unlikely to approve a spot Bitcoin ETF in 2022, we believe, leaving US investors reliant on less-efficient futures, trusts and themed equity ETFs for fund exposure,” Seyffart wrote in a Dec. 9 research note, adding that Ethereum futures ETFs could reach US exchanges before a spot bitcoin product.&nbsp;



As part of its <a href="https://cms.blockworks.co/sec-rejects-vanecks-proposed-spot-bitcoin-etf/" target="_blank" rel="noreferrer noopener">denial of VanEck’s planned spot bitcoin fund</a>, the SEC said in a letter that the Cboe BZX Exchange, on which the ETF’s shares would have traded, “has not met its burden” that the proposal meets the requirements of the Securities Exchange Act of 1934.



“The SEC cannot have been much more clear in their guidance. Any approval would be a shocking surprise,” Nadig said.



<blockquote class="wp-block-quote">“I give essentially zero odds to a pure Bitcoin ETF in 2022.”</blockquote>



Balchunas said he always expected the ProShares Bitcoin Strategy ETF to be used by traders more than long-term investors, noting that his optimism for an ETF that invests directly in bitcoin remains strong.&nbsp;



“I think a spot bitcoin ETF, and ultimately different takes on it — like a spot Ethereum, a crypto picking active ETF, a crypto basket…S&amp;P of crypto — is going to fly off the shelves,” he said, “and be the big category that we all are expecting.”



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