- Some ETF professionals do not expect a spot bitcoin ETF to hit the US market until the second half of 2022, at the earliest
- Eventual approval of a spot bitcoin ETF is “inevitable,” Bitwise Asset Management CIO Matthew Hougan says
Though 2021 has been a year during which bitcoin hit an all-time-high price and saw increased demand from institutional investors, the expectations around when the US Securities and Exchange Commission (SEC) could approve a spot bitcoin ETF are not as bullish.
Bloomberg Intelligence Analysts Eric Balchunas and James Seyffart wrote in a note published last week that proposed ETFs that would invest in bitcoin directly “have virtually no chance of SEC approval in the near term,” given the agency’s concerns about lack of oversight and potential for market manipulation.
The prediction follows the SEC’s denial of VanEck’s proposed spot bitcoin ETF, which came a couple of days before its 240-day review period for the product expired.
“The SEC’s rejection of VanEck’s proposed spot Bitcoin ETF, though not surprising to us, appears to hinge on a concern with legal technicalities that overlooks the potential benefit to investors and recent improvements in market transparency and security,” Balchunas and Seyffart explained.
Objections to a spot bitcoin ETF
The SEC noted in a Nov. 12 letter that the Cboe BZX Exchange, on which the VanEck ETF’s shares would have traded, has not met requirements in the Securities Exchange Act of 1934. A section of the law requires that a national securities exchange be “designed to prevent fraudulent and manipulative acts and practices,” as well as to protect investors.
Cboe also argued in the VanEck application that the bitcoin futures market is meaningfully large and regulated by the Commodity Futures Trading Commission, satisfying the SEC’s surveillance criteria.
“The SEC rejected this notion, saying actors could manipulate the spot bitcoin market without trading CME futures or affecting them,” the Bloomberg Intelligence analysts added. “Saying this so soon after approving bitcoin futures ETFs appears inconsistent to us given that the spot and futures markets are intertwined; manipulating spot prices would in turn affect futures.”
Neena Mishra, director of ETF research for Zacks Investment Research, noted that SEC Chairman Gary Gensler has mentioned the need for surveillance agreements with crypto trading platforms, which appears to be almost impossible in the near-term.
“It remains to be seen if exchanges like Cboe can secure those surveillance agreements with some of the largest crypto exchanges and if that would satisfy the SEC,” she said. “I don’t expect to see a physical bitcoin ETF anytime soon, but I hope I’m wrong.”
The SEC’s stance doesn’t make sense to many, Mishra added, given that spot bitcoin ETFs are trading successfully in other countries. Canada-based Purpose Investments launched the world’s first ETF backed by physically settled bitcoin in February on the Toronto Stock Exchange. The fund gathered $1 billion in assets during its first month.
A week after the VanEck rejection, the SEC ruled that it would need more time to consider whether to allow Global X’s proposed spot bitcoin ETF to trade.
The SEC had last delayed its decision related to the planned offering on Sept. 29, a regulatory filing states, and the agency is choosing to “institute proceedings” to determine whether it will approve or disapprove the product.
A spokesperson for Global X declined to comment.
“I think their denial of that was pretty firm and it really sort of solidified the SEC’s case that they are not interested in a spot ETF at this time,” Morningstar Analyst Bobby Blue said of the Global X postponement. “Market dynamics might push them to do so over time, but at this point I don’t see one on the short- to medium-term horizon.”
What are others saying?
Other ETF industry professionals that Blockworks has spoken to also do not expect the SEC to allow such a product in the next six or so months.
Gensler continues talking about the lack of regulation in crypto markets, which he believes could subject bitcoin ETF investors to fraud and manipulative acts, said Nathan Geraci, president of The ETF Store. A spot bitcoin ETF won’t come until there’s a crypto regulatory framework in place that the SEC is comfortable with, he added.
“Gensler was crystal clear in messaging that the SEC would be open to bitcoin futures ETFs under certain parameters and he then followed through by approving those exact products,” Geraci told Blockworks. “Until we see similar messaging regarding spot bitcoin ETFs, I’m not holding my breath on approval.”
The ProShares Bitcoin Strategy ETF (BITO), which launched on Oct. 19, was the first bitcoin futures-based product in the US and has grown to $1.4 billion. Similar funds launched later on by Valkyrie Investments and VanEck have about $70 million in combined assets, according to ETF.com.
Grant Engelbart, a senior portfolio manager at Brinker Capital, said he wonders if the lack of asset growth in the bitcoin futures ETFs – aside from BITO – could affect the SEC’s thinking about demand for a spot vehicle.
“My guess would be late 2022 at the earliest,“ Engelbart said about a spot bitcoin ETF approval. “Issuers will continue to put forth strong evidence for the need for spot and market efficiency and eventually gain the confidence of the SEC, but I’m just not sure there is much of a rush from the SEC’s standpoint, especially after the wave of recent futures-based approvals.”
Dave Nadig, CIO and director of research for ETF Trends and ETF Database, said he predicts a spot bitcoin ETF approval “post-midterms at the earliest.”
While Bitwise Asset Management CIO Matthew Hougan did not share a specific timeline for when he expects such a product to be permitted, he said it will happen eventually.
Bitwise reapplied to launch an ETF last month that would invest directly in bitcoin. The San Francisco-based crypto fund group had previously filed for a physically-backed bitcoin ETF in 2019, but withdrew its request in January 2020 amid SEC concerns.
Since 2013, when the first bitcoin ETF application was filed, the SEC has asked good questions about the nature of the bitcoin spot market, Hougan said, adding that he hopes Bitwise’s latest research – published with its most recent filing – answers those questions.
“Every day brings us closer to the inevitable eventual approval of a spot bitcoin ETF,” Hougan told Blockworks. “Nothing from the VanEck disapproval or other recent action changes this.”
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