Race to a Spot Bitcoin ETF: TradFi Hopes to Take BTC Mainstream

KEY TAKEAWAYS

The spot Bitcoin ETF is the crypto industry's "Holy Grail." The approval of the ETF will not only bring in institutional investors but also help retail investors get exposure to BTC with ease. However, the US SEC has rejected all applications to date. Now, BlackRock, the world’s largest asset manager, wants to give it a shot. It's now or never.

The race to the first spot Bitcoin (BTC) ETF is on. BlackRock, the world’s largest asset manager, filed an application for a spot BTC ETF in mid-June 2023. It joined a long list of applicants, which include fellow traditional finance (TradFi) companies WisdomTree and Invesco.

Will the U.S. Securities and Exchange Commission (SEC) reject ETF applications as it has done in the past? What is different this time?

In this article, we answer all your questions.

Why Is the Spot Bitcoin ETF Coveted?

Many have tried – and all have failed. The SEC has rejected every spot Bitcoin ETF application it has received so far. The list of applicants is long and diverse. Crypto natives Grayscale and Galaxy Digital, alternative investment firms Ark Invest and Valkyrie, and TradFi companies WisdomTree and Fidelity have all been rejected by the U.S. regulator.

What is an ETF?
An exchange-traded fund or ETF is an investment vehicle that tracks the price of an asset, security, or index. An ETF pools money from investors and aims to achieve the same return as the underlying asset. The spot Bitcoin ETF will track the market price of BTC in real time.

The spot Bitcoin ETF remains a highly-coveted milestone for the industry. The approval of the ETF will not only bring in institutional investors but will also help retail investors get exposure to BTC with ease.

Currently, investors face several complexities when finding the best cryptos to invest in. Individuals have to learn how to use crypto wallets and how to protect their private keys. Many face difficulty buying cryptos due to the lack of support from banks for crypto companies.

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All of this could be solved by an ETF that tracks the market value of Bitcoin. It will allow investors to gain exposure to the largest coin without owning the cryptocurrency itself. Technical difficulties related to owning a Bitcoin will be eliminated. Investments will be safe from hacks and thefts. Moreover, an SEC-approved spot Bitcoin ETF could easily be listed alongside equities and other ETFs at your local TradFi brokerage.

A seal of approval from the U.S. SEC will also ease the tension within the industry. There is uncertainty in the crypto industry following the lawsuits filed by the SEC against Binance and Coinbase. A spot Bitcoin ETF approval would indicate that the U.S. regulator is willing to meet the crypto industry halfway by prioritizing investor protection.

Isn’t There a Bitcoin ETF Already?

The answer is yes. The ProShares Bitcoin Strategy ETF (BITO) was approved by the SEC in 2021. The ETF was so popular at the time of its debut that it became the fastest investment vehicle to hit a trading turnover of over $1 billion. BITO achieved this feat in just two days in October 2021.

However, BITO doesn’t track spot Bitcoin prices.

BITO gives investors exposure to Bitcoin futures. A futures contract is a derivative financial contract that obligates the contract holder to buy or sell the underlying asset at a predetermined price and date. Futures are mainly used for hedging and speculation. Futures investments can lead to larger losses and smaller gains than investing directly in the underlying asset.

The ProShares Bitcoin Strategy ETF explicitly mentioned in its prospectus that the fund does not directly invest in Bitcoin.

Clearly, this ETF is not the ideal way to gain exposure to the crypto coin. That’s why the industry is craving a Spot Bitcoin ETF.

Why Could This Time Be Different?

Hasn’t the SEC rejected every spot Bitcoin application it has received?

Well, this time around, BlackRock is the one applying. It is the largest asset manager in the world, with an AUM of over $9 trillion. The company operates iShares – one of the world’s largest ETF providers.

It feels like the race to a spot Bitcoin ETF has reached a boiling point. There is optimism in the market that if anyone can, it’s BlackRock. Even the companies rejected in the past – like Valkyrie, WisdomTree, Invesco, and Galaxy – have made fresh applications shortly after BlackRock’s filing.

Bloomberg Senior ETF Analyst Eric Balchunas tweeted a “fun fact” that BlackRock held a record of 575-1 in getting its ETFs approved by the SEC. Balchunas later cooled expectations and said that the spot bitcoin ETF has a “50% chance of getting approved.”

The analyst added the SEC could take to issue Coinbase’s role as prime broker for the fund.

What could help BlackRock in its bid to list the first spot Bitcoin ETF is the involvement of the Nasdaq stock exchange to pacify the U.S. SEC.

Bitcoin price manipulation is a major issue that the SEC is concerned about. To address this concern, the Nasdaq Exchange proposed to enter a surveillance-sharing agreement with a U.S. spot Bitcoin trading platform to obtain information to detect, investigate and deter fraud and market manipulation.

BlackRock’s spot Bitcoin ETF would be listed on the Nasdaq Exchange if approved.

Bitcoin Price Rallies on ETF Applications and Compliant CEX Launch

The BTC price had been tanking before the news about multiple spot Bitcoin ETF applications came to light. BTC had fallen to a low of about $24,750 by mid-June following SEC’s lawsuit against Binance and Coinbase. BlackRock’s ETF application filed on 15 June supported the coin’s rebound to over $30,000 by late-June 2023.

Another development that helped shore up investor confidence was the launch of a new crypto exchange called EDX Markets.

EDX is backed by a consortium of major TradFi institutions, including Charles Schwab, Citadel Securities, and Sequoia Capital. The exchange, which aims to enable “compliant trading of digital assets,” has launched at an opportune time when the SEC is penalizing “unregistered securities exchanges” in the U.S.

Tradfi Hopes to Take BTC Mainstream: Good News or Bad News?

There is an ancient Chinese proverb that tells its listeners not to judge the news too quickly. A development perceived to be “good news” could result in bad consequences with time. The same can be said about “bad news” that ends up yielding good results.

So, can we be certain that a spot Bitcoin ETF will ultimately turn out to be “good news” for the crypto industry?

For investors, the answer is probably yes. A spot Bitcoin ETF could pave the way for institutional and first-time investors to get exposure to BTC, bringing in more capital to the market. With time, Bitcoin investments could even become “mainstream.”

However, if you direct the same question to a cyberpunk, the answer may not be obvious. Bitcoin and cryptocurrencies were prophesized to disrupt the traditional finance industry. Now as the SEC’s war against crypto-native firms heats up and compliant TradFi companies (BlackRock, EDX) step in to fill the gap, we have to ask ourselves what the future of a decentralized, peer-to-peer and privacy-championing currency like Bitcoin may look like.

Will cryptocurrencies get engulfed by the sheer force and influence of TradFi? Only time will tell.

The Bottom Line: Could 2023 be the year?

Crypto finance companies and their TradFi counterparts have chased the spot Bitcoin ETF for nearly a decade. Many consider the ETF to be the ‘Holy Grail’ for the crypto industry.

There is a feeling that 2023 may be the year that the world finally sees a spot Bitcoin ETF approved in the U.S.

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Mensholong Lepcha
Crypto & Blockchain Writer

Mensholong is an experienced crypto and blockchain journalist, now a full-time writer at Techopedia. He has previously contributed news coverage and in-depth market analysis to Capital.com, StockTwits, XBO, and other publications. He started his writing career at Reuters in 2017, covering global equity markets. In his free time, Mensholong loves watching football, finding new music, and buying BTC and ETH for his crypto portfolio.