Little evidence that a spot bitcoin ETF would expand the market
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You don’t have to want to invest in bitcoin to be in favour of US regulators giving their approval to a bitcoin exchange traded fund. You can disapprove of other people putting their money into the cryptocurrency but defend the idea that the Securities and Exchange Commission should let them. Perhaps not to the death — we don’t need to go all Voltaire about this — but you get the idea.
Applications for a spot bitcoin ETF — a fund that would actually hold bitcoin directly as opposed to investing in derivatives tied to the bitcoin price — have been consistently rejected by the SEC over the past decade.
But a court ruling this week looks to have changed the picture. A judge ruled that the regulator acted capriciously in denying the Grayscale Bitcoin Trust’s request to convert to an ETF, given futures-based bitcoin funds are already available.
The ruling added to excitement about spot bitcoin ETFs that has been building since June when BlackRock, the world’s largest fund manager, put in its own application to launch one. Surely, crypto enthusiasts reasoned, well-connected BlackRock would not be making such a request unless it knew the regulator was thawing its position?
There were specific reasons to think BlackRock will be able to break the logjam. Its application included a plan for a “surveillance-sharing” arrangement with a crypto exchange, to deal with the SEC’s concern that nefarious traders could manipulate the market to the disadvantage of the ETF’s investors. Other asset managers, including Cathie Wood’s Ark, have amended their pending bitcoin ETF applications to copy the BlackRock plan.
The bitcoin price shot up 20 per cent in a week after the BlackRock news in June, and was up 7 per cent on Tuesday’s court victory by Grayscale, as traders bet the launch of an ETF will tempt in a rash of new buyers.
Personally, I am tiring of the 15-year quest to find a use for the bitcoin blockchain beyond self-reflexive speculation on the price of bitcoin itself. It has been sad to watch a generation of young people lured into cryptocurrency trading instead of learning the long-term investment techniques that build wealth. It’s been enraging to watch the explosion of get-rich-quick products labelled “decentralised finance” when so many are just Ponzi schemes hiding in plain sight. To see some of the more egregious purveyors of this financial snake oil being hauled before the courts has been pleasing but it’s surprising, frankly, to see the “value” of bitcoin and all the other cryptocurrencies remain above $1tn despite the cascading failures of the past year.
But who am I to disagree with BlackRock chief executive Larry Fink’s view — recently acquired — that bitcoin is an “international asset” for investors to “play” as an alternative to gold or currencies such as the euro or sterling? His group’s spot bitcoin ETF will probably have lower fees than the current futures-based funds in the US, and provide a better guarantee of doing what it says on the tin — tracking the price of bitcoin — than alternatives such as the Grayscale Bitcoin Trust which, as currently structured, has swung as far as 50 per cent in either direction from its net asset value. For people who feel they must “play”, spot bitcoin ETFs will be safer, cheaper, simpler products, and the benefits of protecting people who have already been lured in to cryptocurrency outweigh the risk of luring in more.
Traders already have a cornucopia of crypto vehicles to pick from on US exchanges, from “2x leveraged” bitcoin funds using derivatives to stock funds stuffed with highly speculative companies that have cryptocurrency or blockchain investments of their own. By comparison, a spot bitcoin fund looks positively vanilla.
More generally, ETFs are home to a dazzling array of bad investment ideas, even more so now that actively managed funds are crowding in after the index trackers that established the product.
The flipside is that fund managers have become more inclined to close funds when an investment fad fizzles, says Todd Rosenbluth of VettaFi, a research firm. Casualties in recent months have included the Punk Subversive Metaverse ETF and the AdvisorShares Drone Technology ETF. BlackRock has no Midas touch, either. Last year, it shut a number of ETFs under the iShares Evolved brand that promised to use machine learning and analysis of font sizes in financial documents to sort stocks into sectoral funds ranging from consumer discretionary to “innovative healthcare”. They had failed to gather significant assets.
There is scant evidence that a spot bitcoin ETF will expand the market at this point. BlackRock will put its marketing muscle behind the product, but I doubt it will be taking out Super Bowl commercials. Crypto trading was long ago “democratised” by Coinbase and other exchanges and the demos has drifted off. Those betting the debut of a spot bitcoin ETF will usher in a new bull market are just as likely to find it opens up short-selling opportunities that hold the price down.
JPMorgan strategist Nikolaos Panigirtzoglou predicts a BlackRock launch will do little more than draw liquidity away from other products, notably bitcoin futures, in a zero-sum game. Spot bitcoin funds have existed for some time outside the US but have failed to attract large investor interest, he pointed out in a research note.
The two-and-a-half-year-old Purpose Bitcoin ETF in Canada has just $600mn in assets, for example, and bitcoin funds globally have not had significant inflows since mid-2021. Spot bitcoin ETFs would be a perfectly inoffensive addition to the US market, though the SEC might find it is opening the stable door after the horse has died.
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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