US Spot Bitcoin ETF Could Open Floodgates for Capital Inflow
VYSYN Weekly Release #95: New regulatory developments increase market optimism for a spot Bitcoin ETF
With the surge in cryptocurrency popularity, mainstream investors are seeking ways to enter the crypto market. Considering the hassles involved in buying, selling, and storing Bitcoin, these investors need a financial instrument that will grant them easy access to the crypto market. A Bitcoin ETF would give investors easy access, but regulators in the United States are reluctant to approve a spot ETF.
In the latest VYSYN Weekly Release, we analyze the importance of a spot Bitcoin ETF and why investor demand for it is on the rise. We will also highlight the reasons US regulators are yet to approve one and the latest development that could change that stance soon.
Investors demand Bitcoin ETFs
Exchange-traded funds or ETFs, are investment funds that track the price of an underlying asset or index. Traditional ETFs track several assets and industries, ranging from commodities to currencies. A Bitcoin ETF would work in the same way – its prices would move in tandem with the price of Bitcoin. However, rather than being traded on crypto exchanges, Bitcoin ETFs will be traded on mainstream market exchanges like the NYSE, CBOE, or TSX.
Bitcoin is complicated to store and secure for the lay investor. There have been numerous cases of lost or forgotten passwords leaving investors locked out of their holdings worth millions of dollars. All of this means the appeal of a Bitcoin ETF is high since it removes investment complexity. The surge in Bitcoin's price in recent months has further increased investor demand for exposure to the asset.
In February 2021, the Canadian government became the first major economy to approve a Bitcoin ETF proposal from Purpose Investments. The launch of the Purpose Bitcoin ETF, trading under the ticker BTTC, was so successful that it recorded over $165 million in trading volume on the first day. Within just two months of its existence, the fund had more than $1 billion in assets under management (AUM).
Following the launch of the Purpose Bitcoin ETF, several financial regulators have softened their stance on the industry and approved ETFs. The latest country to join the Bitcoin ETF bandwagon is Australia, which recently gave the green light to Cosmos Asset Management to launch its Bitcoin ETF. The fund is expected to start trading on the CBOE equities trading platform by next week.
SEC seemingly shifting on spot Bitcoin ETF approval criteria
While regulators in different countries are warming to the industry, the U.S. Securities and Exchange Commission (SEC) is yet to approve a spot Bitcoin ETF in the country. The SEC often cites fraud and manipulation risks as its reasons for declining ETF proposals. The rejections all appear to pivot around the regulator's concern about legal technicalities. It overlooks the benefits to investors and recent improvements in market transparency and security.
In October 2021, the regulator approved a Bitcoin futures ETF proposal by ProShares. Trading under the ticker "BITO", the fund tracks the price movements of Bitcoin futures contracts. With the US SEC still reluctant to approve a spot Bitcoin ETF, crypto enthusiasts in the country are beginning to give up on the possibility of getting one any time soon. However, a recent development has rekindled investor optimism of witnessing a spot Bitcoin ETF.
The SEC recently approved a Bitcoin futures ETF proposal by Teucrium Trading. While this may not appear to be big news, considering that it is the fourth Bitcoin futures ETF to be approved, this one is different.
The first three Bitcoin futures ETFs were filed under the Investment Company Act of 1940, which the SEC argued provides robust consumer protection. In contrast, the recently approved Teucrium Bitcoin futures ETF was filed under the Securities Act of 1933 and the Securities Exchange Act of 1934. Interestingly, several rejected spot Bitcoin ETF proposals, including those filed by Ark 21Shares, VanEck, and NYDIG, were all filed under the 1933 Act.
GBTC or someone else?
The Teucrium approval is seen as paving the way for a spot Bitcoin ETF according to some market observers, given the SEC citing the lack of investor protection in the 1933 and 1934 acts as a major roadblock to approving a spot Bitcoin ETF. Craig Salm, Chief Legal Officer at Grayscale Investments, said, "It's a really positive step forward on the path of ultimately getting approval for spot-based ETFs."
He pointed out that the SEC "can no longer justifiably cite the ‘40 Act as being the differentiating factor" between futures and spot ETF approvals. Grayscale Investments is presently trying to get its Bitcoin Trust (GBTC) index fund converted into a spot Bitcoin ETF.
Converting GBTC from a futures-tracking index fund to a spot ETF will be a momentous occasion for the markets. The SEC is currently reviewing Grayscale’s proposal and is expected to announce a decision in July 2022. Investors stand to gain from an approval.
Index funds trade once daily and experience significant discounts or premiums between fund price and portfolio values as a result. For instance, GBTC currently trades at a 23% discount relative to BTC futures prices.
In contrast, ETFs trade throughout the day like common stocks allowing investors to capture price moves more accurately and transparently. GBTC currently has $27.8 billion in assets. Conversion to an ETF would rank it within the top 50 ETFs worldwide. The bottom line is that converting GBTC to an ETF helps investors, something that is a part of the SEC’s mandate.
Given the SEC’s willingness to approve a fund under the 1933 and 1934 acts, the possibility of a spot Bitcoin ETF being incorporated has increased. Only time will tell whether GBTC will be the first spot Bitcoin ETF or whether another fund house will manage to launch a pioneering fund. Either way, investors stand to gain tremendously from these moves.
The approval of US-based spot Bitcoin ETF would have a monumental impact on the Bitcoin market. It would open the floodgates for money to flow in from the biggest capital market in the world. Trillions of dollars of US capital are in the spot markets and a US Bitcoin Spot ETF would make it easy for this capital to flow into the Bitcoin market. If even a fraction of this capital finds its way into the market, it may have a huge impact on Bitcoin price performance.
About VYSYN Ventures
VYSYN Ventures is a longstanding venture capital company that specializes in funding and supporting disruptive startups in the blockchain and cryptocurrency industry. We have provided early-stage support to several projects that have grown USD market capitalizations of hundreds of millions and even billions. Our incubation program focuses on providing capital allocation, versatile marketing support, and tech assistance.