The Bitcoin ETF has once again become a major talking point in the cryptoverse in recent months. This is in large part due to the pending outcome of Blackrock's spot Bitcoin ETF filing with SEC back in June and which was swiftly followed by filings made by Fidelity, Invesco, VanEck, WisdomTree). The anticipation around the decision also reflects the market's thirst for bullish momentum in what is approaching a two-year bear market.
For anyone even loosely paying attention to the shifting investor sentiment on Bitcoin over the past five years, the appetite for a regulated spot ETF comes as no surprise and is symptomatic of a gradual warming of attitudes toward cryptoassets in general and Bitcoin in particular. Indeed, it is difficult to remember a time when so many of the world's large asset managers including JP Morgan, Blackrock, Vanguard, and Fidelity, to name but a few, were beating the drum for Bitcoin so vigorously.
What a spot Bitcoin ETF would mean for markets
Looking at the data, it isn't difficult to trace this enthusiasm back to some solid fundamentals.
First, it's an established fact that as the world's largest asset manager with approximately $9 trillion in assets under management (Figure 1), even a 1% rotation of Blackrock's portfolio into Bitcoin would produce a sizeable (16%) rise in its marketcap at current levels and have a correspondingly large impact on sentiment and price.
Figure 1: Blackrock's total assets under management, 2008 – Q2 2022 ($ trillions)
Second, it's easy to forget that the ETF has been the most disruptive force in the asset management industry over the past two decades. Total ETF AUM reached $6.7 trillion across the US and Europe by the end of December 2022, which is equivalent to around a 15% compound annual growth rate (CAGR) since 2010. This momentum is expected to continue, with the global market for ETFs projected to reach some $14 trillion by 2024, according to Blackrock's own data.
Figure 2: Potential global ETF asset growth trajectory 2018-2024 ($ trillions)
Third, irrespective of the continued bearish sentiment gripping the crypto space, a vast body of data points to a growing recognition of its investment potential both at the institutional and retail level – hardly a surprising fact given that Bitcoin has been the best- performing asset over the past decade.
For example, blockchain software firm, Consensys recently released the results of one of the largest cross-country surveys ever conducted on the state of crypto adoption. In the study, 92% of those surveyed demonstrated awareness of crypto, with over one third (37%) believing in its potential as the future of money and 31% seeing crypto as the future of digital ownership (Figure 3).
Figure 3: Global % of crypto awareness across global jurisdictions
Additionally, the Institutional Crypto Outlook Survey released in June 2023 by Binance indicated that 63.5% are positive about the outlook for crypto over the next 12 months, during which time 50% are expecting to increase their allocation.
Bitcoin's rocky road towards a spot ETF
Despite the current euphoria, many may not be aware that Bitcoin's path towards a spot ETF has been a long and drawn-out process which dates back to July of 2013 with the first (unsuccessful) filing made by Cameron and Tyler Winklevoss, the founders of crypto exchange Gemini.
Just for context, the below is a list of firms that have had spot Bitcoin ETF filings rejected by the SEC:
🚫 Global X
🚫 Kryptoin
🚫 Fidelity/Wise Origin
🚫 Galaxy Digital
🚫 VanEck
🚫 First Trust/SkyBridge
🚫 NYDIG/Stone Ridge
🚫 One River
🚫 Grayscale
Though it is reasonable to question why the outcome for Blackrock should be any different from the previous failed bids, there is a certain inevitability around the filing which has been the SEC's official docket since mid-July. For one thing, Blackrock already has an existing crypto product with its spot Bitcoin private trust for US-based institutional clients launched in August 2022. The trust offers investors direct exposure to the price of Bitcoin and the spot Bitcoin ETF filing is widely considered to be building on this foundation.
Perhaps more important are the mechanisms Blackrock's ETF proposal includes in order to satisfy the SEC’s requirement for surveillance sharing as part of efforts to prevent market manipulation. Through its chosen listing exchange, Nasdaq, it will include dual-rack two surveillance systems for both the futures market overseen by CME, and another for spot market to be handled by Coinbase.
The nuance lies in the difference between surveillance sharing agreements (SSA) and Information sharing agreements. The SSA concerns data surveillance carried out by the spot exchange (Coinabse), which can be shared with regulators, ETF providers, and listing exchanges if deemed suspicious, whereas information-sharing agreements allow regulators and ETF providers to pull data directly from the exchange.
These factors taken together explain why many believe Blackrock may have done enough to address the SEC’s concerns to become the first spot Bitcoin ETFs. At the same time, however, the SEC has also been accused of sending the market mixed messages with its recent approval of a leveraged Bitcoin futures ETF, a development which has only led to even more questions around their approach to their stated mandate of stepping up "investor protections" in the crypto industry.
Europe edges towards its own Bitcoin ETF
While the focus remains on US-based filings, Europe has been quietly moving towards a spot Bitcoin ETF of its own which may be launched before the end of 2023 by Jacobi Asset Management. The Jacobi Bitcoin ETF will be a centrally cleared, crypto-backed financial instrument with custody supported by Fidelity Digital Assets and will represent a shift from the existing exchange-traded notes (ETNs) and exchange-traded commodites (ETCs) that have hitherto dominated the European crypto-backed traditional financial instrument landscape.
However due to UCITS rules that require ETFs to be diversified (no single holding can constitute more than 20% of the fund's net asset value), Jacobi has opted for the fund to be authorised in Guernsey. This brings both advantages in terms allowing for the specific ETF designation (which is a non-debt-based instrument), as well as regulatory challenges.
Having already received approval from the Guernsey Financial Services Commission (GFSC) in October 2021 and previously set to debut on the Euronext Amsterdam Exchange in July 2022, Jacobi was forced to postpone its listing due to extreme market conditions caused by the collapse of the Terra ecosystem and FTX.
With Jacobi expected to announce their launch in the coming months, they may well get the jump on Blackrock. Moreover, the fact that Jacobi recruited former Blackrock executive, Martin Bednall, as its new CEO to head up their Bitcoin ETF listing aspirations reflects their intent to be first over the line in Europe.
Despite concerns, a spot ETF is now inevitable
A Bitcoin spot ETF now seems all but inevitable and would expand the market for Bitcoin investments and provide greater scope for traditional institutions, including pension funds, hedge funds, and banks to achieve the exposure they have been pushing for. Furthermore, should Blackrock's ETF be rubber-stamped, it could open the floodgates as crypto fund manager Grayscale Investments is attempting to pressure the SEC to approve all the recently filed spot Bitcoin ETFs simultaneously to negate any competitive advantage. Such a scenario could provide additional bullish impetus ahead of the Bitcoin halving event expected in Q2 of next year.
"The launch of BlackRock's ETF will be the best thing that could happen to Bitcoin." – Galaxy Digital CEO, Mike Novogratz
Despite the obvious excitement and anticipation around the SEC's pending decision, these developments have not been well received in all quarters. For many who participate in cryptocurrency ecosystems, the ETF approval is emblematic of a broader takeover by the very same institutions that Bitcoin was originally supposed to safeguard against through its open, blockchain-based decentralised architecture.
But irrespective of one's view on whether these developments sully Bitcoin's original mission, participatory vehicles for institutional investors will ultimately be a key element of the long-term stability and viability of the asset class.
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