What will a Bitcoin spot ETF bring?

Bitcoin spot EFT will open the road to institutionalization of Web3.0.

Written by: Song Jiaji, Ren Heyi

Summary

**Bitcoin spot ETF uses Bitcoin spot as the underlying asset and is a compliant investment tool for traditional capital market investors to hold Bitcoin. Whether spot ETFs can be approved in the United States is the focus of the market’s greatest attention. **Bitcoin ETFs allow investors to gain exposure to Bitcoin and related assets without having to research, purchase or store the actual cryptocurrency (or derivative assets), in terms of compliance, fees, liquidity and management costs. Very suitable for the broader capital market and investors. Therefore, the market has been looking forward to the U.S. SEC’s approval of a Bitcoin spot ETF as soon as possible.

**Severe price fluctuations are one of the reasons why the SEC is cautious. The deadline for the latest batch of spot ETF applications is March next year. **In the past, Bitcoin spot ETFs submitted by the U.S. capital market have been rejected by the SEC many times, mainly because of insufficient investor protection in the Bitcoin market. On October 16, industry media Cointelegraph published false news on X (formerly Twitter), which caused short-term violent fluctuations in Bitcoin prices, causing cryptocurrency positions worth nearly US$100 million to be liquidated in less than an hour. Situations like this are not uncommon in the cryptocurrency market, so the SEC’s concerns are not entirely unfounded. The U.S. SEC has successively postponed its decision on the Bitcoin spot ETF applications of WisdomTree, Invesco Galaxy, Valkyrie, Fidelity, VanEck, Bitwise and BlackRock. The latest review time for the current 11 major Bitcoin spot ETF applications will be concentrated on mid-October, with a deadline of March 2024. It can be said that applications for Bitcoin spot ETFs in the US market have entered a peak period, and the Bitcoin halving is expected to be around the end of April 2024. Therefore, whether the spot EFT is approved this time has become the focus of the industry.

**With reference to the promotion of gold prices by the launch of gold ETF, the Bitcoin spot ETF is worth looking forward to. **The launch of gold ETF has a positive boost to gold prices, which has positive implications for Bitcoin spot ETF. It should be noted that the world’s recognition of gold is not generated by spot ETFs. If the Bitcoin spot ETF is approved, it means that the huge traditional wealth world recognizes Bitcoin and even the Web3.0 world, which will further accelerate the two. fusion of those. This is a process from 0 to 1, and the marginal change is far beyond the approval of gold ETF. Of course, another difference is that the total number of Bitcoins is fixed at 21 million, while gold still has continuous new output. The Bitcoin spot ETF was approved in the United States and is expected to bring incremental funds. Galaxy Digital’s calculations concluded that Bitcoin is expected to rise by 74% in the first year after the spot ETF is approved (taking the Bitcoin price of US$26,920 on September 30, 2023 as a starting point); in the longer term, investing in Bitcoin products The potential funding size is between US$125 billion and US$450 billion.

**Information, fundamentals and capital are expected to “resonate” next year. **Looking at the three rounds of bull-bear transitions since the birth of Bitcoin, the Bitcoin halving has always been in the starting point of the upward trend. This is an “experience benefit” at the information level, and each round of market trends starts with an industry round. Innovative applications serve as fundamental support. Of course, the injection of incremental funds is the basis for the upward market to start. Judging from the current situation: Information: It is expected to usher in the fourth halving at the end of April 2024; Fundamentals: RWA/intention and other innovations drive the birth of new industry applications, and new application innovations are accumulating; Funding: If Bitcoin The approval of spot ETFs will bring huge incremental funds.

1. core ideas

Bitcoin spot ETF uses Bitcoin spot as the underlying asset and is a compliant investment tool for traditional capital market investors to hold Bitcoin. Bitcoin spot ETFs have been repeatedly rejected in the U.S. market over the past decade, but with the growth of the cryptocurrency market and the increasing recognition of crypto assets in traditional capital markets. Although there are already Bitcoin spot ETFs in other countries’ markets and some Bitcoin futures ETF products in the U.S. market, whether spot ETFs can be approved in the U.S. is still the focus of the market’s greatest attention.

Looking at the three rounds of bull-bear transitions since the birth of Bitcoin, the Bitcoin halving has always been in the starting area of the upward market. This is an “experience benefit” at the information level, and each round of market has industry innovative applications as the basis. Of course, the injection of incremental funds is the basis for the upward trend to start. Judging from the current situation, the information is expected to usher in the fourth halving at the end of April 2024; in terms of fundamentals, RWA/intent and other innovations drive the birth of new industry applications, and new application innovations are accumulating; in terms of funds, if Bitcoin The approval of the currency spot ETF will bring huge incremental funds.

2. Bitcoin spot ETF applications enter peak period

2.1. Why Bitcoin spot ETF is important

**Bitcoin spot ETF uses Bitcoin spot as the underlying asset and is a compliant investment tool for traditional capital market investors to hold Bitcoin. **Bitcoin spot ETF is an exchange-traded fund with Bitcoin as the underlying asset and an index fund. Bitcoin ETFs allow investors to gain exposure to Bitcoin and related assets without having to research, purchase, or store the actual cryptocurrency (or derivative assets), making them ideal for compliance, fees, liquidity, and management costs. The broader capital markets and investors.

In comparison, the underlying asset of Bitcoin futures ETF is Bitcoin futures contract. The core difference between Bitcoin futures ETF and spot ETF is the underlying asset. From the perspective of price fluctuations, spot ETFs and futures ETFs are very similar. They are both designed to accurately track BTC prices and help investors gain exposure to BTC; futures ETFs generally have higher fees because they also involve futures contract operations, which are more complex. Therefore, the market has been looking forward to the U.S. SEC’s approval of a Bitcoin spot ETF as soon as possible.

According to coinglass data, as of November 5, the Bitcoin balance in the wallets of 20 mainstream cryptocurrency exchanges was 1.835 million, and 40 listed companies held a total of approximately 208,000 Bitcoins; and according to Galaxy Digital’s calculations, as of On September 30, Bitcoin investment products (also including ETPs and closed-end funds) held a total of 842,000 Bitcoins - if calculated based on the Bitcoin price of US$35,200 on the Coinbase (COIN) trading platform on November 5, these The total value of Bitcoin is approximately $29.6 billion.

Existing Bitcoin investment products have problems such as high fees, low liquidity and tracking errors. More importantly, these products also have compliance and compliance issues for traditional investor groups who hold deeper funds. Convenience issues, not to mention the administrative burden of managing Bitcoin in person including wallet/private key management, self-custody, and tax filing. Therefore, Bitcoin spot ETF will be a more ideal investment tool.

2.2. The bumpy road to Bitcoin ETF application

The BTC spot ETF can be traced back to 2013 when the Winklevoss twin brothers (Cameron and Tyler) tried to launch a BTC spot ETF. They applied several times over the years but were unsuccessful. The plan is still on hold. At that time, in 2013, Bitcoin reached the peak of the first bull market, with a price of US$1,163. As of November 5 this year, the price of Bitcoin has exceeded US$35,000. The attraction brought by rising prices is the most direct factor in the capital market’s attention to Bitcoin spot ETFs. Therefore, many institutions subsequently tried to launch Bitcoin spot ETFs.

In the past, Bitcoin spot ETFs submitted by the U.S. capital market have been rejected by the SEC many times, mainly because of insufficient investor protection in the Bitcoin market. On October 16, local time, industry media Cointelegraph posted on It then adjusted back to around $27,900 after the news was confirmed to be false, causing nearly $100 million worth of cryptocurrency positions to be liquidated in less than an hour. Situations like this are not uncommon in the cryptocurrency market, so the SEC’s concerns are not entirely unfounded.

The U.S. Securities and Exchange Commission (SEC) has successively postponed decisions on the Bitcoin spot ETF applications of WisdomTree, Invesco Galaxy, Valkyrie, Fidelity, VanEck, Bitwise and BlackRock. The latest of the current major 11 Bitcoin spot ETF applications The review time will be concentrated until mid-October, with the final deadline in March 2024. It can be said that applications for Bitcoin spot ETFs in the US market have entered a peak period, and the Bitcoin halving is expected to be at the end of April 2024. Therefore, whether the spot EFT is approved this time has become the focus of the industry. Compared with ten years ago, this batch of Bitcoin spot ETF application institutions has included traditional mainstream financial investment institutions such as BlackRock. In other words, it has become a trend for traditional financial institutions to enter the Bitcoin spot ETF. If approved, they will enter Cryptocurrency investment funds are expected to be dominated by traditional financial capital, which is different from the past.

2.3 Grayscale’s victory in the SEC incident brings confidence to the market

Prior to the approval of the Bitcoin spot ETF, Grayscale’s Bitcoin and other cryptocurrency trusts were alternatives to traditional financial markets for investing in cryptocurrency assets. As of November 4, Grayscale has launched a variety of cryptocurrency trusts including BTC, ETH, cryptocurrency market index, etc.

For products like GTBC, investors can directly purchase and trade GTBC shares in the secondary market. However, as a closed fund, there are currently no clear redemption rules. For a long period of time, GTBC has maintained a negative premium. To solve the liquidity problem, Grayscale attempted to convert GBTC into an ETF. On June 29, 2022, the SEC rejected Grayscale’s application to convert its Bitcoin Trust (GTBC, Grayscale Bitcoin Trust) into an ETF. After Grayscale appealed, on October 23, 2023, the Washington, D.C. Circuit Court of Appeals made a decision issued a final ruling, ordering the SEC to cancel the decision to reject Grayscale’s Bitcoin spot ETF application, believing that the SEC’s decision to reject Grayscale’s attempt to convert its Grayscale Bitcoin Trust (GBTC) worth approximately US$17 billion into a spot ETF was “arbitrary and capricious". This means that the SEC must re-accept Grayscale’s application to convert GBTC into a spot ETF. Of course, the result may still be rejected, but the SEC must give new persuasive reasons. In order to show the importance of ETFs to Grayscale, Grayscale specially opened a litigation page section on its official website to display its litigation with the SEC in the form of a timeline. This also reflects Grayscale’s persistence and determination in Bitcoin spot ETFs. .

Although Grayscale’s victory in the lawsuit does not mean that GBTC will be freely converted into an ETF immediately, the market believes that the Bitcoin spot ETF is getting closer, and this victory has injected great confidence into the market. Affected by this series of news, as of November 4, the negative premium rate of Grayscale Bitcoin Trust continued to narrow to 12.77%.

Grayscale’s victory in the lawsuit shows that there is no “flaw” in the legal aspect of launching the Bitcoin spot ETF, which has brought great confidence to the market. Therefore, the application for Bitcoin spot ETF has entered the peak period, and the market’s expectations for this have also shown. Quite a bit of heat.

3. What is the existing Bitcoin ETF market like?

3.1． Bitcoin Spot ETF Situation

Although the application for Bitcoin spot ETFs in the U.S. market is not smooth, several other countries’ capital markets have actually approved Bitcoin spot ETFs before the United States. Among them, the top-ranked Bitcoin spot ETFs include:

• Launched in February 2021, the Purpose Bitcoin ETF (BTCC) trades on the Toronto Stock Exchange (TSX) and has been extremely popular; *3 iQ CoinShares Bitcoin ETF (BTCQ) is another Bitcoin spot ETF that trades on the TSX;
• QBTC 11 by QR Asset Management (QBTC 11) is Latin America’s first Bitcoin ETF, launched on the Brazilian Stock Exchange (BVMF) in June 2021. As of November 4, 2023, the QBTC 11 ETF held 727 Bitcoins.

These Bitcoin ETFs track Bitcoin spot price performance very well, allowing you to gain exposure to Bitcoin by holding the ETFs, and these ETFs successfully demonstrate strong investor demand. Based on the Bitcoin price of US$35,200 on the Coinbase (COIN) trading platform on November 5, Bitcoin has a market value of approximately US$700 billion. Compared with this, the size of ETFs undoubtedly has a lot of room for growth. Although Bitcoin ETFs can already be traded in countries or regions such as Canada, Brazil, and Europe, spot Bitcoin ETFs in the U.S. market still face regulatory obstacles and are the most anticipated products in the market.

3.2. Bitcoin Futures ETF Already First

As Bitcoin leads the growth of the cryptocurrency market, crypto assets have gradually entered the vision of traditional financial investment institutions. On December 18, 2017, the Chicago Mercantile Exchange (CME), one of the world’s largest futures exchanges, launched Bitcoin futures contracts, and just eight days ago (December 10, 2017), the Chicago Board Options Exchange (CBOE) )’s online Bitcoin futures contract became the world’s first (traditional financial market) Bitcoin futures contract.

Although there is currently no Bitcoin spot ETF listed in the United States, there are already some Bitcoin futures ETFs listed in the United States. As of November 4, the total assets under management of the five major Bitcoin futures ETFs, BITO, XBTF, BTF, BITS and DEFI, have reached US$1.19 billion. Among them, BITO, officially issued by ProShares in October 2021, is the largest futures ETF within statistical scope, with total assets reaching US$1.08 billion. Secondly, the total size of XBTF and BTF issued by VanEck and Valkyrie is US$58.66 million and US$31.94 million respectively.

The underlying targets tracked by these Bitcoin futures ETFs are usually the Bitcoin futures contracts of the Chicago Mercantile Exchange (CME). Among them, BITO, the largest, is the only futures ETF that is fully allocated with CME futures contracts and implements a “rolling” futures contract strategy. In addition, other futures ETFs allocate a certain proportion of other assets on the basis of CME futures contracts. For example, XBTF and BTF allocate U.S. Treasury bonds, and BITS allocates blockchain ETFs issued by other institutions.

**Before the United States approved Bitcoin spot ETFs, futures ETFs partially met the investment needs of some investment institutions for Bitcoin-related assets, but the scale of US$1.19 billion is compared to Bitcoin’s market value of nearly US$700 billion. Obviously it is far from enough to meet the needs of the market. That’s why spot ETFs attract so much attention from the market. **

4. What will Bitcoin spot ETF bring?

After summarizing the experience of the launch of gold ETF, US Global Investors believes that after the launch of gold spot ETF in 2004, as liquidity and programmatic trading increased, the price of gold rose by 420%. The experience of gold shows that spot ETF is indeed very important. Compared with The market impact after the launch of the Bitcoin spot ETF provides an empirical reference and inspiration; therefore, it is believed that the launch of the Bitcoin spot ETF will also open up space for related sectors to rise.

**It should be noted that the world’s recognition of gold is not generated by spot ETFs. If the Bitcoin spot ETF is approved, it means that the huge traditional wealth world will further recognize Bitcoin and even the Web3.0 world. Accelerate the integration of the two. This is a process from 0 to 1, and the marginal change is far beyond the approval of gold ETF. Of course, another difference is that the total number of Bitcoins is fixed at 21 million, while gold still has continuous new output. **

The Bitcoin spot ETF was approved in the United States and is expected to bring a certain amount of incremental funds. As of October 2023, the total assets managed by brokers ($27.1 trillion), banks ($11.9 trillion) and registered investment advisers ($9.3 trillion) in the U.S. wealth management market reached a total of $48.3 trillion. GalaxyDigital calculated based on this and concluded that:

• Bitcoin is expected to rise 74% in the first year after spot ETF approval (taking the Bitcoin price of $26,920 on September 30, 2023 as a starting point);
• Over the longer term, the potential size of funds invested in Bitcoin products ranges from US$125 billion to US$450 billion.

Looking at the three rounds of bull-bear transitions since the birth of Bitcoin, the Bitcoin halving is always in the starting area where the market turns upward. This is an “experience benefit” at the information level, and each round of market is preceded by a round of industry innovation applications. (Respectively, the emergence of competing Bitcoin products, preliminary exploration of industry applications driven by Ethereum smart contracts, and innovations brought about by innovative applications such as DeFi/Metaverse) As fundamental support, of course, the injection of incremental funds is the basis for the start of the upward market . Looking at the current situation:

*Information: It is expected that the fourth halving will be held at the end of April 2024;

• Fundamentals: Innovations such as RWA/intent drive the birth of new industry applications and are accumulating new application innovations;
• Funding: If the Bitcoin spot ETF is approved, it will bring huge incremental funds

Therefore, we believe that from the perspective of the three-party driver model, if the Bitcoin spot ETF is approved, it is expected to bring positive factors to the market.

As the SEC’s final approval deadline approaches, the market is paying more attention to the results of this approval and the specific opinions on the approval. According to a Fox Business reporter, the SEC put forward new conditions for ETF approval of spot Bitcoin during a meeting with ETF applicants, including requiring the ETF to be created using cash. This means that Bitcoin spot ETFs continue to advance in the U.S. capital market, which is the most concerning issue in the cryptocurrency market.

Investment advice: Pay attention to cryptocurrency-related sectors

We believe that if the Bitcoin spot ETF is approved, its significance will not only bring traditional financial capital to Bitcoin investment, but also promote traditional financial capital to enter the entire cryptocurrency market and even the Web3.0 world. Therefore, it is recommended to pay attention to listed companies related to cryptocurrency and Web3.0.

There are currently four main categories of relevant listed companies:

1. Computing power mining stocks: carry out Bitcoin mining business by holding/managing computing power;

2. Mining machine manufacturers: R&D, production and sales of Bitcoin mining machines;

3. Crypto-asset exchange: Provides trading, custody, financial management and other services for crypto-assets;

4. Tunbi stocks: Bitcoin is used as the main asset allocation.

risk warning

The development of blockchain business models is less than expected: As the blockchain technology that is the basis of cryptocurrencies such as Bitcoin, there is a risk that the business model will not be implemented as expected; the development of related algorithms and ecology is less than expected, leading to fluctuations in cryptocurrency market prices.

Uncertainty in regulatory policies: At present, the regulatory policies of various countries on cryptocurrency and Bitcoin spot ETFs are still in the research and exploration stage, and there is no mature regulatory model, so the industry faces the risk of regulatory policy uncertainty.