The eight years of Bitcoin ETF in the United States, from unattainable to within reach
On October 9, Bloomberg reported that four BTC ETFs are expected to receive approval from the U.S. Securities and Exchange Commission (SEC) by the end of October. The SEC is likely to decide by the end of October whether to approve, reject, or delay the listing applications for such ETFs. Bloomberg ETF analyst James Seyffart stated that he believes the chances of approval are high, "The SEC and its chairman Gensler have no reason to make a contrary decision less than a month after making positive comments on the BTC futures ETF based on the 1940 Act at the end of September."
Gensler teaches a Blockchain course at MIT
SEC Chairman Gary Gensler has consistently advocated for bringing crypto into the regulatory framework, and the necessary path to this framework is to provide compliant crypto exposure for investors. On September 30, he expressed support for BTC futures ETFs, rather than BTC spot ETFs. As of now, there are a total of nine BTC futures ETFs waiting for SEC approval.
Just a few days ago, the SEC approved the Volt Crypto Industry Revolution and Tech ETF, which will allocate 80% of its holdings to entities defined as holding a majority of BTC net assets or deriving most of their income from BTC mining, lending, or trading. This has also been viewed by the market as a prelude to BTC ETFs.
Following a series of regulatory developments, the passage of BTC ETFs seems to be just a step away, and these news have sparked strong market interest, with market sentiment gradually warming. If the SEC ultimately approves crypto ETFs, it will undoubtedly have a demonstrative effect in traditional finance. If crypto ETFs proliferate and financial giants compete to acquire crypto, it is not impossible.
Although several BTC ETFs have been launched previously, the introduction of a crypto ETF in the U.S. is still a milestone: BTC will fully open the door to the most developed and capital-intensive traditional finance—America—allowing numerous traditional financial institutions to have crypto exposure, which may lead to a sharp rise in market temperature. If the SEC ultimately approves, it may add some fuel to the gradually warming market sentiment, and the term "market" will no longer need to distinguish between traditional finance and the crypto world; the significance of this event is enough to penetrate the entire financial market.
Why are ETFs important?
In the traditional financial system, ETFs are an extremely important component. Because when a commodity can appear in the form of an ETF, it signifies the compliance and maturity of the commodity in the local market. Exchange-traded funds (ETFs) can securitize specific assets through physical collateral, allowing investors to indirectly hold exposure to the corresponding investment targets simply by purchasing shares of the fund issued by the institution. This product was invented by John Bogle, the founder of Vanguard. In 1993, he launched the world's first and still widely known index ETF—the S&P 500 ETF.
A few years after the birth of index ETFs, the first bond ETF was born in 2001, and after years of development, the types of ETFs have gradually diversified. How important are ETFs in today's financial market? We have now entered an era where everything can be an ETF; Canada even launched the world's first cannabis-themed ETF.
Currently, there are three well-known BTC ETFs globally: the Purpose BTC ETF, which holds 21,700 BTC; the 3iQ CoinShares BTC ETF, which holds 20,200 BTC; and the CI Galaxy BTC ETF, which holds 3,393 BTC. As a rapidly rising new asset, many institutions are interested in crypto. However, due to compliance requirements, there are not many investment targets available for holding this asset.
In the first half of 2021, BTC once again experienced a sustained rise. Unlike before, this bull market was led by institutions, with the funding from investment institutions and listed companies far surpassing that of retail investors. With the push of massive capital, BTC also reached a historical high of $64,000. Despite the attention crypto has received from traditional finance, most large traditional financial institutions have not allocated to crypto. Regulatory and compliance issues have always hindered mainstream financial institutions from allocating crypto exposure. ETFs are compliant, regulated, and have good liquidity, and if a crypto ETF were to exist, it would undoubtedly open the door between the crypto world and traditional finance.
ETFs have long been one of the most successful investment tools available to investors, as they are low-cost and have high intraday liquidity. ETF trading alone accounts for 30% of the total trading volume on all U.S. exchanges. How much capital could a BTC ETF bring to the crypto market?
Hard-to-deliver physical gold is not the first choice for investors trading gold
Let's take gold as an example. Data shows that the current global gold Bars and Coins scale is about 38,000 tons, while the gold ETF market size has reached about 2,200 tons, accounting for 5.6% of the B&C gold market share. If we extrapolate based on this ratio, ETFs could attract about 6% of the current total market capitalization, which, based on the current market value, amounts to approximately $60 billion.
ETFs not only solve compliance issues but also provide important liquidity to the market. ETFs offer investors a cheap and simple tool to access Bitcoin in a safe and easily obtainable product. This method will help better protect investors who may not be very familiar with crypto: they do not need to actually hold Bitcoin, understand chains, addresses, public keys, private keys, or worry about forgetting their private keys and losing their assets. This will technically level the investment threshold for everyone in crypto, and although this may not have been the original intention of blockchain, this fairness unexpectedly aligns with the mission of blockchain.
The "Great Voyage" of BTC ETFs
The development of BTC ETFs has been fraught with challenges. As early as 2013, the Winklevoss twins announced plans to launch a BTC ETF. In 2014, the ETF was rejected by the SEC after submitting an application. Since then, the Winklevoss twins have attempted various methods to establish a BTC ETF, including changing trading venues and locations, applying multiple times over the years, but have not succeeded, and the plan remains stalled to this day. This may have been the first attempt at a BTC ETF.
In 2016, SolidX's application for a Bitcoin ETF was rejected. 2017 seemed to be a year of rapid development for BTC ETFs. That year, BTC's price fluctuated wildly, rising from a low of $789 at the beginning of the year to a high of $18,674 by the end of the year. Several BTC ETF funds applied for establishment within a year, from the BTC Investment Trust at the beginning of the year, to VanEck in the middle of the year, and to Exchange Listed Funds Trust, ProShares, REX BTC, and First Trust by the end of the year. Unfortunately, they were either rejected by the SEC or withdrew voluntarily, with none successfully issued.
In 2018, even against the backdrop of a continuous decline in coin prices, new ETF applications did not cease. That year, new players GraniteShares and Direxion entered the market, along with two old players: VanEck and SolidX jointly applied for an ETF. However, there was no difference from the previous year; the former two's ETF applications were rejected by the SEC, while the latter's application was voluntarily withdrawn due to a breakdown in cooperation.
At that time, the SEC had not yet clearly defined BTC, as crypto was neither a security nor a financial derivative. As a non-physical commodity, BTC was theoretically not regulated by the SEC and the Commodity Futures Trading Commission (CFTC), which was one of the main reasons for the frequent rejections of BTC ETFs.
Since then, every year, one or more BTC funds have submitted applications, but without exception, they have all failed. Applications have been repeatedly rejected, hopes have been repeatedly dashed, and the issuance of BTC ETFs seems to be forever stuck in "next year." Until today, the issuance of the "first BTC ETF in the U.S." still remains in the state of "expected to pass."
By 2021, the wheels of history finally began to turn slowly. In February of this year, Canada approved the world's first BTC ETF—the Purpose BTC ETF. After being officially listed on the Toronto Stock Exchange (stock code BTCC), the ETF achieved a total trading volume of 9.3 million shares on its first day, with a total trading amount reaching $145 million, becoming one of the top ten most actively traded securities on the Toronto Stock Exchange that day.
In just a few months, crypto ETFs began to grow, quickly completing a path that had not been traversed in previous years. Just two months after the issuance of the BTC ETF, three ETH ETFs were also approved for listing: the Purpose Ether ETF (ETHH) launched by Purpose Investment, the CI Galaxy Ethereum ETF (ETHX) launched by CI Global Asset Management, and the Evolve Ether ETF (ETHR) launched by Evolve Capital Group.
GrayScale as a representative alternative to ETFs
Cross-chain bridges widely exist in the crypto world, connecting different infrastructures, and there is also an urgent need for a "bridge" to connect the traditional financial and on-chain worlds. GrayScale Trust is the most famous bridge among them.
Traditional financial institutions on Wall Street cannot easily allocate crypto exposure
If a compliant institutional investor is bullish on crypto, how can they allocate crypto exposure in a fully compliant manner? GrayScale Trust is one of the answers. In this round of institution-driven bull market, the rapid rise of GrayScale Trust has also shown traditional finance a new opportunity—the real demand for entering the crypto world is urgent in the market. Even now, GrayScale remains the largest holder among institutions, with BTC holdings reaching 649,000. For a long time, GrayScale Trust shares have been one of the main ways for institutions to indirectly invest in crypto currencies.
Unfortunately, GrayScale Trust is not that "user-friendly." GrayScale is not a true ETF product and has long been regarded as an alternative to crypto ETFs. Although it provides institutions with crypto exposure, it has significant disadvantages compared to real ETFs. GrayScale Trust's GBTC shares not only have a six-month lock-up period but can only be resold after unlocking, not redeemed. This special mechanism may also be one of the reasons for the long-term premium of GrayScale shares compared to BTC. For several years, GrayScale GBTC has maintained a high premium level, sometimes exceeding 100%. The lack of a regulatory framework has left institutional investors without easy tools for entry.
In addition to GrayScale Trust, there are other alternatives in the market. As early as 2017, France's Tobam issued the world's first BTC mutual fund. In the same year, Switzerland's Swissquote Group launched a BTC certificate ETP product, which was listed on Switzerland's largest securities exchange, Six Swiss. Subsequently, countries such as Germany, Sweden, and Austria successively issued crypto ETP products. Like GrayScale Trust, these products can only meet some functions of ETFs—ETPs are essentially bonds and cannot be included in the regulatory framework for funds.
Within the current regulatory framework, crypto ETFs are the true demand of the market, as alternative products to ETFs cannot truly replace ETFs. If a crypto ETF can be established, it would create a fully compliant, tradable financial product that financial institutions can consider as a fund purchase. This greatly lowers the threshold for institutions to allocate to crypto. This is also one of the reasons why the crypto industry has repeatedly applied for eight years despite being rejected.
Crypto ETFs are currently gaining momentum. However, in the capital-rich U.S., no compliant ETFs have been launched yet. Statistics show that as of now, at least 15 asset management institutions in the U.S. have applied for crypto ETFs at least 35 times. Unfortunately, none have been approved so far. As the compliance framework gradually improves, the door to the crypto world is slowly opening to traditional finance. If this BTC futures ETF is approved, it may have a certain demonstrative effect in the traditional financial field. Whether U.S. crypto ETFs will catch up with other regions or remain in the "expected to launch" state for years, we still need to wait for time to provide the answer.