Is the Bitcoin spot ETF coming soon?

Author: IOBC Capital

The Bitcoin spot ETF is expected to be approved, sparking heated discussions in the market. According to the timeline of the 21Shares Bitcoin ETF, the first Bitcoin spot ETF may be born on August 11. However, some believe that the SEC may prefer BlackRock's iShares Bitcoin Trust to be the first approved Bitcoin spot ETF.

1. What is an ETF?

ETF, or Exchange-Traded Fund. An Exchange-Traded Fund (ETF) is an investment tool that tracks the price of assets, securities, or indices. ETFs pool investors' funds with the aim of achieving the same returns as the underlying assets.

In recent years, many companies in the industry have been striving to apply for Bitcoin ETFs. Bitcoin ETFs are divided into: Bitcoin Spot ETFs and Bitcoin Futures ETFs. Bitcoin Spot ETFs track the market price of BTC in real-time, while Bitcoin Futures ETFs track the price of Bitcoin futures contracts.

According to the SEC's official definition, a Bitcoin Futures ETF is a standardized agreement to buy or sell a specific quantity of Bitcoin at a specified price on a specific future date. Currently, the SEC has approved four Bitcoin Futures ETFs. Since Bitcoin Futures ETFs do not directly invest in Bitcoin, this is not the most ideal way to invest in Bitcoin.

Therefore, the industry has longed for the launch of Bitcoin Spot ETFs.

2. Current Development Status of Bitcoin ETFs

Registering Bitcoin ETFs with the SEC has always been a challenge, especially for Bitcoin Spot ETFs. So far, the SEC has not approved any applications for such spot ETFs due to concerns about potential fraud or manipulation in the spot market. In contrast, the SEC has approved six Bitcoin ETFs for futures trading.

1. Six Bitcoin Futures ETFs Approved by the SEC Previously, the SEC mainly approved the following six Bitcoin Futures ETFs:

Proshares (BITO): Proshares Bitcoin Strategy ETF, ticker BITO, currently has an asset management scale of $997 million. It was approved by the SEC on October 18, 2021, and trades on the NYSE Arca Exchange. The fund's investment strategy explicitly states, "The fund invests primarily in bitcoin futures contracts. The fund does not invest directly in bitcoin." This ETF was very popular upon its debut, with trading volume exceeding $1 billion in just two days. Proshares (BITI): Proshares Short Bitcoin ETF, ticker BITI, currently has an asset management scale of $139 million. Launched in June 2022, it is currently the only Bitcoin short ETF approved by the SEC. Valkyrie (BTF): Valkyrie Bitcoin Strategy ETF trades on Nasdaq, ticker BTF, with current assets of $31 million. It was approved on October 21, 2021. The custodian is US Bank. According to the Investment Company Act of 1940, this ETF is classified as a "non-diversified" fund. VanEck (XBTF): VanEck Bitcoin Strategy ETF trades on Cboe BZX Exchange, ticker XBTF, with current assets of $46.5 million. Established on November 15, 2021, this ETF has a unique advantage as it is a C-corp, which differs from other ETFs (registered as investment corporations). This is a tax-efficient structure, as C-corporations do not need to distribute long-term capital gains as dividends to investors. For investors, this method may reduce taxable distributions, allowing more funds to be invested in the fund.

Simplify (MAXI): Simplify Bitcoin Strategy PLUS Inc ETF was launched in September 2022 and trades on Nasdaq. Since this ETF uses three strategies (Bitcoin Futures, Income, Option overlay) to achieve its investment objectives, and based on its actual allocation, it mainly invests in U.S. Treasury bonds, MAXI is less well-known in the industry compared to the first three Bitcoin Futures ETFs. Currently, it has an asset management scale of $25 million. Global X (BITS): Global X Blockchain & Bitcoin Strategy ETF was launched in November 2021, with current assets of $10 million. This ETF features a 50% investment in CME Bitcoin futures contracts and a 50% investment in shares of its sister ETF (Global X Blockchain ETF, BKCH). The BKCH ETF includes a range of blockchain stocks, including MARA, COIN, HUT CN, RIOT, APLD, BTBT, etc. It essentially covers the mainstream digital asset mining companies, cryptocurrency exchanges, and blockchain development companies listed on Nasdaq. Since this ETF does not invest entirely in Bitcoin futures, it is also not well-known in the industry. In addition to these six Bitcoin Futures ETFs approved by the SEC, there are some Bitcoin Futures ETFs that are not approved by the SEC, or Bitcoin Futures ETFs from other countries, and even spot ETFs. For example: the Hashdex Bitcoin Futures ETF traded on NYSE Arca approved by the CFTC; the Southern Eastern BTC Futures ETF traded on the Hong Kong Stock Exchange; the Purpose BTC Spot ETF, 3iQ BTC Spot ETF, and Horizons BTC Leveraged ETF traded on the Toronto Stock Exchange.

2. How Far Are We from the Launch of Bitcoin Spot ETFs?

Historically, the SEC has rejected several Bitcoin spot ETF applications, mainly including: As shown in the table, the SEC has rejected dozens of Bitcoin spot ETF applications in recent years. In all cases, the SEC's reasons for rejection mainly include three points: 1. These applications fail to demonstrate that these ETFs "are designed to prevent fraud and manipulation";

2. These applications fail to demonstrate that these ETFs "are designed to protect investors and the public interest";

3. The issuers of these applications have insufficient filings and lack necessary information.

Currently, the Bitcoin spot ETFs awaiting approval mainly include the following:

The most discussed Bitcoin spot ETF applicants in the market recently are mainly BlackRock and Fidelity.

BlackRock The world's largest asset management company, BlackRock, applied for a Bitcoin spot ETF on June 15 and recently resubmitted the application. The new document mentions listing Coinbase as a "surveillance-sharing agreement" partner market. If BlackRock's iShares Bitcoin Trust is approved, it will trade on Nasdaq and use Coinbase Custody as its cryptocurrency custodian and Bank of New York Mellon as its cash custodian, adopting Coinbase, Inc. as the SSA partner market. There is controversy in the industry regarding whether this iShares Bitcoin Trust belongs to an ETF or a Trust. However, a key difference between BlackRock's iShares Bitcoin Trust and Grayscale's GBTC is that it is more flexible, redeemable, and has authorized participants (AP)—this is crucial as it can avoid the long-term premiums or discounts seen with GBTC. (Authorized Participants are one of the main participants in ETF creation and redemption.) Fidelity Investments Wise Origin Bitcoin Trust is a spot Bitcoin exchange-traded fund managed by Fidelity. In its proposal submitted to the SEC, it previously applied for listing this ETF on the CBOE's BZX exchange. Recently, it also added designating Coinbase as a surveillance-sharing agreement partner market, and vaguely mentioned that "a custodian authorized by the New York Department of Financial Services will be responsible for the custody of this Trust's Bitcoin."

3. Factors That May Affect the Outcome of Bitcoin Spot ETF Applications

1. Surveillance-Sharing Agreement The surveillance-sharing agreement. According to the SEC's definition: the characteristics of a surveillance-sharing agreement are that the agreement stipulates the sharing of information regarding market trading activities, clearing activities, and customer identities; both parties to the agreement have a reasonable ability to obtain and provide the required information; and no existing rules, laws, or practices will prevent one party from obtaining or providing this information to the other party. Taking Fidelity's Wise Origin Bitcoin Trust application as an example, in the proposal submitted to CBOE BZX on June 30 for listing and trading Wise Origin Bitcoin Trust, it clearly states, "The Exchange is expecting to enter into a surveillance-sharing agreement with Coinbase, Inc." (Note: the content regarding SSA is on pages 68-69 of this 194-page document). In this rule filing, regarding the surveillance-sharing agreement, it is expected that the spot BTC SSA will have the characteristics of a surveillance-sharing agreement between two members of ISG, which will allow the exchange to obtain data on spot Bitcoin transactions occurring on Coinbase in a manner similar to how exchanges share information within ISG when deemed necessary, as part of its ETF monitoring plan. If the exchange and Coinbase reach such an agreement, the exchange will incorporate the spot BTC SSA into its market monitoring plan before allowing share trading.

This spot BTC SSA, combined with the information provided by ISG related to CME Bitcoin futures, will further enhance the exchange's ability to detect and prevent market manipulation, as the exchange believes that CME Bitcoin futures themselves represent a substantial regulated market. In summary, the surveillance-sharing agreement helps to detect and prevent misconduct, can prevent fraud and manipulation, and protects investors and the public interest. Currently, many in the industry believe this may be the most critical change determining whether the Bitcoin spot ETF will be approved. 2. Several Key Roles Related to Bitcoin Spot ETFs When applying for Bitcoin spot ETFs, there are several key roles: Sponsor, Exchange, Trustee, Cash Custodian, Bitcoin Custodian, Authorized Participants, and SSA market. It has been observed that in terms of the choice of listing exchanges, BlackRock and Valkyrie chose NASDAQ, while ARK/21Shares, Invesco, WisdomTree, VanEck, and Fidelity chose CBOE BZX, and Bitwise chose NYSE Arca. In terms of cash custodians, they mostly choose large U.S. banks, such as Bank of New York Mellon. The choice of cash custodians should not be a key factor in determining whether the ETF is approved; in terms of cryptocurrency custodians, it may be more important, and perhaps Coinbase Custody is a choice favored by the SEC; in terms of Authorized Participants, this is also quite important, as it is key to maintaining the supply-demand balance and liquidity of the ETF; the SSA market helps to detect misconduct and prevent fraud and manipulation, which may be one of the core roles considered by the SEC.

Whether all these roles are adequately prepared, and whether each role has a company that meets SEC requirements, may significantly impact whether the Bitcoin spot ETF can be successfully launched.