The possibility of a Bitcoin spot ETF has caused a stir 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 people believe that the SEC may be more willing to let BlackRock’s iShares Bitcoin Trust become the first approved Bitcoin spot ETF.
1. What is an ETF?
ETF, or Exchange-Traded Fund, is an investment tool that tracks the price of assets, securities, or indices. ETFs pool investors’ funds and aim to achieve the same return as the underlying asset.
In recent years, many companies in the industry have been working hard 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.
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According to the definition on the SEC website, a Bitcoin futures ETF is a standardized agreement for buying and selling a specific amount of Bitcoin at a specified price on a specific date in the future. 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 been eager for the launch of Bitcoin spot ETFs.
2. The development status of Bitcoin ETFs
Registering Bitcoin ETFs with the SEC has always been a challenge, especially Bitcoin spot ETFs. So far, due to concerns about potential fraud or manipulation in the spot market, the SEC has not approved any such spot ETF applications. 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, with the code BITO, currently has an asset management scale of 997 million US dollars. It was approved by the SEC on October 18, 2021, and is traded on the NYSE Arca Exchange. In the investment strategy of the fund, it is clearly stated that “The fund invests primarily in Bitcoin futures contracts. The fund does not invest directly in Bitcoin.” This ETF was very popular when it first debuted, with its trading volume exceeding 1 billion US dollars in just 2 days.
Proshares (BITI): Proshares Short Bitcoin ETF, with the code BITI, currently has an asset management scale of 139 million US dollars. It was launched in June 2022 and is currently the only approved Bitcoin short ETF by the SEC.
Valkyrie (BTF): The Valkyrie Bitcoin Strategy ETF trades on Nasdaq with the code BTF and currently has assets under management of $31 million. It was approved for establishment 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): The VanEck Bitcoin Strategy ETF trades on the Cboe BZX Exchange with the code XBTF and currently has assets under management of $46.5 million. It was established on November 15, 2021. This ETF has a unique advantage as it is a C-Corp, which is different from other ETFs registered as investment corporations. This is a tax-efficient structure because C-Corps do not have to distribute long-term capital gains as dividends to investors. For investors, this approach may reduce taxable distributions, resulting in more funds invested in the fund.
Simplify (MAXI): The Simplify Bitcoin Strategy PLUS Inc ETF was launched in September 2022 and trades on Nasdaq. Because this ETF uses three strategies (Bitcoin Futures, Income, Option overlay) to achieve its investment objective, and from its actual allocation, mainly invests in US Treasuries, MAXI is not well known in the industry compared to the previous three Bitcoin Futures ETFs. It currently has assets under management of $25 million.
Global X (BITS): The Global X Blockchain & Bitcoin Strategy ETF was launched in November 2021 and currently has assets under management of $10 million. This ETF’s feature is that it invests 50% in CME Bitcoin Futures contracts and 50% in the shares of its sister ETF (Global X Blockchain ETF, BKCH). This BKCH ETF has a series of blockchain stocks, including MARA, COIN, HUT CN, RIOT, APLD, BTBT, etc. Basically covers the stocks of mainstream digital asset mines, cryptocurrency exchanges, and blockchain development companies currently listed on Nasdaq. Because this ETF does not invest entirely in Bitcoin futures, it is not well known in the industry.
In addition to the six Bitcoin Futures ETFs approved by the SEC, there are also some Bitcoin Futures ETFs that are not approved by the SEC or other countries, and even spot ETFs. For example: Hashdex Bitcoin Futures ETF approved by the CFTC and traded on the NYSE Arca; Southern Dongying BTC Futures ETF traded on the Hong Kong Stock Exchange; Purpose BTC Spot ETF, 3iQ BTC Spot ETF, Horizons BTC Leveraged ETF, etc. traded on the Toronto Stock Exchange.
2. How far away is the launch of Bitcoin Spot ETF?
3. Factors that may affect the result of Bitcoin ETF application
1. Surveillance-sharing agreement
According to the SEC’s definition: The surveillance-sharing agreement is characterized by an agreement that provides for the sharing of information about market trading activity, clearing activity, and customer identity; the parties to the agreement have a reasonable ability to obtain and provide the requested information; and no existing rule, law, or convention will prevent one party to the agreement from obtaining this information from or providing this information to the other party.
Taking the Wise Origin Bitcoin Trust applied by Fedelity as an example, in the document submitted by CBOE BZX on June 30th to propose the listing and trading of Wise Origin Bitcoin Trust, it is clearly written that “The Exchange is expecting to enter into a surveillance-sharing agreement with Coinbase, Inc.” (Reminder, the content about 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 the surveillance-sharing agreement between the two members of ISG, which will enable the exchange to obtain data on spot Bitcoin transactions that occur on Coinbase in a manner similar to the sharing of information within the ISG when necessary, as part of its plan to monitor ETFs. If the exchange and Coinbase reach such an agreement, the exchange will include the spot BTC SSA in its market monitoring plan before allowing share trading. This spot BTC SSA, combined with the information related to CME Bitcoin futures provided by ISG, the exchange believes that CME Bitcoin futures themselves represent a significant regulatory market, which will further enhance the exchange’s ability to detect and prevent market manipulation.
In summary, the surveillance-sharing agreement helps to detect and prevent improper behavior, prevent fraud and manipulation, and protect investors and the public interest. Currently, many in the industry believe that this may be the most critical change in determining the approval of Bitcoin spot ETFs.
2. Several key roles related to Bitcoin spot ETF
When applying for a Bitcoin spot ETF, there are several key roles: Sponsor, Exchange, Trustee, Cash Custodian, Bitcoin Custodian, Authorized Participants, and Surveillance-sharing Agreement Market.
According to observations, in the selection of listing exchanges, BlackRock and Valkyrie chose NASDAQ, ARK/21Shares, Invesco, WisdomTree, VanEck, and Fidelity chose CBOE BZX, and Bitwise chose NYSE Arca. In terms of cash custodians, they are basically choosing large banks in the United States, such as Bank of New York Mellon. The choice of cash custodian should not be the key to whether the ETF is approved or not; in terms of cryptocurrency custodians, it may be more important, and perhaps Coinbase Custody is the SEC’s preferred choice; in terms of authorized participants, it is also important, which is the key to maintaining the supply and demand balance and liquidity of the ETF; the SSA market, which helps to detect improper behavior, prevent fraud and manipulation, may be one of the most core roles considered by the SEC.
Whether these roles are ready, and whether each role has a company that can meet the SEC requirements, may have a significant impact on whether the Bitcoin spot ETF can be successfully launched.