Grayscale Investments LLC won a court ruling on August 29 to convert its Bitcoin Trust GBTC into an ETF. Investors who want to bet on Bitcoin may soon have more options. Major financial firms including BlackRock, Fidelity and Invesco have filed to sell U.S. "spot" ETFs directly tied to their Bitcoin holdings. In the past, the U.S. Securities and Exchange Commission (SEC) has often rejected these products, citing caution about volatility and potential manipulation. But Grayscale's ruling and BlackRock's filing suggest the cryptocurrency industry has the upper hand.
1. What does a Bitcoin ETF look like?
ETFs are a $7 trillion industry and part of a broader family of products known as exchange-traded products, though people often use "ETFs" to refer to all of them because they are by far the largest and most popular category. Crypto-native companies and major Wall Street financial institutions are trying to launch an ETF that actually holds Bitcoin, rather than investing in Bitcoin futures. Futures-backed Bitcoin ETFs have been available to U.S. customers since 2021, but the SEC has not approved any applications for so-called spot Bitcoin ETFs. Issuers and investors are advocating that spot Bitcoin ETFs be equally accessible to U.S. retail and institutional investors, a development that is seen as having the potential to greatly expand participation in the cryptocurrency industry.
2. What is the difference between Bitcoin futures and Bitcoin spot?
Futures are contracts to buy or sell an asset at a specified price at a later date. They are widely used in many markets, such as oil, by investors who want to speculate on price movements without directly owning or taking possession of the underlying asset. As the price of Bitcoin fluctuates up and down based on direct trades, Bitcoin futures indirectly track the spot price of the cryptocurrency on exchanges such as the Chicago Mercantile Exchange. In contrast, in the spot Bitcoin market, users buy and sell actual digital currencies through exchanges.
3. What Bitcoin ETFs have existed before?
The ProShares Bitcoin Strategy ETF (BITO), the first U.S. bitcoin futures ETF, opened on Oct. 19, 2021, to strong demand. The Purpose Bitcoin ETF (BTCC) debuted in Toronto in early 2021 and invests directly in “physical/digital bitcoin,” according to its issuer, Purpose Investments. Meanwhile, several U.S. investment trusts have been eyeing bitcoin in a similar way to ETFs, but with certain restrictions. The Grayscale Bitcoin Trust (GBTC) is physically backed, meaning it holds bitcoin. Grayscale Investments sued the SEC for trying to turn GBTC into an ETF; this is how Grayscale Investments won a key legal battle in August.
4. What is the situation with spot Bitcoin ETFs?
BlackRock, the world's largest asset manager, filed an application for a spot Bitcoin ETF in June, sparking speculation that the long-fantasy investment product would finally receive SEC approval. In turn, BlackRock's application led to a surge in the cryptocurrency market and a series of similar ETF applications, including resubmissions from issuers such as Fidelity Investments and WisdomTree. Grayscale Investments has always believed that converting GBTC into an ETF will help unlock billions of dollars of value for GBTC investors. The SEC can ask the D.C. Circuit Court of Appeals or the full bench of the U.S. Supreme Court to review it to challenge the court's ruling in August.
5. Why have regulators long avoided Bitcoin ETFs?
In addition to concerns about liquidity and manipulation, regulators have expressed concerns that Bitcoin's volatility may be too dramatic for ordinary investors: Bitcoin's full-year returns over the past three years were a 305% increase in 2020, another 60% increase in 2021, and then a 64% drop in 2022. The SEC has also questioned whether fund companies have the information they need to adequately value tokens like Bitcoin, including whether they can verify who owns the underlying coins. In 2021, SEC Chairman Gary Gensler testified to the Senate Banking Committee that the lack of regulation and oversight in the crypto market has led to "concerns about the potential for fraud and manipulation." To alleviate some of the SEC's concerns, BlackRock and other issuers following in its footsteps have proposed so-called supervision sharing agreements, a way to mitigate the risk of market manipulation and fraud. Coinbase, the only publicly traded pure spot cryptocurrency exchange in the United States, has become the preferred market surveillance partner for ETF issuers.
6. What might the SEC process look like?
Some experts expect at least one spot Bitcoin ETF to receive final approval by the end of the year, while others advise caution, as there have been about 30 failed attempts in the field that failed to convince the SEC. Analysts will now also keep a close eye on any potential developments in Grayscale Investments’ GBTC conversion process.
