BlackRock’s iShares unit filed paperwork Thursday afternoon with the U.S. Securities and Exchange Commission (SEC) for the formation of a spot bitcoin (BTC) exchange-traded fund (ETF).
As with all things perpetually online, many are tying themselves up and tripping over semantics. Is this proposed fund actually an ETF or just a trust? The question seems odd, but the tippity top of BlackRock’s S-1 filing sports this as the name of the proposed fund: iShares Bitcoin Trust.
Before going further, as Bloomberg’s Eric Balchunas tweeted, this is exactly how the SPDR Gold Shares ($GLD) ETF works. It's a trust, but it acts like an ETF. Without getting into it too deeply, if the iShares Bitcoin Trust is approved and functions with daily creations and redemptions, then it would basically look and act like an ETF. Who cares if it’s technically a “trust?”
The answer is “many people.” The market has some consternation with the word trust in the context of publicly-traded bitcoin instruments given Grayscale’s bitcoin product, the Grayscale Bitcoin Trust (GBTC). GBTC holds bitcoin and shares can be purchased over-the-counter for price exposure to the underlying bitcoin. There’s consternation because GBTC shares trade at a steep discount to net asset value.
In plain English, according to Grayscale’s website, the market value of a share of GBTC is $13.40 even though the amount of bitcoin held per share is $23.00 (as of June 15, 2023).
(Disclosure: Grayscale, like CoinDesk, is a subsidiary of Digital Currency Group)
That’s bad for many reasons. But this shouldn't happen with BlackRock’s product since it's basically an ETF. Really though the interesting conversation to be had about this technically-a-trust-but-basically-an-ETF has to do with how this will affect exchanges and paper bitcoin.
Trading above bitcoin’s cap
Bitcoin liquidity has suffered ever since Binance eliminated its zero-fee bitcoin trading program earlier this year and FTX collapsed last November. The Binance news probably goes without further explanation, but on FTX, documents showed that its bankruptcy team has been unable to locate virtually all the bitcoin the failed exchange owed customers. (Who knows how much of that bitcoin was just “paper bitcoins” or IOUs.)
And that’s nothing to say of the bear market which has scared away market participants.
With this market illiquidity has come volatile price swings. But if the iShares fund is approved and BlackRock comes into the bitcoin market, there’s a good chance this would cure any concern of liquidity problems. The sheer amount of attention a BlackRock-sponsored bitcoin ETF would garner cannot be overstated. BlackRock is the largest asset manager in the world. At a minimum it would bring an air of legitimacy and that air should breed a heavy inflow of money.
Maybe that would increase the price of bitcoin, but beyond that there are two very important things to consider going forward that I will be watching.
First, exchanges should be a bit fearful. If new investors want price exposure to bitcoin and don’t care about the aspect of it that makes it cool (like using it), then those investors will look to pay as little as possible for that bitcoin. Why would an investor pay a 1% fee at an exchange when they could pay a tiny fraction of that through an ETF when they aren’t interested in actually using bitcoin?
Second, with bitcoin’s fixed supply is the introduction of a spot ETF from BlackRock going to supercharge the expansion of paper bitcoin? The Bitcoin protocol says that only a certain amount of bitcoin can exist, but the financial markets certainly don’t say that. Financial markets allow the creation of exotic financial instruments that can represent pretty much anything, including any amount of bitcoin.
Because the going U.S. dollar market price for bitcoin is dependent on the amount of U.S. dollars an exchange would give you for bitcoin and that amount is governed by the market, what’s to stop the market from being affected by immense speculation on derivatives markets which make the effective supply of bitcoin tick over its finite supply cap? Potentially, nothing.
To be sure, there’s some debate over whether the SEC will approve BlackRock’s offering. So far the securities agency has rejected every spot market bitcoin ETF put before it, essentially because it believes the bitcoin market can be manipulated. BlackRock’s filing comes with heightened market surveillance features, however, so some analysts think this may be the first spot bitcoin ETF out the door – plus it’s BlackRock, is the SEC going to deny BlackRock?
In any event, whether this all means the price of bitcoin goes up or down or wherever it should be, an approval of the iShares Bitcoin Trust will be a big deal.