The Ripple Effects of a Spot Market Bitcoin ETF

Financial giants including BlackRock and Fidelity are looking to launch a bitcoin investment vehicle for people who do or cannot hold BTC directly.

AccessTimeIconOct 16, 2023 at 4:23 p.m. UTC
Updated Jan 26, 2024 at 2:37 p.m. UTC
AccessTimeIconOct 16, 2023 at 4:23 p.m. UTCUpdated Jan 26, 2024 at 2:37 p.m. UTC
AccessTimeIconOct 16, 2023 at 4:23 p.m. UTCUpdated Jan 26, 2024 at 2:37 p.m. UTC

The likelihood of having a spot market bitcoin ETF, or exchange-traded fund, ready to list on the market by year’s end is now a near certainty. After years of legal wrangling, the U.S. Securities and Exchange Commission (SEC) has run out the clock on applying to the U.S. Court of Appeals, which recently excoriated the securities regulator for its seemingly biased decision in approving a futures-based ETF while denying a substantively similar spot market-based product.

A spot market bitcoin ETF is something of a holy grail for the crypto industry, despite the fact that these stock market-traded financial funds already trade in Canada and Europe. The reason why has to do almost entirely with the SEC denying the dozens of applications its seen so far, putting it out of reach for U.S. investors looking for bitcoin exposure without buying bitcoin directly.

For instance, Grayscale’s filing for a spot bitcoin ETF in October 2021 and its rejection by the U.S. Securities and Exchange Commission (SEC) in June 2022 made far fewer headlines than the August ruling by a three judge panel for the U.S. Court of Appeals that the regulator was “wrong.” News of the court’s ruling made tidal waves across the crypto and financial worlds because of what it could mean for BlackRock's recent spot bitcoin ETF submission.

When one reads headlines such as “BlackRock: The Secret Company that Owns the World,” it’s no surprise that bitcoin’s price jumped 20% over the 11 days following the announcement from the world’s largest asset manager. The initial bump triggered optimistic enthusiasm about a future bull run.

Despite BlackRock’s 99.8% ETF approval record, it’s still unclear how the SEC will rule on this, given that it hasn’t approved any prior bitcoin ETFs and is aggressively targeting major U.S.-based crypto exchanges.

Nevertheless, the association of Bitcoin with BlackRock provides plenty of optimism among some Bitcoin and crypto maximalists, while others worry about a centralized entity yielding too much power in the space.

TradFi’s involuted relationship with bitcoin

Considering it appears BlackRock’s bitcoin ETF would be backed by actual bitcoin, and would therefore require the asset manager to purchase as much bitcoin as the ETFs it sells, it’s quite clear it will boost the price of the cryptocurrency. On its face, however, institutional interest in bitcoin and crypto isn’t new. After the Winklevoss twins — yes, those Winklevoss twinsfiled the first bitcoin ETF in 2013, several major financial institutions like UBS, Citi, Barclays and more showed interest in crypto and blockchain. And all this was before the 2017 bull run.

Since then, institutions of all sizes have continued exploring offering crypto services to their list offerings. An entire ecosystem of projects dedicated to providing institutions with the infrastructure they need to securely offer things like decentralized finance (DeFi) services and tokenized assets has come out of the woodwork.

Galaxy-owned GK8, for example, lets institutions provide an array of digital-asset services with the security guarantee of its trusted custody platform and flagship Cold Vault. Such projects that hand-hold institutions into the crypto frontier have helped banks and investment firms find new revenue streams while expanding crypto adoption.

The transparency and speed of transactions has inspired banks to collaborate within an industry consortium to develop common blockchain platforms in an effort to facilitate quicker and smoother movement of funds. JPMorgan Chase, too, has been building a private blockchain network for years, and now plans to release its own crypto wallet.

With more TradFi involvement in crypto and growing usage of blockchain and other crypto-related technologies, it begs the question: What difference would BlackRock’s ETF approval really make beyond raising bitcoin’s price trajectory?

Crypto whales

For the optimists, an SEC approval for BlackRock’s ETF would legitimize not only bitcoin, but the entire crypto industry. This belief is hardly debatable. With an unprecedented $9 trillion in assets under management and 70 offices across 30 nations, BlackRock is a bridge between bitcoin and an unfathomable amount of wealth.

And when the world’s largest and most prestigious asset manager shows interest in a specific asset or asset class, investors across the globe take notice.

This zeitgeist toward bitcoin normalization could also be bolstered by pending regulatory clarity in the U.S. Greater institutional involvement will likely heighten the competitiveness of traditional financial institutions in offering crypto products and infuse capital into the crypto market, leading to rising prices and liquidity.

But rising prices don’t necessarily mean long-term sustainability within crypto. We’ve witnessed several bull cycles and massive price swings in just the last six years. There’s also no guarantee that a rise in bitcoin’s price will translate to rising crypto prices across the board.

Decentralization purists are justified to feel threatened by certain elements of TradF gaining an expanded role in a space they primarily built. To them, massive asset managers and investment banks represent an ideological enemy and they fear it throwing its not proportioned weight around, or worse, swallowing up crypto-native companies altogether just like the whale swallowing up the Prophet Jonah in the Bible. While Jonah was spat back out after three days, a TradFi whale takeover could erase all the progress crypto and DeFi have made over the last couple of years.

In the event of a bitcoin ETF and balanced regulatory approaches in the U.S. and E.U., crypto (mainly DeFi) and TradFi can coexist because they serve different demographics with different services and products.

In addition to applying innovative financial solutions to digital and real-world assets, crypto companies can also expand adoption by providing financial services to underbanked populations, mainly in developing nations, because of the technical advantage firms like BlackRock, Fidelity and VanEck hold over the financial sector.

Moreover, major institutions can help facilitate convenient access to DeFi products like staking, lending and borrowing to investors who are less familiar with the technical obstacles needed to engage with crypto directly.

Not long ago, TradFi was threatened by a nascent crypto industry bent on undermining the need for a well-established centralized financial world. And with uncertain regulations in the pipeline, a potential bitcoin ETF, and more interest from TradFi that scenario has been flipped.

But by utilizing their own strengths, TradFi and crypto-native companies can help build a more robust crypto ecosystem capable of fueling mass adoption, regardless of whether the SEC approves the proposed ETF.

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Matan Doyich

Matan Doyich is the co-founder and CEO at Crypto Index.