Comprehensive Analysis of Bitcoin ETF

Bitcoin ETF Analysis

Author: Blockchain Today; Translation: Huohuo/Baihua Blockchain

Among mainstream financial professionals, Bitcoin Exchange-Traded Funds (ETFs) are seen as the holy grail to truly drive cryptocurrencies alongside stocks and bonds as an investor focus. But what exactly are Bitcoin ETFs, why are they so important, and what are the obstacles? This comprehensive guide aims to uncover all the information you need to know about the coveted prize in the race for mass adoption of cryptocurrencies.

1. Defining Bitcoin ETFs

Exchange-Traded Funds (ETFs) are investment tools that track a basket of underlying assets. ETF shares are traded on exchanges like stocks. Due to the simplification of investments in commodities, stocks, bonds, and other assets, ETFs manage trillions of dollars. Now, Bitcoin and other cryptocurrencies are also seeking the same model.

Bitcoin ETFs will offer regulated and liquid exposure to Bitcoin price movements by tracking futures contracts instead of directly owning BTC. Top ETF issuers like Vanguard Group eliminate tail risks by using futures hedging.

In simple terms, a cryptocurrency ETF provides indirect exposure to Bitcoin without the need for self-custody or understanding its complex technology (such as digital wallets). Given Bitcoin’s complexity and reputation for risk, this is expected to eventually open the floodgates of capital for conservative institutional investors who are cautious about trading Bitcoin directly.

2. A Brief History of Bitcoin ETF Proposals

Since the Winklevoss twins (famous for their involvement with Facebook) applied for approval for the first-ever US Bitcoin ETF in 2013, the race to approve the first Bitcoin ETF has been ongoing for nearly a decade. However, the SEC has consistently rejected applications, with over a dozen applications citing cryptocurrency market manipulation and lack of regulatory transparency to adequately protect investors.

Nevertheless, large traditional financial institutions are still seeking approval. After years of futility, optimism emerged in mid-2022, with a shift in regulatory attitude after prolonged legal appeals by issuers, ultimately allowing the first Bitcoin ETF. But the intense competition for dominance in the cryptocurrency ETF space is just beginning…

3. Key Advantages of Bitcoin ETFs

From the perspective of cryptocurrency advocates, the approval of Bitcoin ETFs brings several important benefits:

1) Mainstream Credibility—The approval of ETFs by the US Securities and Exchange Commission grants regulatory legitimacy to cryptocurrencies as an investable asset class, rather than speculative novelties in the realm of traditional finance.

2) Easy market access – It allows any investor willing to purchase stocks to gain exposure to cryptocurrencies through brokerage accounts, without the need for a digital wallet or trading account.

3) Liquidity – Compared to decentralized cryptocurrency spot and derivative markets, large regulated trading platforms such as CME and ICE provide more liquidity for ETFs. Converting to cash is also easier.

4) Improved market dynamics – The participation of large institutional players trading ETFs may help alleviate excessive volatility and manipulation in the cryptocurrency market.

5) Professional custody – ETFs managed by large issuers offer proven custody solutions to ensure the security of managed assets, rather than relying on individual investors to protect their cryptocurrencies.

4. Cases of Bitcoin ETFs

Despite the eager expectations of the cryptocurrency community, Bitcoin ETFs targeting institutional investors still have some drawbacks and criticisms:

1) Contrary to the decentralized concept – Regulated ETFs contradict the core concept of Bitcoin as a direct peer-to-peer currency that does not require trusted intermediaries. For cryptocurrency purists, ETFs undermine the purpose of Bitcoin.

2) Weakening bullish arguments – If investment becomes easier and a large amount of speculative capital enters the market, adjustments are inevitably likely to occur, which will suppress the potential for appreciation driven by scarcity.

3) Contradiction with “not your keys, not your coins” – The attractiveness of Bitcoin’s self-sovereign savings relies on investors safeguarding their private keys. ETFs, on the other hand, relinquish this benefit by entrusting custody to traditional banks.

4) Tax treatment remains complex – Fund issuers warn that the complex tax reporting rules for cryptocurrencies still apply to ETFs, undermining simplification. For example, cryptocurrencies are subject to constraints of anti-money laundering and 1099-B reporting rules.

5) Subject to the whims of institutions – Allowing Wall Street participants such as BlackRock to dominate the inflow and outflow of funds gives them too much influence over prices, potentially manipulating the market to the detriment of retail holders.

6) Mainnet settlement delays – ETFs rely on monthly futures settlements rather than direct and immediate Bitcoin transactions, which can distort spot exposure and fail during periods of volatility.

While the benefits of Bitcoin ETFs may seem obvious to most people, they also bring drawbacks to the principle of decentralization. Like most aspects of cryptocurrencies, their costs and benefits remain fiercely debated as they continue to evolve.

5. Key participants in the Bitcoin ETF race

The most intense competition is between the main ETF issuers, who are seeking a first-mover advantage by listing large funds that are sure to be profitable:

1) Grayscale Bitcoin Trust – The most famous cryptocurrency asset management company currently controls over $20 billion worth of Bitcoin through its GBTC trust. Grayscale leads the ETF pack in terms of resources and institutional brand recognition.

2) Valkyrie – A smaller asset management company that has applied for a leveraged Bitcoin futures ETF and hopes to outperform more well-known participants in execution. Valkyrie also offers niche ETFs such as space exploration and medicinal fungi.

3) VanEck – An experienced ETF issuer that manages over $70 billion in assets covering everything from gold to video games. After years of attempting to bring regulated cryptocurrency products to market, VanEck has applied for Bitcoin ETF and futures tools.

4) Fidelity – The financial services giant is also vying for early Bitcoin ETF status to complement its institutional digital asset division, which offers custody, research, and trading services.

Main issuers such as WisdomTree, First Trust, Morgan Stanley, Goldman Sachs, and Galaxy Digital continue to seek approval for future ETFs to ensure long-term competition.

6. How does the ETF approval process work?

So, when can investors expect to see a Bitcoin ETF? Here are the key steps in the detailed regulatory approval process:

1) Application

Issuers like Grayscale or VanEck formally apply for trading products related to Bitcoin and cryptocurrency futures contracts on trading platforms. This kicks off a marathon of creation and review.

2) SEC involvement and feedback

Once submitted, the U.S. Securities and Exchange Commission (SEC) provides initial feedback and subsequent rounds of inquiry, asking how the proposal meets standards for investor protection, fair markets, prevention of manipulation, disclosures, and more.

3) Revision process

Issuers repeatedly revise their applications using new data and models to address concerns raised by the SEC and public comments, aiming to resolve deficiencies and uncertainties identified by the regulatory agency.

4) SEC decision

Finally, after lengthy back-and-forth discussions, if the final proposal successfully convinces the SEC that investor risks have been minimized, the commission formally approves the application under the 1934 Securities Exchange Act and Reg A+.

5) Listing and trading

The issuing company lists its new Bitcoin ETF for trading, once approved, on major exchanges such as CBOE, NYSE, and NASDAQ. Authorized participants create and redeem shares based on market demand.

This marathon-like process can take several years to conclude, but despite legal costs reaching seven figures, issuers are still eager for a first-mover advantage. The returns from a successful Bitcoin ETF that attracts trillions of dollars outweigh the costs.

6) Reasons for Delay

So, what are the key issues raised by the U.S. Securities and Exchange Commission (SEC) over the past decade that continue to hinder approval? Regulatory agencies cite:

1) Manipulation – Allegations of rampant market manipulation, including money laundering transactions, fraud, and improper stablecoin printing, have led skeptics to believe that the Bitcoin market is still subject to excessive manipulation and unable to protect mainstream investors.

2) Volatility – The volatility of cryptocurrencies far exceeds that of stocks and other mainstream assets. The stomach-churning fluctuations of Bitcoin may not be suitable for retail investors who are not accustomed to heart-stopping roller coaster risks.

3) Transparency – The opaque nature of the cross-border cryptocurrency market concerns regulatory agencies, as the market sees large trading volumes and participants from loosely regulated jurisdictions, which they believe undermines the transparency necessary for a fair and trustworthy market.

4) Custodial Solutions – The SEC remains skeptical of the security standards and insurance custodial solutions for institutional-scale Bitcoin investments, which require bulletproof protection against theft and fraud that exist in traditional finance.

However, pure sustained interest makes approval seem long-term inevitable. The question becomes which issuer will crack the code first. As futures ETFs are launched internationally, the SEC is facing increasing global pressure.

7. Latest Developments in Bitcoin ETF Approval

After a decade of pessimism and delay, the door to the dream of a U.S. cryptocurrency ETF has opened slightly in mid-2022, with positive signals converging:

1) Improvement in Bitcoin Market Fundamentals – Reduced volatility and increased liquidity strengthen the debate around manipulation and maturity.

2) Global ETF Approvals – Regulatory agencies in Canada, Australia, Brazil, and some European countries have approved Bitcoin ETFs, putting pressure on the SEC.

3) Futures ETF Quota – The SEC allows ProShares and Valkyrie to launch futures-based Bitcoin ETFs instead of spot exposure, which is a significant milestone.

4) Increasing Regulatory Comments – Comments from SEC Chairman Gary Gensler and CFTC Chairman Rostin Behnam acknowledge the potential development path for crypto ETF products.

Although futures ETFs lack the direct ideal exposure sought by issuers, any thaw in regulation after multiple strong rejections will rejuvenate optimism. The tide is slowly turning towards a balance between decentralized cryptocurrencies and necessary investor protection.

8. Prospects for Approval of Bitcoin ETF

Looking ahead, maturity and specialization seem to be the most likely paths to SEC allowing US investors to use Bitcoin ETF:

1) Mature market fundamentals

With improvements in cryptocurrency market infrastructure in areas such as custody, monitoring, liquidity depth, price discovery, regulatory compliance, complexity of fund issuers, and regulation of major trading platforms, concerns about manipulation and consumer protection have eased.

2) Professional Bitcoin ETF products

The US Securities and Exchange Commission may be convinced by target products that have stricter investor requirements, insurance guarantees, or recognition of the unique risks of cryptocurrencies, rather than a one-size-fits-all approach. Consider gold ETFs that are suitable for qualified investors and retirement accounts.

3) Competition with foreign jurisdictions

With the successful launch of cryptocurrency ETFs abroad, the US Securities and Exchange Commission faces greater pressure to emulate and provide a fair competitive environment, otherwise it risks completely relinquishing digital asset innovation to other jurisdictions.

When the stars finally align, the gates of Bitcoin and cryptocurrency funds can finally open to a large amount of potential institutional capital waiting for an opportunity. Its impact will be powerful, sending a signal to Wall Street: Cryptocurrency has earned a place on the investment desks of big companies.

But this passionate race for cryptocurrency ETFs is still a marathon, not a sprint – although the finish line is shining in the distance. Patience, perseverance, and timely overcoming of all obstacles will prevail.

9. Chain Reaction of Bitcoin ETF Approval

When the dam finally breaks and the US Securities and Exchange Commission approves its first Bitcoin ETF, the resulting stampede is expected to trigger a huge chain reaction:

1) With potential investor demand gaining SEC approval to legally enter, trillions of institutional capital will flow into the cryptocurrency market over the next few years.

2) As financial advisors promote cryptocurrency ETFs alongside traditional assets to their clients, mainstream awareness and adoption will also increase. Grandma can now ask about Bitcoin without fear.

3) Market dynamics will undergo significant changes, primarily with reduced volatility and manipulation, as a large inflow of institutional funds drives the market instead of whale games.

4) Greater trading influence shifts from East Asia to the West. But if Wall Street dominates, will decentralization be compromised?

5) Fund issuers and cryptocurrency companies are racing to launch secondary ETFs for other digital assets such as Ethereum and decentralized finance tokens.

6) Considering the severity of the impact of capital inflows, the valuation of struggling cryptocurrency companies and currencies skyrocketed simply because of irrelevant rumors about potential ETF exposure in the future.

There is no doubt that the collapse of the first approved Bitcoin ETF will trigger a financial and cultural tsunami that will reshape the entire cryptocurrency landscape, making previous frenzies seem bizarre. The scale of the cryptocurrency will explode with activity.

10. Approval Reasons

Although frustrated by the perpetual lag of the U.S. Securities and Exchange Commission, there are convincing reasons supporting their conservative stance:

1) Investor protection first – The U.S. Securities and Exchange Commission’s duty prioritizes the protection of retail investors rather than meeting the needs of cryptocurrency enthusiasts. Approving inappropriate products will result in a failure of their mission.

2) Higher standards required – Bitcoin ETFs need to integrate safely with a broader financial ecosystem, requiring a higher level of maturity and compliance standards than the current loosely regulated spot trading platforms in the cryptocurrency market.

3) Lessons from the housing crisis – Regulatory agencies are still haunted by the 2008 real estate bubble, when the demand for exotic investment products forced Wall Street to ignore risks and abandon due diligence. This classic cycle of greed is similar to today’s frenzy of cryptocurrency ETFs and is worrisome.

4) If it’s not broken, don’t fix it – Trillions of dollars continue to flow happily into profitable stock, bond, and commodity ETFs. Why take the risk of reputation damage and investor lawsuits by prematurely exposing complex cryptocurrencies?

Their skepticism stems from experience, not unfounded cryptocurrency phobia. But incentives to enhance U.S. innovation leadership may ultimately influence incremental opening of computation.

11. Common Misconceptions about Bitcoin ETFs

Investors should avoid several long-standing misconceptions surrounding Bitcoin ETFs:

1) “Approval of an ETF means smooth sailing”

An approved ETF does not guarantee that Bitcoin prices will always skyrocket. Poor structure or winter conditions in the cryptocurrency market can still lead to fund closures, losses, or mergers like any other ETF.

2) “It will trade at the full value of Bitcoin”

Due to the involvement of futures contracts, the trading price of Bitcoin ETFs may continue to be lower than the actual Bitcoin pricing, as perpetual futures rarely trade 1:1 with spot transactions.

3) “Altcoin ETFs will follow suit”

Just because the first Bitcoin ETF has been approved, it does not automatically mean that other cryptocurrency ETFs will quickly follow. The U.S. Securities and Exchange Commission will still evaluate them individually.

4) “ETF means full acceptance by regulatory agencies”

Allowing cryptocurrency ETFs does not mean full acceptance of cryptocurrencies. ETF approvals will come with strict limitations, rather than wholesale approval of cryptocurrencies by retail investors.

5) “Bitcoin becomes risk-free”

Trading regulated products like Bitcoin ETFs does not eliminate the inherent risks of the cryptocurrency market, such as volatility, trading platform interruptions, trading suspensions, and closures.

While a Bitcoin ETF is undoubtedly positive, it also has subtle differences and is not a magical risk-free solution for investing in digital assets. Having realistic expectations helps individual investors protect themselves from excessive optimism.

12. Criticisms and concerns about Bitcoin ETF

In addition to common cryptocurrency critics, even supporters of ETF approvals acknowledge potential issues:

1) Excessive institutional influence – Wall Street’s influence on fund inflows/outflows can bring tail risks, where whales collude to manipulate the market at the expense of retail traders.

2) Increased volatility – Making trading easier may exacerbate speculative booms and busts as foolish money flows in based on mainstream cryptocurrency speculation rather than fundamentals.

3) Undermining the bull case – If approved too early, a disastrous unsuccessful ETF could severely hinder further approval prospects instead of driving overall adoption.

4) Conflicting cryptocurrency values – Allowing intermediaries to hold custody and large institutions to dominate conflicts with the direct peer-to-peer ownership and financial sovereignty spirit of cryptocurrencies.

5) Complex tax treatment – Cryptocurrency’s complex tax reporting rules (such as 1099-B and wash sales) can surprise advisors and investors, causing headaches for accountants.

While approval clearly marks a milestone, an ETF that is carefully executed, respects the structure of cryptocurrencies, and aligns with investor readiness may lead to more sustainable outcomes than prematurely offering it to everyone for free. Finding the right balance is key.

13. The Ideology Behind Bitcoin ETF

On a value level, debates arise around whether Bitcoin ETFs uphold or undermine the core philosophical foundations of cryptocurrencies:

1) The case for purism

Bitcoin ETF undermines its original intention as a provable scarce digital currency that individuals can directly hold the keys to. Allowing Wall Street intermediaries to dominate the flow of funds contradicts the spirit of “be your own bank.”

2) Response from pragmatists

ETFs provide cautious portfolio diversification for retail investors who are unfamiliar or inexperienced with the complex storage and security aspects of self-custody of cryptocurrencies, which are necessary to achieve the ideals of libertarianism.

3) Rebuttal from purists

Perhaps so, but attracting newcomers through traditional financial instruments will deepen reliance on institutions rather than allowing ordinary people to adopt revolutionary technology based on its novel advantages.

4) Pragmatic counterargument

If the goal of decentralized finance is global inclusivity, we cannot expect ordinary investors to immediately plunge into complete self-sovereignty. Some transitional ramps assist in achieving democratization of access, even if they are not philosophically perfect. Mainstream adoption and understanding need to go through several stages. We must allow progress in connecting the world.

The eternal tension between idealism and pragmatism, the radical vision of cryptocurrencies and their gradual adoption, remains constant. As always, the answer lies in the gray area.

14. BlackRock Drives Bitcoin ETF Race

In the field of institutional asset management, few names are as important as BlackRock. This $10 trillion investment giant is eyeing the launch of a spot Bitcoin exchange-traded fund (ETF) that could shape the landscape of crypto ETFs.

In August 2022, BlackRock partnered with Coinbase to submit an application for an ETF focused on Bitcoin, which has unique potential advantages. With over $20 trillion in assets managed by its Aladdin software, BlackRock’s massive scale gives it significant influence.

This section explores BlackRock’s bid and compares it to competitors vying for approval from the U.S. Securities and Exchange Commission.

1) Why BlackRock’s Bitcoin ETF is important

As the world’s largest asset management company, any ETF issued by BlackRock would immediately gain the highest brand recognition and trust. This makes it more likely to attract skeptical institutional investors compared to lesser-known issuers.

BlackRock’s solid reputation in retirement funds and retirement accounts addresses investor protection and security concerns. Collaborating with regulated trading platform Coinbase further strengthens custody arrangements.

The company manages hundreds of ETFs globally, covering stocks, bonds, commodities, real estate, and more. Its extensive ETF experience enables BlackRock to build bulletproof Bitcoin tools that meet regulatory requirements.

Managing assets totaling 10 trillion dollars, there is no competitor that can compare in terms of scale. BlackRock’s powerful investment in Bitcoin ETF leaves competitors in the dust.

2) What sets BlackRock’s ETF apart from competitors

The unique aspects of BlackRock’s application include:

1) It tracks actual Bitcoin instead of futures, providing a better direct exposure to spot markets. This satisfies purists.

2) Coinbase ensures the security of the underlying assets, combining BlackRock’s financial strength with Coinbase’s native reputation in cryptocurrencies.

3) The ETF will target institutional investors with a higher risk tolerance, rather than easily swayed beginners. This conservative focus reflects the preferences of the SEC.

4) BlackRock’s Aladdin software allows funds such as pension funds to establish cryptocurrency allocation models for the entire portfolio instead of isolated products.

5) BlackRock pledges to encourage sustainable mining practices for the Bitcoin its funds track through transparency standards and industry dialogue.

These differentiating factors have led to BlackRock’s success with the U.S. Securities and Exchange Commission (SEC), while other companies have failed due to acknowledging flaws and devising targeted solutions.

3) Criticisms of BlackRock’s Bitcoin ETF

Despite its advantages, BlackRock’s ETF application and features have faced criticism:

A. As a traditional financial giant, BlackRock’s first major Bitcoin ETF design contradicts the spirit of cryptocurrencies revolving around individual financial sovereignty, rather than intermediaries such as asset management companies.

B. Given past abuses caused by greed and lack of accountability, it is believed that Wall Street institutions like BlackRock, once authorized to receive large-scale inflows of cryptocurrencies, will act benevolently, which poses moral risks.

C. Allowing giants like BlackRock to monopolize early control over Bitcoin investment channels concentrates too much influence in companies that have already been criticized as anti-competitive and politically overwhelming.

D. Despite BlackRock’s commitment to sustainability, its environmental record in supporting fossil fuel projects has been compromised, raising doubts about its ability to ensure responsible Bitcoin mining practices.

E. Collaborating with Coinbase introduces the risk of single-point failure custody, as Coinbase frequently experiences interruptions and customer support has been criticized. Putting all the eggs in one basket.

Despite reservations, BlackRock’s scale and reputation make it a popular contender for providing approved ETFs, while pure cryptocurrency participants have failed after years of intense regulatory resistance.

15. Conclusion

The emergence of SEC-approved Bitcoin exchange-traded funds (ETFs) is expected to open the institutional capital gateway needed for the true disruption of mainstream finance by the cryptocurrency revolution. However, this democratizing and maturing tool for blockchain investment channels needs to be carefully and responsibly implemented after years of reasonable regulatory resistance.

Through market evolution and specialized fund structures, addressing concerns about volatility, manipulation, security, and investor protection, Bitcoin ETFs can provide the holy grail entry for sustainable mass adoption. But, while learning from past financial frenzies, cautious protection and standards must take priority over the enthusiasm for quick wealth to avoid disastrous setbacks.

The iterative approval process aims to balance innovation and stability. Approval seems inevitable within the next decade, but early approval may jeopardize long-term credibility and acceptance unless the SEC’s mission to serve households and retirement accounts is extremely carefully maintained, while showing interest in this paradigm shift in currency now.

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