New Trends in the Bitcoin ETF Landscape

Emerging Developments in the Bitcoin Exchange-Traded Fund (ETF) Sector

Author: Pedro M. Negron Source: medium Translation: Shanouba, LianGuai

The cryptocurrency industry has been speculating on the approval of a Bitcoin spot ETF. This provides an opportunity for direct asset exposure as well as exposure through traditional financial channels. The growing interest from both traditional finance and the crypto ecosystem has caught the attention of major players in traditional finance who are now seeking to seize this opportunity. The approval process is both long and tedious. Many companies from the crypto field, such as Grayscale, have been pioneers in this space, but their applications are still awaiting approval.

Other product application deadlines are looming, and speculation and interest around this topic are rapidly increasing.

• From Miner Meltdown to Crypto Crash Public Mining Firms Take a Plunge as Bitcoin Stumbles
• How can Bitcoin improve the abundance of water resources in water-deficient countries?
• El Salvador’s Bitcoin Bonds Cleared for Takeoff Launch on Track for Early 2024

Before making a final decision to approve or reject, the Securities and Exchange Commission (SEC) has the authority to delay its decision on an application up to three times. Ark Invest will be the first company to reach the final deadline on January 10, 2024. On October 2, Monday, 9 Ethereum futures ETFs were listed simultaneously, implying that the SEC may consider using a similar approach to evaluate the approval of a Bitcoin spot ETF. The SEC may choose to issue more comprehensive approvals simultaneously rather than approving each application before its respective deadline to avoid showing favoritism towards any specific entity.

In early 2022, the bear market caused the GBTC trading price to have a discount relative to the value of its held Bitcoin. The discount of GBTC intensified by the end of 2022 after Grayscale’s parent company, Digital Currency Group, went bankrupt, reaching nearly 50% of its all-time high.

Nevertheless, in the summer of 2023, BlackRock’s application for a Bitcoin ETF, along with its impressive record of 575 approved applications out of 576 and managing assets close to $10 trillion, reignited optimism for ETF approval. This led to a decrease in the discount of GBTC. Soon after, Grayscale achieved a significant victory in its lawsuit against the SEC’s denial of its transition to an ETF. This victory further confirms the dynamic changes in this field.

Due to these developments, the Grayscale (GBTC) product has become an indicator of the market’s assessment of the probability of ETF approval. In 2023, GBTC price soared by 320%, surpassing Bitcoin’s 165% growth during the same period. This is evident. These rising price changes and the differences between GBTC and BTC have become particularly noticeable in the correlation between assets and their varying levels of volatility.

When the difference between GBTC and Bitcoin prices is at its highest, the correlation between the two assets is -0.27. Such low correlation suggests that, during this specific period, the trading of GBTC almost moves in the opposite direction to the price trend of Bitcoin. Over the past two years, GBTC’s volatility has reached a peak of 103%, significantly higher than Bitcoin’s highest volatility of 61%.

Furthermore, it is worth noting the trend analysis of approved Bitcoin futures ETFs such as BTF and BITO. Over the past two years, the 30-day volatility of these two ETFs has consistently been higher than the actual asset they aim to track, BTC. The increased volatility of these futures ETFs can be attributed to their underlying structure, where asset contracts roll over on a monthly basis. Typically, when a new futures contract is issued, it tends to trade at a premium, but as the expiration date approaches, this premium decreases. During the rebalancing process from one month contract to the next, futures ETFs typically purchase Bitcoin at a premium, resulting in poorer performance and higher volatility.

This dynamic is one of the reasons why upcoming spot ETFs are poised to become more advantageous products. Since funds in spot ETFs can be redeemed, a closer alignment with the underlying BTC asset may lead to more accurate tracking, thereby reducing the higher volatility associated with futures ETFs.

Although the concept of a Bitcoin spot ETF has been a topic of discussion for years, understanding its deeper implications is crucial. Unlike the Bitcoin futures ETFs approved at the end of 2021 that involve derivative contracts, spot ETFs will involve direct purchases of actual Bitcoin. Spot ETFs will pave the way for traditional market participants to directly invest in Bitcoin. While the prospects for approval of a Bitcoin spot ETF remain uncertain, recent events indicate that the dynamics between the traditional financial system and the cryptocurrency market are shifting and converging. These developments highlight the continuous evolution of cryptocurrency as an important asset class and the growing recognition of cryptocurrency by people.

We will continue to update Blocking; if you have any questions or suggestions, please contact us!