Will BlackRock’s spot Bitcoin ETF breathe life into the comatose crypto market?

Is it really an ETF?

The first point to note here is that there are many crypto-based investment products in the market. In fact, SEC has approved Bitcoin futures ETFs in the past that holds futures contracts of Bitcoin, but there are no spot crypto ETFs as of now.

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The first Bitcoin-based ETF, called the ProShares Bitcoin Strategy ETF (BITO), started trading in October 2021. BITO was one of the most sought-after funds after its launch as it became the fastest ETF across all categories, and hit the $1-billion mark in assets under management (AUM) in history.

Since then, many other crypto-based ETFs, such as one on Ethereum, have come up in the market, but they have all been futures-based.

BlackRock’s iShares Bitcoin Trust application for establishing a ‘Trust’ is not an ETF in the traditional sense.

What is an investment trust?

In crypto, an ‘Investment Trust’ is a closed-ended fund set-up as a company, which can buy and sell shares on an exchange. The trust invests in a portfolio of assets, and hence the value of the share of the fund is tied to the value of the underlying assets it holds.

Given that it is a closed-ended fund, the Net Asset Value (NAV) of each share can decouple from the asset’s market price, and can show a huge divergence.

Grayscale's Bitcoin Trust Product (GBTC) is the biggest crypto-based product available in the market, with AUM of more than $15 billion as of May end.

Unlike GBTC, the BlackRock’s Trust, if approved, will allow redemptions, which could be a big win for investors.

"The true difference in BlackRock’s application is two-fold. BlackRock's involvement with Coinbase, particularly at this state of the market, is a confidence-inspiring move, and, secondly, to avoid previous criticism around spot-pricing feed. BlackRock plans to use the CF Benchmarks Index, created by a UK FCA-regulated firm. It is the same benchmark that is used by the CME to settle Bitcoin futures,” said Parth Chaturvedi, Investments Lead, CoinSwitch Ventures.

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It is worth highlighting that this is not BlackRock's first foray into crypto. Last year, in August, the asset manager launched a spot Bitcoin private trust for institutional clients in the US.

To be sure, the BlackRock’s Bitcoin product is technically a ‘Trust’ and not an ETF in the traditional sense. But its Trust is proposed to work like an ETF.

Chances of approval

In the past, applications for launching spot crypto ETFs by asset managers, such as VanEck, Ark Invest, and Bitwise, have all been rejected by the regulator.

The SEC has maintained that spot Bitcoin is not safe enough to be offered to retail investors. The rejections were based on the ETFs’ inability to meet SEC rules, which are designed to prevent fraudulent and manipulative acts and practices.

The issue was so contentious that, last year, Grayscale sued the SEC after it rejected the application to convert GBTC into an ETF. While a trust is a preferred medium of institutional investors, an ETF is a favourite vehicle for retail investors, which increases penetration and depth of an asset class.

BlackRock’s success in getting SEC approvals inspires confidence among sceptics and investors alike. In its history, the fund manager has applied for 576 ETFs with the SEC, with just one being disapproved so far.

BlackRock has included a “surveillance-sharing agreement” between exchanges in its application, which will help allay SEC’s concerns about market manipulation and potentially tipping the odds in favour of the asset manager’s application.

Implications if ETF is approved

Dhruvil Shah, Vice-President of Technology at Liminal, a wallet infrastructure and custody solutions platform, said: “BlackRock's move to launch a Bitcoin ETF in the face of regulatory scrutiny shows that it is committed to adopting digital assets and offering alternative investment options. Despite the SEC's latest actions, BlackRock's action demonstrates its confidence in the future of digital assets.”

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BlackRock's Bitcoin ETF differs from earlier ETFs as it would be a spot ETF, meaning it would hold actual Bitcoins on its book.

“BlackRock ETF would actually have to buy the spot BTC and as a result, demand will go up, at least for the amount Bitcoin is removed from circulation. There is no doubt that it will lead to a price rise and significant sentiment rise,” said Ajeet Khurana, Founder and CEO of Reflexical, a crypto advisory firm.

Further, a Bitcoin-based spot ETF, with a redemption option is expected to bring the price of the fund close to the asset class. At present, the units of the GBTC, which is a Grayscale BTC Trust, is trading at a 40 percent discount to the price of Bitcoin itself, a major drawback of an Investment Trust.

Minal Thukral, Executive Vice President, Growth and Strategy, CoinDCX, added: “This could lead to more institutional investors investing in Bitcoin, which could have a significant impact on the price of the crypto. Though it is still too early to say the impact of BlackRock's Bitcoin ETF on the market, it could be a major step forward for the overall crypto industry.”

Takeaway for investors

Bitcoin, the original cryptocurrency, is currently trading around the $26,500 level, which is a far cry from its all-time high of $69,045, hit on November 10, 2021.

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In the past, the crypto market has reacted in a much more enthusiastical manner to the positive developments in the market.

For example, when the first Bitcoin-based ETF -- ProShares Bitcoin Strategy ETF – was approved in October 2021, the crypto market had jumped more than 10 percent. Today, on a seven-day period, Bitcoin is up around 3 percent.

While BlackRock is the biggest asset manager in the world and has an excellent track record in getting product approvals, it is yet to be seen whether the SEC will give the go-ahead to a spot Bitcoin ETF at a time when it has sued major crypto exchanges for trading unregistered securities, and alleged poor practices.