Do We Need A Spot Bitcoin ETF?

Fund managers are patiently waiting for approval of a spot bitcoin ETF and believe the U.S. markets are ready for new entries. 

The U.S. Securities and Exchange Commission is reviewing an application to convert the Grayscale Bitcoin Trust (GBTC) into an ETF, among others. Grayscale Investments is hopeful that the agency would allow it to happen, according to Dave LaValle, global head of ETFs at Grayscale.   

The proposed listing venue for the ETF, the New York Stock Exchange, filed a Form 19b-4 with the SEC on Oct. 19, setting off a 240-day review and open comment period that will expire on July 6. LaValle told the Inside ETFs conference in Hollywood, Florida last week that the vast majority of the comments made have been supportive of the company’s proposal.  

“This is the same exact regulatory process that has happened with every other kind of exotic or new exposure that has been attempted to be brought to market in the form of an ETF, and we welcome that,” he explained.   

A green light to convert GBTC into an ETF would certainly be beneficial for the fund and its investors. GBTC was last trading at a discount of more than 30% to its net asset value. 

As LaValle said, GBTC currently does not have a redemption mechanism, and as a result, “it's behaving like a closed-end fund.” 

“We haven't had regulatory approval for the current product to have redemptions,” he added. “If it had simultaneous creations and redemptions, there would be a true arbitrage opportunity as there is in an ETF, and the discount would immediately collapse.” 

“That’s why we're pushing to get this ETF approved; we know it's the easiest way and the quickest way to collapse that discount,” LaValle continued. “Overnight it would trade at NAV.” 

Bitcoin Futures ETF A Good Step  

LaValle said that when the SEC approved the first bitcoin futures ETF—the ProShares Bitcoin Strategy ETF—last October, it was “a massive step in the right direction towards a spot bitcoin ETF.”    

“We're very supportive of the bitcoin futures product being in market, but we also think a spot bitcoin product actually makes a lot more sense. It's just a better exposure,” he noted. “In instances where there's a commodity in an ETF that can be reliably stored—hard metals, precious metals, gold, silver and the like—the marketplace has spoken that a spot-based product, or a product that actually holds the physical, is really preferred.” 

LaValle said we know a spot product is preferred, because in cases where both spot and futures ETFs are available, the spot ETFs have more assets and liquidity. He mentioned the SPDR Gold Trust (GLD) and the iShares Gold Trust (IAU) as the best examples of this phenomenon.

On the other hand, he said that when the commodity can't be reliably stored, as in the case of oil and corn, it’s futures-based ETFs that have thrived. 

“We believe that bitcoin, being that it can be reliably stored, is going to follow the [model] of a gold or silver ETF. The spot product is going to be what the marketplace really desires,” LaValle predicted.  

SEC’s Hesitation  

If a spot bitcoin ETF is the one the marketplace prefers, and if the SEC is comfortable enough to approve a bitcoin futures ETF, what is stopping the SEC from greenlighting the former? 

“That was in our mind as well. If you're comfortable with a derivative on an underlying asset, then you must be comfortable with the underlying asset,” LaValle remarked. “The SEC hasn't agreed with us yet on that, but they have been very consistent with their messaging. Their concerns center around surveillance of the underlying bitcoin market and managing potential market manipulation.”  

Though LaValle didn’t say it outright, he suggested there was some inconsistency in the types of products that the SEC has allowed to trade: “Fixed income ETFs are a really credible way to get liquid, quick exposure into the fixed income market. But when you look at the underlying fixed income market, it's not a super transparent market.”

“There aren’t great surveillance agreements between the brokers that are dealing. It's not like you have surveillance agreements between Goldman, UBS and the J.P. Morgan bond trading desks, right? Or, if you take a look at like the senior loan market, senior loans don't settle very easily. There's not a lot of transparency in them. They settle in 30, 60 or 90 days sometimes.”   

“The SEC’s approach to ensuring the bitcoin market has appropriate transparency, appropriate surveillance, and appropriate size is a little bit counter to some of the decisions and some of the exposures that they have previously allowed to be in an ETF wrapper.”

“But you can’t go in and tell the SEC, ‘You've done this before, so you should do it now.’ That doesn't really work. But it is to say that the ETF market is robust and the wrapper is very robust and it has been battle-tested in a way that has given investors and institutions—large-scale banks and the government—a lot of comfort in transacting in an underlying asset.” 

Who Needs A Bitcoin ETF? 

LaValle emphasized that a spot bitcoin ETF was a useful product despite there being many other avenues to buy bitcoin today:  

“The barriers to buy digital assets have come down so significantly, but not everybody wants to deal with [the other ways to buy bitcoin].” 

According to LaValle, the ETF wrapper has brought assets to market that have historically only been available to a subset of investors, usually institutions. For bitcoin, it’s a little different, because there are a lot of retail investors who trade cryptocurrencies, but they are still a minority.  

“It’s been a barbell, where you've either been a retail enthusiast that has gotten involved and understood wallet infrastructure, or you’ve been a large institution who took the time to do it,” he said. 

A bitcoin ETF would be for everybody in between. 

“ETFs have proven to be high quality, resilient building blocks for investors’ portfolios, and it's a lot easier to put another ETF next to an S&P 500 ETF, next to a Treasury ETF, next to a commodity ETF—and have everything managed with your advisor,” LaValle explained.  

He made an interesting point that the vast majority of the advisor platforms don't allow for crypto access, while the vast majority of advisors’ clients are interested in gaining access to crypto:  

“The advisors that we've spoken to feel a little bit trapped. The spot ETF would be a great building block for them.” 

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