Hoping for Bitcoin Spot ETF to Drive Bull Market? I'm afraid it's difficult

Some analysts believe that Europe's approval may have a positive impact on ETF applications from institutions such as BlackRock. Unfortunately, the reality is still quite bleak.

The Bitcoin ETF application fever triggered by BlackRock is cooling down rapidly.

Since June, with traditional institutions such as BlackRock and Fidelity applying for BTC ETFs, the crypto market, which was on the verge of collapse, has regained vitality. BTC once surged to $31,000 after the positive news released by BlackRock, attracting many expected positive buyers to enter the market. However, recently, the host institution SEC has continued to show a hawkish attitude, and the signal released has put the spot ETF, which has never been approved, into a haze again, and the mediation between institutions and regulators has become increasingly tense.

Against this backdrop, Jacobi listed the Jacobi FT Wilshire Bitcoin ETF on Euronext Amsterdam last week, marking the launch of Europe’s first spot Bitcoin ETF. Although the European crypto volume is relatively small and the impact is limited, it still brings benefits to the industry to a certain extent.

The narrative of Bitcoin ETF has therefore been extended again.

01. European Bitcoin Spot ETF Launched

On August 15, Jacobi Asset Management, an asset management company headquartered in London, UK, launched the investment product Jacobi FT Wilshire Bitcoin ETF and listed it on the Euronext Amsterdam with the trading code BCOIN.

This ETF is a Bitcoin spot ETF, and it is also the first product of this type to be launched in Europe. It is reported that the approval of the BCOIN ETF application was also somewhat lucky. As early as October 2021, it had applied for it. At that time, Europe's crypto regulation was relatively open, especially in 2021 when the crypto market continued to explode. Institutions had a strong demand for this type of investment, and there was less corresponding regulatory resistance. Therefore, it was approved by the regulator, the Guernsey Financial Services Commission (GFSC), when it was launched. The ETF was originally scheduled to be launched in July 2022, but due to the Terra and FTX incidents, it was not officially launched until August this year.

In order to enable the exchange to obtain the average BTC price in real time, BCOIN ETF cooperated with index provider Wilshire Indexes to use the FT Wilshire BTC hybrid price index to track the product price benchmark. At the same time, the index focuses on the ESG concept and provides a verifiable built-in renewable energy certificate (REC) solution through the cryptocurrency platform Zumo to achieve decarbonization strategy.

In terms of custody and market making, the BCOIN ETF will be provided with custody services by Fidelity Digital Assets, which will charge investors an annual management fee of 1.5%. Flow Traders will serve as a market maker, and Jane Street and DRW will be authorized participating traders.

02. Differences in Bitcoin ETF categories and market conditions

In fact, from an industry perspective, ETFs are not new to the crypto space, especially spot ETFs, which have been discussed frequently recently. From an investment perspective, traditional market products for investing in Bitcoin are mainly divided into ETFs and trust funds, and ETFs can be further divided into spot ETFs and futures ETFs. Spot ETFs and trust funds are basically similar, but spot ETFs and futures ETFs perform quite differently, mainly in terms of tracking targets, costs, and supervision.

First of all, there is the difference in the tracking targets. Spot ETFs are more spot-like and mainly track the spot price of the target, while futures ETFs focus on the price of futures contracts listed on the exchange. In other words, spot ETFs are very similar to directly purchasing the underlying product and can directly enjoy the added value brought by the price increase, but futures ETFs are buying and selling futures contracts settled in cash and need to obtain profits based on predicted trends.

The second is the cost difference . For risk hedging, futures usually purchase several contracts on different dates, which also brings additional rollover costs. The cost of spot ETFs is the need to pay custody fees. Generally speaking, the cost of futures ETFs is often greater than that of spot ETFs. However, because futures are traded on margin, futures ETFs can be leveraged, but spot ETFs generally cannot.

Finally, there are regulatory differences . The biggest difference between the two is on the trading side. Compared with the exchange index that futures ETFs can track, spot ETFs do not have a complete and regulated platform for purchase, withdrawal, and custody at fair prices in traditional mainstream exchanges around the world. Therefore, spot supervision is more stringent, which is why there are currently no spot ETFs in the United States. After the FTX incident, the difficulty of applying for spot ETFs has increased day by day.

Therefore, at present, there are only two well-known Bitcoin spot ETFs in the world. In addition to the BCOIN issued this time, there are four types of products launched by Purpose Investment, a Canadian investment management company, in February 2021. According to the purchase currency and risk hedging, they can be divided into BTCC and BTCC.B purchased with Canadian dollars. The difference between the two is that the former can hedge the risk of the US dollar, while the latter cannot, as well as BTCC.U purchased with US dollars and allows investors to hold Bitcoin in US dollars. There is also BTCC.J with a carbon neutral concept. Since these four types of products are only listed on the Toronto Stock Exchange and are not open to US users, the audience is relatively limited. In terms of data, as of August 23, Glassnode data showed that the total assets under management of the ETF reached US$6.576 billion, and the number of bitcoins held was about 23,200. Among them, BTCC is mainly a Canadian retail investment tool, currently quoted at US$4.96, which is 37.81% lower than its initial opening price of 11 Canadian dollars after exchange rate conversion.

BTCC ETF total asset management trend, source: Glassnode

Trust funds are obviously more familiar to investors, the most representative of which are Grayscale GBTC and BTCE issued by Germany's ETC Group. It is worth noting that GBTC was not originally a trust fund, but intended to apply for an ETF, but was rejected by the SEC and had to be changed to a private trust fund after weighing the two. GBTC targets institutional investors and is publicly traded on OTCQX. In order to maintain compliance, GBTC cannot be redeemed regardless of cash contributions or physical subscriptions. Since the market is in a semi-closed state, the market price is not entirely determined by the actual BTC price, but more depends on buying sentiment. Discounts and premiums between the market net value and the fund net value frequently occur. Since February 2021, the fund has been in a negative premium state.

Despite this, GBTC is still the most influential Bitcoin-like ETF product in the industry. According to official website data, as of August 21, GBTC's total assets under management reached US$16.078 billion, and the number of bitcoins held was 624,000, accounting for 3.2% of the total BTC circulation. The current secondary market quotation is US$17, and the negative premium is 26.83%. It is worth noting that since the BlackRock incident, GBTC has been positively affected by the convertible ETF, and the negative premium rate has shown a narrowing trend. On August 15, the value rose to 23.9%, the highest since April 26, 2022. It can be seen that the current market expectations for GBTC have improved.

Grayscale Fund’s partial holdings, source: Coinglass

Compared with the above two categories, Bitcoin futures ETF is the most common and the earliest cryptocurrency financial product approved by regulators. Currently, there are 5 Bitcoin futures ETFs listed on exchanges in the United States, namely BITO issued by ProShare, XBTF issued by VanEck, BTF issued by Valkyrie, BITS issued by Invesco, and DEFI issued by WisdomTree. These 5 major futures ETFs are mainly based on CME's Bitcoin futures contracts, and the latter four also have some U.S. debt, cash or other blockchain-related ETFs. Hong Kong has also launched a Bitcoin futures ETF issued by Southern East Investment on the Hong Kong Stock Exchange, but the overall splash is not large, so I will not go into details here.

Among the five major futures ETFs, BITO is the first Bitcoin futures ETF in the United States. It was listed on the New York Stock Exchange on October 19, 2021, and is also the largest and most influential futures ETF. As of August 22, the total assets under management of the five major futures ETFs were approximately US$1.037 billion, of which BITO's total assets under management reached US$954 million, accounting for 91.99%, and the average daily trading volume reached 9 million shares, which is two orders of magnitude higher than the same type. However, in terms of annual returns, due to the large number of ETFs covered, BITS is the most advanced one, with an annual return of 81.01%. Even though other ETFs have had negative returns in the bear market in the past three months, it has stood out and topped the list with a return of 4.61%.

03. Institutions continue to fight despite repeated failures. Why is Bitcoin spot ETF important?

Analyzing the significance of ETFs, due to the complex and difficult operations in the crypto field, many investors have been forced to turn around at the first hurdle such as wallet registration. Therefore, ETFs are favored by traditional institutions because they allow holding without actual purchase, and have become an important channel for the traditional world to invest in crypto assets such as BTC.

Looking at the price development history of Bitcoin, whenever traditional institutional funds enter the market, BTC can obtain endorsement and soar in value, and its legitimacy can also build a growth flywheel. For example, after the launch of the Grayscale GBTC Trust, encryption entered an unprecedented bull market lasting more than a year, and the price even reached an all-time high of US$64,000.

In this context, the approval of ETFs is particularly important, especially ETFs that can be purchased directly for spot, which can broaden the channels for institutional income and thus become a battleground for asset management institutions. Currently in the United States, futures ETFs have achieved certain results, with 5 futures ETFs approved, but there has not been a single successful case for spot ETFs. Institutions have almost fought again and again, with applications from more than 22 institutions all rejected. 2021 was the peak year for applications, with 12 applications from institutions such as VanEck, Valkyrie Investments, and NYDIG all initiated that year.

Since June this year, at a critical moment when institutions such as Binance and Coinbase were successively sued, large institutions led by BlackRock have gathered again and set off a wave of applications for spot ETFs and spot trusts. According to statistics, the SEC has received 8 Bitcoin spot ETF listing applications, including BlackRock, including BlackRock iShares Bitcoin Trust, Fidelity Wise Origin Bitcoin Trust, WisdomTree Bitcoin Trust, VanEck Bitcoin Strategy ETF, Invesco Galaxy Bitcoin ETF, ARK 21Shares Bitcoin ETF, etc.

In this round of applications, as some investors entered the market with favorable conditions, the price of BTC stretched from US$25,000 to US$31,000. Since then, even in the nearly two months when negative data spread, it has fluctuated around US$26,000. It can be seen that the positive impact of spot ETFs has at least added about US$3,000 to the price bottom of BTC out of thin air.

BTC price trend in the past year, source: Coinmarketcap

04. The game between market and regulation makes it difficult for European spot ETFs to attract attention

Compared with previous developments, this European spot ETF made almost no splash.

Since its official listing on August 18, as of August 22, according to EURONEXT data, the ETF opened at $17.73, falling below the issue price of $18. Except for 4,122 transactions on the 18th, the trading volume dropped rapidly, with only 50 transactions occurring on the 21st, which was a rather dull performance. The global crypto market was also calm, and even discussions in the crypto community were relatively rare.

BCOIN ETF basic information column, source: EURONEXT

The reason is that, globally, the European market influence is far lower than that of North America, the crypto base, and the buying power of crypto is more concentrated in North America, mainly in the United States. What is a little strange is that the high adoption rate of crypto in Europe is not low. According to the Chainalysis 2022 Global Crypto Adoption Index, the EU ranks fourth among 154 countries and regions in the world, second only to Vietnam, India and Pakistan. The high adoption rate has not brought about the growth of ETFs.

Comparing digital gold with physical gold, we can find that the underlying reasons are similar to those of gold ETFs. Although Europe accounts for about 45% of the market, the United States almost single-handedly promotes the development of gold ETFs, and its influence on the market is significantly higher than that of Europe and other regions.

According to the data, the United States is the world's largest gold ETF market, accounting for more than half of the global gold ETF holdings. The Street Tracks Gold Trust Fund (NYSE code GLD), the first gold ETF in the United States and even the world, founded in 2004, is currently the world's largest gold ETF. According to data from the World Gold Council, its share of the gold ETF market in 2021 is approximately 28.7%, far exceeding other similar funds. In terms of physical gold, according to data from the U.S. Treasury Department, as of the end of 2020, the United States' gold reserves reached 8,133 tons, ranking first in the world. Back to BTC, the United States is also the region with the most BTC in the world. According to The Block, the U.S. government holds more than 50,000 BTC and is one of the largest Bitcoin whales.

In this context, the unsatisfactory performance of ETFs is not surprising, as the United States, a key region, has not yet relaxed its regulations, and Europe’s new actions are not enough to support the rise of the crypto market.

On the other hand, some analysts believe that Europe's approval may have a positive impact on ETF applications from institutions such as BlackRock. Unfortunately, the reality is still quite bleak.

Although BlackRock, the world's largest asset management company with more than $10 trillion in assets under management, has only had one ETF application rejected over the years among 500, industry experts are generally skeptical about the approval of spot ETFs, especially after BlackRock listed Coinbase as its market regulator in July.

Stuart Barton, the chief investment officer of the SEC, said in an interview with Coindesk that Bitcoin Cash is not listed on any regulated exchange, and according to listing rule 19 b-4, self-regulatory entities seek SEC approval before making any trading rule changes, so the SEC occupies the commanding heights of the entire strategy. In the eyes of the SEC, Coinbase is an unregulated exchange and it is difficult to meet the SEC's requirements, so the probability of passing is low.

The former director of Internet Enforcement at the SEC also agreed with this conclusion. He elaborated on the prediction that the spot ETF might not be passed, but chose to analyze the current situation from the perspective of partisan struggle. He believed that the current regulation stems from the negative understanding of cryptocurrencies by the ruling party headed by former President Trump, and there are partisan differences in the SEC. Therefore, if the Republicans are elected, the SEC is more likely to approve the spot ETF.

At present, the six spot ETFs applied for this time have entered the review stage. The review period was originally set at 45 days, but the SEC said that it is very likely that a reply will be confirmed next year. The ever-extending time and expectations have worn away the market's remaining enthusiasm, and the BTC price is gradually recovering to its original $26,000.

Considering the market performance, it would be difficult to hope to drive growth again with the expectations of spot ETFs without any practical measures.