Why are the crypto community and Wall Street craving a spot Bitcoin ETF?

Grayscale Investments LLC won a court ruling on August 29 to convert its Bitcoin Trust, GBTC, into an ETF. Investors looking to bet on Bitcoin may soon have more options. Major financial firms including BlackRock, Fidelity and Invesco have submitted applications to sell U.S. “spot” ETFs directly tied to Bitcoin holdings. In the past, the U.S. Securities and Exchange Commission (SEC) has often rejected these products, citing caution over volatility and potential manipulation. But Grayscale’s ruling and BlackRock’s filing suggest the cryptocurrency industry has the upper hand.

1. What does a Bitcoin ETF look like?

ETFs are a $7 trillion industry and part of a broader family of products known as exchange-traded products, although people often use "ETF" to refer to all of them because they are by far the largest and most popular Welcome category. Crypto-native companies and major Wall Street financial institutions are trying to launch an ETF that actually holds Bitcoin, rather than investing in Bitcoin futures products. Futures-backed bitcoin ETFs have been available to U.S. clients since 2021, but the SEC has yet to approve any applications for so-called spot bitcoin ETFs. Issuers and investors are advocating that spot bitcoin ETFs are equally available to U.S. retail and institutional investors, a development seen as having the potential to significantly expand participation in the cryptocurrency industry.

2. What is the difference between futures bitcoin and spot bitcoin?

Futures are contracts to buy or sell an asset at a specified price at a later date. They are widely used in many markets, such as oil, by investors looking to speculate on price movements without directly owning or possessing the underlying asset. As the price of Bitcoin moves up and down based on direct trades, Bitcoin futures indirectly track the spot price of the cryptocurrency on exchanges such as the Chicago Mercantile Exchange. In contrast, in the spot bitcoin market, users buy and sell the actual digital currency through exchanges.

3. What Bitcoin ETFs were there before?

ProShares Bitcoin Strategy ETF (BITO) is the first Bitcoin futures ETF in the United States. It opened on October 19, 2021 and has strong demand. The Purpose Bitcoin ETF (BTCC) debuted in Toronto in early 2021, with its issuer Purpose Investments saying it invests directly in "physical/digital Bitcoin." Meanwhile, some U.S. investment trusts have been focusing on Bitcoin in an ETF-like manner, but with certain restrictions. Grayscale Bitcoin Trust (GBTC) is physically backed, meaning it holds Bitcoin. Grayscale Investments sued the SEC for trying to turn GBTC into an ETF; this is what happened when Grayscale Investments won a key legal battle in August.

4. What’s the situation with spot Bitcoin ETFs?

BlackRock, the world's largest asset manager, filed for a spot Bitcoin ETF in June, fueling speculation that the long-illusory investment product would eventually win SEC approval. BlackRock’s filing, in turn, led to a surge in cryptocurrency markets and a flurry of similar ETF filings, including refilings from issuers such as Fidelity Investments and Wisdom Tree. Grayscale Investments has always believed that converting GBTC into ETFs will help unlock billions of dollars in value for GBTC investors. The SEC could challenge the August court ruling by asking the D.C. Circuit Court of Appeals or the full U.S. Supreme Court to review it.

5. Why have regulators shunned Bitcoin ETFs for so long?

In addition to concerns about liquidity and manipulation, regulators have expressed concern that Bitcoin's volatility may be too intense for ordinary investors: Bitcoin's full-year return over the past three years was a 305% gain in 2020, It rose another 60% in 2021, followed by a 64% decline in 2022. The SEC also questioned whether fund companies have the information needed to adequately evaluate tokens like Bitcoin, including whether they can verify who owns the underlying coins. In 2021, SEC Chairman Gary Gensler testified to the Senate Banking Committee that the lack of regulation and oversight in the crypto market led to “concerns about the possibility of fraud and manipulation.” To allay some of the SEC's concerns, BlackRock, and other issuers following in its footsteps, have proposed so-called surveillance-sharing agreements, a way to mitigate the risk of market manipulation and fraud. Coinbase, the only publicly traded spot-only cryptocurrency exchange in the United States, has become the market surveillance partner of choice for ETF issuers.

6. What might the SEC process look like?

Some experts expect at least one spot bitcoin ETF to receive final approval by the end of the year; others advise caution as there have been about 30 previous attempts on the battlefield that have failed to convince the SEC . Analysts will also now keep a close eye on any potential developments in Grayscale Investments' GBTC conversion process.