What are the Risks of Bitcoin ETF launch? In a Dec. 19 podcast, Coinbase researchers warned there are at least two potential problems that could arise with the launch of spot Bitcoin ETFs.
The potential launch of spot Bitcoin exchange-traded funds (ETFs) in the United States may lead to a shortage of “regulated” Bitcoin and impact a popular trading strategy, according to researchers at Coinbase. With less than three weeks remaining until a potential approval, concerns have been raised about the impact on the market. Coinbase’s head of institutional research, David Duong, and senior sales trader, Greg Sutton, highlighted two key risks associated with the launch. They mentioned the possibility of institutions facing challenges in sourcing sufficient BTC, as issuers would need to acquire enough Bitcoin to hold in their ETFs. This could potentially affect the supply and demand dynamics for Bitcoin in the regulated market.
“You need to buy Bitcoin from certain regulated places, what if demand is so great that these guys are unable to acquire the Bitcoin they need?”
Crypto venture firm Bitwise predicted that a spot Bitcoin ETF would be the most successful launch of an ETF product of all time.
Listen closely, my friends. #bitcoinisinteresting pic.twitter.com/pbfo6vlX0C
— Bitwise (@BitwiseInvest) December 20, 2023
2 risks of Bitcoin ETF launch
While acknowledging that the issue of sourcing Bitcoin is a positive challenge compared to low inflows, David Duong of Coinbase emphasized that it’s a risk worth considering as spot Bitcoin exchange-traded funds (ETFs) potentially launch. Another concern, raised by senior sales trader Greg Sutton, revolves around a popular institutional trading strategy known as the “basis trade.” This strategy capitalizes on the price difference between spot Bitcoin and the price of Bitcoin futures contracts.
With the significant increase in volume on both spot Bitcoin and futures contracts, the potential profit from the basis trade has recently surged as much as 20%, according to data from Velo. However, as institutional investors gain more direct exposure to Bitcoin through a spot ETF product, the basis trade’s profitability may decrease due to a narrowing of the price difference between spot and futures contracts. This poses a potential challenge to institutional trading strategies in the evolving landscape of Bitcoin investment.
As of now, there are 13 applications for a spot Bitcoin exchange-traded fund (ETF) awaiting approval from the Securities and Exchange Commission (SEC). There is a prevailing belief that one or more of these ETFs could be approved as early as January 10, with Bloomberg ETF analysts Eric Balchunas and James Seyffart estimating the approval chance at 90%.
In a December 21 update, Seyffart mentioned that Grayscale, a crypto asset manager, has held another meeting with the SEC. During this meeting, Grayscale advocated for in-kind redemptions instead of cash creation, indicating ongoing discussions and efforts by market participants to address regulatory considerations and preferences related to the potential approval of spot Bitcoin ETFs.
Update: @Grayscale met with the SEC again yesterday regarding $GBTC pic.twitter.com/SIxdARrPyB
— James Seyffart (@JSeyff) December 20, 2023
Indeed, an in-kind redemption model is often considered more efficient for ETF issuers. In this model, instead of selling the underlying asset to raise cash for issuing shares, the issuer can directly redeem or create new shares by exchanging the actual assets themselves.
More read: BlackRock meets SEC, Nasdaq to discuss listing rules for spot Bitcoin ETF