Approaching the launch of spot Bitcoin ETFs: Strategies for redemption and market impact
It is widely believed that Bitcoin ETF applications have played a major role in driving Bitcoin’s price back above $40k. The reasoning behind this is simple: with the introduction of institutional legitimacy, the pool of capital flowing into Bitcoin would increase.
Institutional investors, ranging from hedge funds and commodity trading advisors (CTAs) to mutual and retirement funds, now have convenient access to diversify their portfolios. They are attracted to Bitcoin because it is an asset that does not depreciate over time, unlike fiat currencies. Bitcoin is also limited to a total supply of 21 million coins and is secured by a powerful computing network.
Currently, there are 13 applicants vying to become institutional gateways for Bitcoin. Matthew Sigel, the Head of Digital Asset Research at VanEck, predicts that SEC approvals will bring in more than $2.4 billion in the first half of 2024, which would further boost Bitcoin’s price. The recent court battle between the SEC and Grayscale Investment over its Bitcoin trust-ETF conversion has increased the perception that Bitcoin ETF approvals are highly likely.
SEC Chair Gary Gensler recently met with representatives from Grayscale and seven other Bitcoin ETF applicants. In an interview with CNBC, Gensler confirmed that the path to Bitcoin ETFs is being explored and that the technicalities are being sorted out.
One significant indicator of the growing acceptance of Bitcoin ETFs is the integration of Wall Street-friendly rules by BlackRock, the world’s largest asset manager. This integration allows banks to participate as authorized participants in Bitcoin ETF exposure. It is worth noting that Gary Gensler himself is a former Goldman Sachs banker.
Given the potential launch of Bitcoin ETFs, it is important to consider the role and concerns of custodians. Coinbase, a leading cryptocurrency exchange, is currently the custodian for 10 out of the 13 Bitcoin ETF applicants. This is not surprising considering Coinbase’s partnership with BlackRock and its close relationship with government agencies.
However, Coinbase has faced legal challenges from the SEC for operating as an unregistered exchange, broker, and clearing agency. This could potentially hinder the approval of Bitcoin ETFs, as it raises concerns about the integrity of Coinbase’s business model.
One of the main concerns of the SEC regarding Bitcoin ETFs is market manipulation. To address this, strict trading controls and market surveillance are required. The SEC has also emphasized the importance of preventing large-scale BTC sales that could artificially suppress the price.
When it comes to redeeming Bitcoin ETF exposure, there are two options: in-kind redemptions and in-cash redemptions. In-kind redemptions involve exchanging BTC ETF shares for the corresponding amount of Bitcoin. This approach is preferred by most Bitcoin ETF applicants, as it minimizes the risk of price manipulation and allows for gradual selling of BTC without flooding the market.
In-cash redemptions, on the other hand, involve exchanging ETF shares for cash. This approach is favored by the SEC, as it keeps the capital within the traditional financial system. However, it could potentially lead to greater price manipulation.
The SEC is currently reviewing the different redemption models proposed by Bitcoin ETF applicants. BlackRock and Fidelity Investments both prefer the in-kind redemption model, which seems to be gaining ground.
In conclusion, the launch of Bitcoin ETFs in 2024 is expected to have a significant impact on the market. The VanEck analyst estimates a $2.4 billion inflow in the short term, while the Bitwise research team predicts that Bitcoin will trade above the new all-time high of $80k. However, the SEC has the power to influence the market by implementing certain details that may act as deterrents to Bitcoin ETF creation and redemption.