Approaching the launch of spot Bitcoin ETFs: Strategies for redemption and market impact
It is widely believed that Bitcoin ETF applications have been the main catalyst for Bitcoin’s return to its April 2022 level above $40k. The theory is simple: with institutional legitimacy, the capital pool for Bitcoin would deepen, attracting institutional investors who want to diversify their portfolios with an anti-depreciating asset. Bitcoin is not only limited to 21 million but also secured by a powerful computing network. Currently, there are 13 applicants vying to become institutional gateways for Bitcoin.
According to Matthew Sigel, VanEck’s Head of Digital Asset Research, SEC approvals are expected to bring in more than $2.4 billion in H1 2024, boosting Bitcoin’s price. SEC Chair Gary Gensler recently met with Grayscale representatives and seven other Bitcoin ETF applicants, confirming in a CNBC interview that the path to Bitcoin ETFs is being sorted out.
One significant development is that BlackRock, the world’s largest asset manager, has integrated Wall Street-friendly rules, allowing banks to participate as authorized participants in Bitcoin ETF exposure. This is noteworthy considering that Gary Gensler himself is a former Goldman Sachs banker.
The role of custodians in Bitcoin ETFs is crucial. Coinbase, the dominant custodian for 10 of the 13 Bitcoin ETF applicants, partnered with BlackRock in 2022 to provide services for institutional investors. Coinbase also collaborates with government agencies and keeps track of law enforcement requests. However, the SEC has sued Coinbase for operating as an unregistered exchange, broker, and clearing agency.
Mike Belshe, BitGo CEO, believes that Coinbase’s fusion of merchant and custodial services could hinder Bitcoin ETF approvals. The SEC has been concerned about market manipulation and has emphasized the need for strict trading controls and market surveillance. In terms of redemptions, the SEC has focused on two options: in-kind and in-cash redemptions.
In-kind redemptions are preferred by most Bitcoin ETF applicants as they are commonly used in traditional stock/bond ETFs. This approach minimizes the risk of price manipulation and allows authorized participants to exchange BTC ETF shares for an equivalent BTC amount. On the other hand, in-cash redemptions offer a more direct BTC-to-fiat pipeline, which the SEC prefers.
BlackRock and Fidelity Investments both favor the in-kind redemption model. BlackRock has revised its model to address the SEC’s concern about market maker risk. The revised model removes the need for pre-funding sell trades and shifts the risk of redemption execution to market makers.
Once Bitcoin ETFs are approved, there are varying estimates of capital inflow and price impact. In the short run, it is estimated that $2.4 billion will flow into Bitcoin, potentially pushing the price to $47,000. Some analysts are even more optimistic, predicting that Bitcoin will trade above $80k in 2024.
However, the SEC has the power to impose details that could deter investors. For example, a high redemption threshold would discourage authorized participants from creating BTC ETF shares due to the upfront cost and perceived risk. Furthermore, if the SEC approves in-cash redemptions, it could increase price manipulation potential.
In conclusion, 2024 is expected to be a significant year for Bitcoin, with the launch of Bitcoin ETFs, the 4th Bitcoin halving, and potential rate cuts by the Fed. The impact of these factors may overshadow the Bitcoin ETFs themselves. Regardless, Bitcoin is set to reach a new level of legitimacy, which will please Bitcoin holders in the years to come.