How Will US Regulators Ensure a Fair Bitcoin ETF Launch?
Bitcoin ETFs represent a new investment milestone for the crypto space. While some experts predict we could see a Bitcoin ETF within two months, the first to gain approval will likely feature a ‘first mover’ market advantage. However, the difference between physical and future-based ETFs may be all it takes to dampen it.
Gary Gensler Favors Future-Based ETFs
In the absence of cryptocurrency exchange traded funds (ETFs), US investors must look elsewhere to increase their crypto exposure without directly holding Bitcoin. However, after multiple delays and denials to approve a single Bitcoin ETF by the SEC, there seems to be a rising consensus that one will be approved by the year’s end.
The man responsible for fast-tracking crypto ETF approvals is Gary Gensler, the head of the US Securities and Exchange Commission (SEC). His views of the crypto space can be characterized by some of his previous comments:
“This asset class is rife with fraud, scams, and abuse in certain applications… I look forward to the staff’s review of such filings, particularly if those are limited to these CME-traded Bitcoin futures.”
That may seem harsh, but Gensler has no problem with mutual funds and closed-end trusts, such as Grayscale Bitcoin Trust. These financial vehicles reside in a heavily regulated futures market, which are governed by the 1940 Investment Company Act. On the other hand, a Bitcoin ETF would involve handling physical Bitcoin directly, the custody of which would require more regulations.
Therefore, based on Gensler’s previous statements, the most likely reason for delaying the approval of a single Bitcoin ETF application is that they were not future-based ETFs. Among mutual funds that are already on the market is Bitcoin Strategy ProFund Investor Class (BTCFX). As one would expect, it follows Bitcoin’s performance closely, increasing by 15% since July.
Accordingly, the investor-protected futures market is to be the most likely space to welcome the first future-based Bitcoin ETF. Bloomberg ETF analyst Eric Balchunas thinks this will happen by the end of October, with the most likely candidate coming from the ProShares ETF specialist, headquartered in Bethesda, Maryland. Its parent company, ProFunds Group, is the owner of the BTCFX mutual fund.
What Happens if a US Bitcoin ETF is Approved?
Only Bitcoin veterans would remember that the first Bitcoin ETF rejection was way back in 2013. The Winklevoss twins, creators of the Gemini Exchange, were the individuals who filed it, only to be rejected at a time when Bitcoin was trading under $100. Since then, dozens more lined up to get the coveted SEC approval.
Why are companies hurling to get ahead of each other? The reason for this is simple – first mover advantage. Because the US economy still dominates the world, the first one to be granted approval for a Bitcoin ETF would almost certainly generate revenue in the range of billions. One only has to look at Canadian ETFs to see this in action.
Canadian Purpose Bitcoin ETF (BTCC) was the first to launch in Canada, only to be followed a day later by Evolve Bitcoin ETF (EBIT). However, by being first, BTCC gained $80 million in trading volume within an hour, having continued this trend ever since. As one off the top five Canadian ETFs, only 3iQ CoinShares Bitcoin ETF (BTCQ) managed to get close to BTCC thanks to a partnership with Europe’s largest digital asset fund manager – CoinShares.
Although the first mover advantage is to be expected, does it mean that Gary Gensler will take account of it in the approval process? To mitigate it, he would have to approve multiple Bitcoin ETFs in one regulatory swoop. Given how the SEC operates, that doesn’t seem likely. On the other hand, unlike Canadian ETFs dealing with physical Bitcoin, these would be future-based.
Correspondingly, this itself may put a damper on the first mover advantage. If you know the basics of futures contracts, you understand their downsides:
- Future price of an asset may be lower than the spot price, resulting in a contango, which is bad for futures investors. The opposite of contango is backwardation – when the price of the futures contract is lower than the spot price.
- Its price can succumb to rapid fluctuations thanks to heavy leveraging. If one is not careful, entire savings can be lost on leveraged futures.
- There may be legislative and tax burdens down the line that were not accounted for at the spot price.
These are the key differences between physical Bitcoin ETFs and future-based Bitcoin ETFs, favored by the current SEC chair. As a result, we are likely to see a slower rate of adoption, which then may level the playing field of approved Bitcoin ETFs entering the market at a later date.
Many prognosticators have used Bitcoin ETFs as the key ingredient for Bitcoin to reach $100k sooner rather than later. Do you think future-based ones will have the same effect? Let us know in the comments below.