- What is an ETF?
- How Spot ETFs Work
- Status of ETF listing applications in the United States
- What’s the problem with having a Bitcoin ETF?
- End: Reference articles
On January 10, 2024, the SEC (US Securities and Exchange Commission) finally approved the listing applications for 11 spotBitcoin ETFs! These ETFs can now be traded in the United States on the NYSE, Cboe and Nasdaq. In the EU, the first spot Bitcoin ETF was listed in Amsterdam in summer 2023 (source: Coin Office)
Note: The following public statement from the SEC indicates that it has approved Exchange Traded Products. Each company’s S-1 (application form) indicates that it is not registered under the Investment Company Act and, for this reason, the SEC may officially use the term “ETP” instead of “ETF”. In this article, the term “ETF” will be used.
SEC.gov | Statement on Approval of Bitcoin Spot Exchange Traded Products Statement on Endorsement of Spot Bitcoin Exchange-Traded Pro
This topic has been widely covered by crypto experts in recent months. Many have cited the SEC’s impending approval of a Bitcoin ETF as one of the main drivers of the price increases we’ve seen in 2023. This article will explain what Bitcoin ETFs are, how they work, and why they will have a huge impact on our industry.
What is an ETF?
ETFs are investment products listed and traded on an exchange and include mutual funds that aim to be linked to indices such as stock indices (index ETFs) and actively managed mutual funds that are not linked to no index (actively managed ETF). . The acronym ETF stands for “Exchange Tnote Fand”. ETFs can be traded by anyone with an account at a securities brokerage, just like listed stocks.
A typical example of an ETF product is an ETF linked to a major index such as the Standard and Poor’s 500 (“S&P 500”). The S&P 500 is a stock market index calculated from the stock prices of 500 leading USETF-listed companies. Funds linked to the S&P 500 are managed so that their price movements are almost the same as those of the underlying index. In other words, investing in this ETF will have almost the same effect as investing in the entire underlying index. In addition to ETFs linked to stock indices, there are also ETFs linked to real estate, bonds, commodity prices, etc.
So, creating a Bitcoin ETF means that we will have a publicly traded product that is linked to the price movement of Bitcoin. A Bitcoin ETF also allows traders to easily gain exposure to the price of Bitcoin through traditional brokerage accounts and stock markets, without having an account on a cryptocurrency exchange.
How Spot ETFs Work
There are three types of spot ETF models depending on the method used for its creation and the options available for its redemption:1. In-kind creation/purchase model2. Liquidity Creation/In-Kind Repurchase Model3. Cash Creation/Redemption Method For this Bitcoin ETF, there have been discussions about whether to use the 1. In-kind creation/redemption model or the 3. Cash creation/redemption model. Let’s take a look at these models. In the case of equity ETFs, under the in-kind model, investors who want to create an ETF will prepare a basket of stocks for ETF creation from their original holdings or from the stock market or the securities market. ready. The ETF is created by contributing this basket of shares to the ETF through an “authorized participant.” In the event of redemption, it is the opposite: the physical basket is returned to investors from the ETF via the authorized participant. The basis price of an ETF is the price used by the authorized participant in the issuing market to establish or redeem the ETF. In the case of stock ETFs, it is calculated once a day using the most recent closing price of the securities held by the ETF. If there is a difference between the ETF’s NAV and the ETF’s trading price, the Authorized Participant may arbitrage so that the two prices are less likely to diverge.
In the cash creation and redemption model, the ETF is created using cash, the ETF manager purchases the underlying shares, and upon redemption the ETF manager converts the shares held by the ETF in cash for redemption. In this case, compared to the in-kind model, the divergence between the spot price and the market price of the ETF may be more likely to occur.
Originally, Blackrock and others had requested an in-kind ETF model, but during communication with the SEC, they decided to move to a cash model. It is suspected that this is because brokers, who serve as authorized participants in the ETF, are having difficulty buying, selling and storing physical bitcoins.
Status of ETF listing applications in the United States
Since October 2023, there have been a series of revisions to the S-1s (application documents), presumably in response to comments from the SEC, and discussions were believed to be progressing toward approval. In order to create a Bitcoin ETF, Blackrock and other investment management companies will need to purchase Bitcoin, and several topics were discussed in this regard, such as: where will the custodian of the purchased Bitcoin be located, what will be the price of The ETF’s value will be based on how the price is determined, whether or not it can be manipulated, whether risks are sufficiently disclosed to investors, etc. An S-1 amendment was made in late 2023 to designate Jane Street and JP Morgan as designated participants of Blackrock’s ETF (iShares Bitcoin), with Macquarie Capital (USA) Inc. and Virtu Americas added earlier this year. This was one of the last amendments before approval. The CBOE announced that negotiations would begin on January 11 (US time).
Spotting Approved Bitcoin ETF Issues Source: Bloomberg
What’s the problem with having a Bitcoin ETF?
Bitcoin ETFs could be a catalyst for institutional investors around the world to start including Bitcoin in their portfolios. For example, according to a survey published by Laser Digital (part of the Nomura group) in June 2023, 96% of institutional investors responding to the survey believe that digital assets such as Bitcoin constitute an opportunity for diversification alongside classes of traditional assets such as bonds, cash. , stocks and commodities. As for the maximum allocation to digital assets, 80% of respondents said they expect around 3-5% of their portfolio to be dedicated to digital assets.
Laser Digital Investor Survey on Digital Assets Laser Digital Investor Survey on Digital Assets
In this survey, approximately 90% of respondents indicated that it is important to have the backing of a large, traditional financial institution before considering investing money in a digital asset fund or vehicle investment. (Source: Laser Digital Investor Digital Asset Survey, June 19, 2023) Sometimes institutional investors have certain limits on what they can invest in and often cannot invest directly in “crypto assets.” On the other hand, ETFs created by large financial institutions are eligible for investment. It is believed that the creation of Bitcoin ETFs will help remove barriers that prevent institutional investors from investing in Bitcoin.
While the total market capitalization of bitcoin is currently around USD 925 billion (EUR 843 billion) and the overall market capitalization of all crypto assets is around USD 1.8 trillion (EUR 1.64 trillion) (at January 11, 2024, source: Coinmarketcap), institutional money invested in stocks and bonds totaled 131,000 billion USD in the 500 largest companies in October 2022 (Source: Willis Towers Watson), of which 3 to 5% would represent between 3,900 and 6,600 billion dollars. It is believed that some of this large sum of money will be used to purchase Bitcoin, as managers must purchase Bitcoin in cash in order to offer Bitcoin ETFs to institutional investors. It is worth noting that spot ETFs on gold, a commodity, were approved in September 2004 and the price of gold has increased significantly since then.
On the other hand, institutional money is unlikely to flow into the market all at once, as institutional investors must go through a number of checks and consultations with decision-making bodies before they can broaden their investment objectives. Additionally, some institutional investors may decide not to invest in digital assets. The impact of the approval of the Bitcoin ETF on the price of Bitcoin should be carefully considered under these circumstances.
End: Reference articles
The approval of the listing of the physical Bitcoin ETF in the United States is, in our opinion, a major milestone in the history of Bitcoin. We look forward to seeing how the investor base will grow and what impact this will have on prices and their movements.
Already a bitFlyer customer? To log in!
This article was originally published on the bitFlyer blog in Japan (https://blog-jp.bitflyer.com/n/n7ca5bd410db1), and was adapted for the English version.