With the arrival of Exchange-Traded Funds (ETFs) in the decentralized cryptocurrency space, including Bitcoin, it is expected that fundraising and liquidity for cryptocurrencies will become easier, and related markets will experience growth.
Bitcoin ETFs and Their Surrounding Issues
The crypto world needs to incorporate the best options from the traditional financial world to expand its influence, increase its credibility, and move closer to legal frameworks. One of these tools is Exchange-Traded Funds (ETFs), which can have regulatory and beneficial impacts on various markets. With the introduction of these ETFs into the decentralized cryptocurrency space, capital raising and liquidity for cryptocurrencies will be anticipated to become more straightforward, and the related markets will see significant growth. Additionally, financial regulations and laws can be better applied to these cryptocurrencies.
Unfortunately, regulatory and oversight bodies have always resisted the presence of cryptocurrencies—especially Bitcoin—in official markets and have not provided the necessary approvals. In this article, we aim to discuss Bitcoin ETFs and the controversies surrounding them.
Former Opponents Now Fight for Bitcoin: BTC ETF vs. SEC
It’s no exaggeration to say that in the world of crypto, legal battles—whether as defendants, plaintiffs, or in pursuit of licensing—have become a norm for many projects. One of the major obstacles that blockchain projects often face is the U.S. Securities and Exchange Commission (SEC). This regulatory body consistently files lawsuits or refuses to cooperate in issuing licenses, blocking the evolution and decentralization of traditional financial and banking systems through cryptocurrencies.
The American multinational corporation BlackRock, valued at over $100 billion and specializing in investment and asset management, has undergone a major shift in attitude, fully entering the new realm of cryptocurrencies. In 2022, BlackRock took its first step by integrating Bitcoin-related services into its proprietary platform, Aladdin. In June of this year, it announced its application for Bitcoin ETFs to the SEC, despite its previous stance of opposition to cryptocurrencies. The company’s CEO had previously labeled Bitcoin, and implicitly all cryptocurrencies, as merely a tool for money laundering.
This change in perspective becomes even more significant when considering that BlackRock is the world’s largest investment firm, managing over $9 trillion in global assets—around 9% of the world’s Gross Domestic Product (GDP).
To put BlackRock’s size into perspective, consider that the world’s total GDP is just over $105 trillion, with the U.S. contributing about 20%. If BlackRock were a country, it would rank second in GDP, just behind the U.S.
Bitcoin ETFs allow individuals and institutions to participate in Bitcoin trading without directly buying, holding, or managing the asset, making the process simpler and more appealing. BlackRock’s main argument for its Bitcoin ETF is that the complexities of buying, holding, and securing Bitcoin deter many potential investors, and a Bitcoin ETF could address these challenges.
BlackRock is not alone; other major firms like Fidelity have also submitted similar ETF applications. The first attempts to secure ETF approval for Bitcoin date back to 2013, but nearly all applications were rejected until late 2021. While some Bitcoin ETFs are currently in operation, we’ll touch on that later.
BlackRock has made numerous attempts to obtain approval, continuously filing applications. As of this writing, BlackRock has submitted 576 applications regarding this matter, with only one approval. Previously, BlackRock had a 99.8% approval rate for its applications, highlighting the resistance against cryptocurrencies.
The SEC’s response to BlackRock and other applicants often repeats the same reasoning: “The applications are vague, incomplete, and unclear.” However, the SEC’s stance seems inconsistent and confusing, as seen in cases like Ripple (XRP).
Previously, the SEC approved Bitcoin investment trusts with limited capital, like those launched by companies such as Grayscale, but these had fewer legal requirements than ETFs. Despite Grayscale’s successful performance, the SEC has refused to grant them an ETF license.
BlackRock has announced that its Bitcoin ETF, iShares Blockchain, will launch. It has reached an agreement with Nasdaq to list and trade the ETF on this exchange. BlackRock seems to be taking extra precautions to ensure success, as Nasdaq can employ a Surveillance-Sharing Agreement to prevent artificial price manipulation. This agreement gives Nasdaq full access to all trading data, including trader identities and transaction volumes, ensuring market integrity.
The ETF’s pricing will be based on spot trading, using the CF CME Bitcoin Reference Rate. Bitcoin holdings for this fund will be managed and stored by the crypto exchange Coinbase, an interesting choice considering the SEC’s ongoing lawsuit against Coinbase for operating as an unregistered securities exchange. This choice may be due to Binance’s current legal issues, although that’s speculative.
The Importance of Exchange-Traded Funds (ETFs)
ETFs are among the most significant financial tools for managing investments. Their importance can be summarized in the following key areas:
1.Liquidity:
ETFs are traded on stock exchanges, meaning they can be bought and sold at market prices during trading hours. This liquidity allows investors to quickly enter or exit positions, unlike traditional mutual funds, priced only once at the end of the trading day. Trading ETFs at any time increases market flexibility and enhances returns.
2.Capital and Liquidity Supply:
Profitability, liquidity, and the dynamic performance of institutions or companies depend on the availability of capital. Often, precious assets or companies fail to grow due to a lack of liquidity or capital. ETFs aggregate assets, providing sufficient capital and liquidity to foster growth.
3.Transparency:
ETFs must disclose their holdings daily, allowing investors to know exactly what assets the funds hold and in what proportions. This transparency enables investors to make informed decisions and better understand the risks and potential returns associated with the ETF.
4.Cost Efficiency:
ETFs are generally considered cost-effective investment tools. They usually have lower expense ratios compared to actively managed mutual funds because they track the performance of specific indices or assets rather than relying on active management. This reduction in costs could lead to higher returns.
5.Accessibility:
ETFs offer access to many investment opportunities, many of which were previously only available to large institutional investors. With ETFs, individual investors can benefit from the returns of various markets without purchasing separate securities or capital assets.
6.Flexibility:
ETFs allow investors to choose investment strategies or modify them as needed. Investors can easily plan for long-term investments or short-term trading, giving them more control over their investment approaches.
Major Bitcoin ETF Applications to Date
Several companies and organizations have submitted applications to the U.S. Securities and Exchange Commission (SEC) to approve Bitcoin ETFs. Here’s a list of some notable Bitcoin ETF applications:
Winklevoss Bitcoin Trust:
The well-known crypto twins Tyler and Cameron Winklevoss were among the first to submit a Bitcoin ETF application in 2013 through their company, Winklevoss Bitcoin Trust. The SEC officially rejected their application in 2017 after several years of deliberation.
VanEck SolidX Bitcoin Trust:
In mid-2018, VanEck and SolidX jointly applied for a Bitcoin ETF. However, due to government shutdowns and regulatory concerns, they withdrew their proposal in 2019.
Bitwise Asset Management:
Bitwise applied in early 2019, but after multiple delays, the SEC rejected it later that year. Bitwise continues to engage with regulators and obtained a similar approval in 2020, though not for an ETF in the strictest sense.
Wilshire Phoenix:
Wilshire Phoenix submitted their application in 2019, but the SEC rejected their proposal in February 2020.
Kryptoin Investment Advisors:
Kryptoin applied for a Bitcoin ETF in May 2019, but their application was rejected at the end of 2021. They are now working on an Ethereum ETF.
Valkyrie Digital Assets:
Valkyrie submitted a Bitcoin ETF application in January 2021, aiming for a New York Stock Exchange listing. However, the SEC rejected their request by the end of 2021.
SkyBridge Capital:
SkyBridge Capital submitted an application for a Bitcoin ETF in March 2021 but was unsuccessful.
Fidelity Investments:
Alongside BlackRock, Fidelity submitted a Bitcoin ETF application, which was rejected earlier this year.
Active Bitcoin ETFs
BITO
The first approved ETF, the ProShares Bitcoin Strategy ETF (BITO), was launched by ProShares in October 2021. It quickly amassed over $1 billion in assets. BITO charges a trading fee of 0.95%, making it more affordable than other options for investors. However, BITO does not directly buy Bitcoin; instead, it holds Bitcoin futures contracts, meaning its price differs from Bitcoin’s spot price. While many in the crypto community do not consider BITO a “true” Bitcoin ETF, ProShares has reserved the right to buy shares in foreign ETFs and other investment tools that hold Bitcoin directly.
BITW
Bitwise, launched in 2017, is the first digital currency index fund, holding 10 popular cryptocurrencies. All assets in BITW are stored in cold storage. Although it operates similarly to an ETF, it lacks the full features of one. BITW charges a 2.5% fee.
BTCE
The BTCetc Physical Bitcoin ETC is an open-ended investment fund. Thanks to German regulations, this is considered a true European Bitcoin ETF. Currently, BTCE operates with a 2% fee and manages over $1 billion in assets.
CXBTF
Launched by the European company Bitcoin Tracker One, this fund trades on Sweden’s over-the-counter markets. It started on the Nasdaq Stockholm in 2015.
BTCC
A true Bitcoin ETF operating on the Toronto Stock Exchange, Purpose Investment launched BTCC in March 2021 with $500 million in assets and a 1% fee.
EBIT
The second Canadian Bitcoin ETF, EBIT, was launched shortly after BTCC on the Toronto Stock Exchange by Evolve. During its first week, EBIT reduced its fee from 1% to 0.75% to compete with BTCC.
BTCX
The third Canadian Bitcoin ETF, launched by CI Galaxy, BTCX, set its fee at 0.40%, lower than its competitors.
Why Are Major Investment Firms Pursuing Bitcoin ETFs?
A Bitcoin ETF could be an excellent benchmark for valuing Bitcoin because it links Bitcoin to one of the most important traditional financial tools—stock market indices. When individuals and institutions begin trading Bitcoin ETFs, they benefit from a diversified portfolio while enjoying the advantages of Bitcoin as a decentralized and innovative asset. Additionally, trading Bitcoin within the framework of an ETF significantly reduces the risks associated with cryptocurrencies, offering a tested and logical solution for managing investment portfolios. In other words, the risks attributed to Bitcoin are controlled through its index-related behavior.
Moreover, launching a Bitcoin ETF on stock exchanges like Nasdaq would signal significant regulatory progress. One of the primary challenges facing cryptocurrencies is regulation. By bringing Bitcoin into regulated financial markets, both the traditional and modern worlds would become more aligned, allowing cryptocurrency transactions to fall under existing regulations with minimal additional legal burdens.
Bitcoin has recently faced challenges such as Binance ending fee-free trading, U.S. and European government investigations into cryptocurrencies, and new restrictive financial regulations. These factors have reduced liquidity and investment activity in the Bitcoin market, leading to significant price fluctuations and liquidity problems. A Bitcoin ETF could resolve these issues by injecting liquidity and restoring confidence in the market.
This explains why financial giants like BlackRock seek approval from the SEC for Bitcoin ETFs. BlackRock, the world’s largest investment and asset management firm, understands that the future of the financial industry is tied to blockchain and cryptocurrencies, especially Bitcoin. By being the first to connect blockchain with traditional markets, these firms will profit and gain a competitive edge, controlling market liquidity and influencing regulatory decisions.
An important historical example highlighting the potential of Bitcoin ETFs is the introduction of gold ETFs in the early 21st century. These funds provided the gold market with the necessary capital and liquidity, leading to significant growth that affected global finance. Bitcoin, often regarded as the “gold” of cryptocurrencies, is expected to have a similarly transformative impact on the worldwide economy soon.
Grayscale Trust
Grayscale Investments was founded in 2013. The company has consistently aimed to be a leader in digital asset management. Grayscale provides public avenues for institutional and individual investors in the cryptocurrency market, primarily focusing its expertise and resources on Bitcoin and Ethereum, followed by other leading cryptocurrencies.
What distinguishes Grayscale is its innovative range of investment products, including the Grayscale Bitcoin Trust (GBTC) and the Grayscale Ethereum Trust (ETHE). Such trusts allow investors—especially those unfamiliar with this domain—to benefit from cryptocurrencies through accounts at traditional brokerage firms.
Grayscale’s commitment to transparency and regulatory compliance has earned it a reputation for reliability. As the growth and adoption of cryptocurrencies continue, such companies will play a crucial role in facilitating institutional and retail investments, solidifying their position as key players in the evolving financial technology landscape.
The Bitcoin Trust, symbolized as GBTC, was launched at the same time the company started its investment activities and has obtained all necessary approvals from regulatory bodies in the United States, including the SEC. GBTC is considered a public investment vehicle designed for traders and enthusiasts of Bitcoin without the need for direct ownership and management of digital assets. This trust operates like traditional public funds; its shares are available for purchase in a typical over-the-counter market (usually the OTC market). Each share of GBTC represents a specific amount of Bitcoin, making it a suitable option for investors looking to incorporate cryptocurrencies into their portfolios.
Grayscale’s fund operates by securely holding Bitcoin in a protected environment on behalf of its investors. This trust’s share price closely correlates with the actual price of Bitcoin, exposing blockchain participants to changes in the price of this digital currency.
One of GBTC’s advantages is that it provides a familiar investment structure for traditional investors, automatically applying standard auditing and trading regulations to Bitcoin. As a result, it can be held in brokerage accounts, tax-advantaged retirement accounts, and other standard investment vehicles. This makes it a very efficient solution for many investors who are uncomfortable with matters such as managing private keys or trading on cryptocurrency exchanges.
As the growth and adoption of cryptocurrencies continue, Grayscale’s role in facilitating institutional and retail investments will be central, cementing its position as a key player in the evolving financial technology landscape.
Such a trust can be considered a vital link between traditional finance and the world of cryptocurrencies. Trusts offer advantages and features such as accessibility, liquidity provision, high liquidity potential, and oversight and regulation. However, investors must carefully consider factors such as premiums, management fees, and tax implications when deciding whether GBTC aligns with their investment goals. As cryptocurrency markets evolve, GBTC may remain important in integrating digital assets into the broader financial ecosystem.
It is important to note that Grayscale’s Bitcoin Trust is like other trusts, meaning that if the fund collapses, the assets will also be lost, and a significant risk is involved—something that does not apply to ETF funds. Additionally, this trust does not offer physical support or Bitcoin delivery. Under these conditions, investors can purchase from this fund through periodic private buying positions, paying a 20% premium plus a 2% commission.
On August 4, 2021, Grayscale announced its intention to convert GBTC into an ETF; however, the SEC has shown significant resistance to this request and has even been slow to respond negatively. Nevertheless, Grayscale has not backed down and submitted a strong and well-documented petition for appeal to the District Court of Columbia in Washington, D.C. In mid-September of this year, three appellate judges ruled that the SEC had mistakenly rejected Grayscale’s proposed Bitcoin ETF without providing sufficient and reviewable explanations and reasons. Therefore, Grayscale—and BlackRock as well—are pressuring the SEC to re-examine their request. Fragmentary news also indicates that the SEC chair is in a rush to provide a quick response to these requests. Hence, there is a high likelihood that at least a response will be given, containing specific reasons for rejecting the request and necessary conditions for obtaining approval.
Grayscale and BlackRock are pressuring the SEC to reconsider their request for establishing a Bitcoin ETF.
Importance of Trust Funds
Trusts are important financial instruments for several reasons, offering many benefits. Here are a few key points highlighting their significance.
First: Asset Protection
Creditor Protection: Certain trusts, such as irrevocable trusts, can protect assets from creditors, legal claims, and bankruptcy proceedings, providing a level of financial security.
Second: Wealth Preservation
- Tax Efficiency: The structure of trust funds can be designed to minimize estate taxes and capital gains taxes.
- Control over Distribution: Trusts allow grantors to specify how and when assets are distributed among beneficiaries.
- Professional Management: These funds are typically entrusted to professional fiduciaries who specialize in investment management, asset protection, and financial planning.
Third: Special Needs Planning
Trusts can be established to provide for individuals with special needs, such as the disabled, without jeopardizing their eligibility for other benefits and assistance.
Fourth: Privacy
Trust funds can keep the names of holders and owners confidential, which is important in certain investment forms and reduces the potential for fraud.
Fifth: Business Succession and Transfer
Trusts can facilitate the smooth transfer of businesses from one generation to another or from one entity to another, acting as a safeguard against conflicts, disputes, legal issues, and similar concerns and ensuring the company’s continuity.
What is the Difference Between a Trust and an ETF?
These two types of funds are investment vehicles used to gain exposure to various assets, but they have distinct differences in structure, management, auditing, and regulatory rules. Here are some key differences between exchange-traded funds (ETFs) and trusts.
Structure:
ETFs are investment funds that hold assets such as stocks, bonds, or commodities designed to track the performance of a specific index. ETF shares are traded on stock exchanges during trading hours, just like regular stocks.
Trusts (such as GBTC) are typically designed to hold a specific asset (in this case, Bitcoin). Investors purchase shares or units in the trust, and these shares represent ownership of a portion of the underlying asset. Trust shares may not be traded continuously on stock exchanges.
Assets:
ETFs can encompass a wide range of underlying assets, including stocks, bonds, commodities, real estate, and more, and can create indices for measurement.
Trusts are often used for investments in cryptocurrencies, real estate, and precious metals. They typically hold specific assets such as Bitcoin, Ethereum, or gold.
Creation and Redemption:
In ETFs, authorized participants, usually large financial institutions, can create or redeem fund shares in large blocks. This mechanism and flexibility help maintain the ETF’s share price relative to its net asset value (NAV).
Trusts usually do not have a creation or redemption mechanism. As a result, their share price may fluctuate independently of the NAV, leading to premiums or fee volatility.
Regulations:
ETFs are subject to regulations governing securities markets and must adhere to requirements such as daily reporting, transparency, and specific disclosures.
Trusts, depending on their structure and jurisdiction, may have different frameworks. For example, some trusts may manage assets offshore and are not subject to state, federal, or national regulators.
Taxation:
ETFs often have favorable and flexible tax treatment, such as the ability to defer capital gains taxes when selling shares.
The tax treatment of trusts can vary based on the held asset and jurisdiction, making it essential to consider tax implications when investing in a trust. For example, redeeming an offshore trust may result in significant tax liability, but remaining invested may allow for reduced tax exposure.
While ETFs and trusts provide investment opportunities, their structures and underlying assets differ significantly. ETFs are multi-asset investment tools encompassing various asset classes; they trade throughout the day and generally have a creation and redemption process. In contrast, trusts are often used for specific assets, may have more limited trading hours, and do not share the same creation and redemption mechanisms. Understanding these differences is crucial when selecting appropriate investment tools for various financial objectives.
Final Thoughts
This article aims to discuss Bitcoin exchange-traded funds and briefly cover their nuances. Despite the strong opposition and resistance from entities like the SEC, market participants have sought to carve their paths, with giants like BlackRock also stepping in to remain competitive. Given various companies’ legal battles and efforts, arbitration bodies are increasingly ruling in favor of companies operating in the cryptocurrency space. This trend could herald a path for cryptocurrencies into legal arenas. If Bitcoin ETFs can commence operations legally, we should expect a further boom in the Bitcoin and other cryptocurrency markets; this signals the unstoppable nature of the blockchain world and the decentralized, cryptocurrency-based future of the financial industry.
