Potential Bitcoin ETF Launch Could Stir Up Market, Coinbase Researchers Warn
Summary:
The proposed launch of Bitcoin exchange-traded funds (ETFs) in the U.S. might lead to a shortage of "regulated" Bitcoin and impact a common trading strategy, warn researchers from Coinbase. As approval for spot Bitcoin ETFs could happen within three weeks, the high demand might make it challenging for institutions to acquire enough Bitcoin for their ETFs. The introduction could also affect the "basis trade" strategy, reducing its profitability. Currently, 13 applications for a spot Bitcoin ETF are pending with the SEC, with expectations of approval as early as Jan. 10.
The unveiling of Bitcoin exchange-traded funds (ETFs) in the U.S. might provoke a scarcity of "regulated" Bitcoin (BTC) and have an adverse impact on a widely used trading model, says a study by Coinbase. Expectations of launching spot Bitcoin ETFs are high and may conceivably occur within the next three weeks. Yet, David Duong, the chief of institutional research at Coinbase, and Greg Sutton, a senior sales trader, warn of two potential threats that might arise following the start of trading. They voiced concerns on a Dec. 19 podcast that the introduction could result in problems for institutions acquiring BTC, specifically the need for issuers to accumulate sufficient Bitcoin to reserve for their ETFs. "Acquiring Bitcoin from certain regulated sources could become a challenge, considering the astounding demand,” they noted.
Crypto-focused enterprise Bitwise has suggested that a spot Bitcoin ETF could be the greatest ETF product launch in history. Nevertheless, it is important to consider the supply risk, Duong asserts, even though it is preferable to have over demand, compared to low inflows. Sutton further specified a second risk relating to the well-known institutional trade strategy called the "basis trade". This involves capitalizing on the disparity between the actual price of Bitcoin and the cost of Bitcoin futures contracts. With recent spikes in the volume of both spot Bitcoin and futures contracts, potential profits from the basis trade have soared up to 20% in the past two weeks, as per data by Velo. However, with more institutional investors obtaining direct Bitcoin exposure through a spot ETF product, the basis is likely to tighten. This will significantly reduce profitability from these trades.
Currently, there are 13 applications for a spot Bitcoin ETF awaiting approval from the Securities and Exchange Commission (SEC). It is generally believed that one or all of these propositions could possibly receive approval as soon as Jan. 10. Bloomberg ETF analysts Eric Balchunas and James Seyffart estimate that there is a 90% chance for approval. Further, on Dec. 21, James Seyffart mentioned in a post that digital asset manager Grayscale had another meeting with the SEC to advocate for in-kind redemptions as an alternative to cash creation. In-kind redemption is usually favored by ETF issuers since it bypasses broker commissions and bid/ask spreads coming from asset sales to collect cash for issuing shares.
Published At
12/21/2023 4:25:53 AM
Disclaimer: Algoine does not endorse any content or product on this page. Readers should conduct their own research before taking any actions related to the asset, company, or any information in this article and assume full responsibility for their decisions. This article should not be considered as investment advice. Our news is prepared with AI support.
Do you suspect this content may be misleading, incomplete, or inappropriate in any way, requiring modification or removal?
We appreciate your report.