Spot Bitcoin ETF Approval: Investor Anticipation, Challenges, and Potential Safeguards
Summary:
This article discusses the anticipation surrounding the potential approval of a spot Bitcoin exchange-traded fund (ETF) by the U.S Securities and Exchange Commission (SEC). The ETF proposal raised by investment giant BlackRock and Grayscale's proposal to convert its Bitcoin Trust into a spot ETF have intensified the industry's focus. However, ETFs face challenges due to Bitcoin trading on unregulated platforms globally. The article suggests utilizing spot prices derived from futures curves for price calculation and cash-based creation and redemption as an effective shield against manipulation. It concludes by emphasizing the importance of careful detailing and safeguards for a Bitcoin ETF to offer promising potential for investors.
Anticipation is mounting among potential traders for the validation of a spot Bitcoin exchange-traded fund (ETF) by the U.S Securities and Exchange Commission (SEC). The buzz was stirred up early in June when BlackRock, a leading investment conglomerate, filed a request for the product. The momentum was further boosted following a court ruling instructing the SEC to revisit its decision to dismiss Grayscale's proposition to convert its Bitcoin Trust (GBTC) into a spot ETF. The SEC has shown reluctance towards ETFs due to the trading of Bitcoin (BTC) in global unregulated platforms, creating difficulties in controlling fraud and unusual price fluctuations.
In an effort to mediate, surveillance-sharing agreements (SSAs) have been proposed with several crypto exchanges. Ideally, under this setup, misconduct by market manipulators could be tracked. However, skeptics argue the SSAs are not comprehensive enough to cover every facet of the market. ETFs are developed based on previous rulings that permitted spot commodity ETFs, informed by the significance of the underlying commodity futures markets.
Presently, the SEC stipulates that the future prices should guide the spot price for a market to qualify as a "regulated market of significant size". This stipulation emphasizes the primacy of data from the future market over the spot market in determining prices. Even so, market manipulation in spot markets could still corrupt the ETF. This is particularly relevant when the net asset value (NAV) calculation is factored in and the method of creation and redemption (whether cash or kind) is factored in.
Take for example a scenario where a malfeasance manages to decrease the price of the underlying commodity by 5% in unregulated spot markets. If creations and redemptions are in-kind, there is an accessible arbitrage situation that acts like a conduit between the ETF and unregulated spot markets. In this situation, the arbitrageur can exploit the discrepancy by purchasing the undervalued spot commodity and selling an equivalent amount of the ETF. Following this, the bought commodity can be utilised to create new ETF units and make up for the short ETF position. The gain from this trade will continue until there is meaningful convergence of the spot commodity price with the equivalent ETF amount.
Establishing a foolproof system to protect the ETF from manipulation is complex. Using spot prices derived from futures curves for NAV calculation, supplemented with cash creation and redemption, could possibly offer the maximum protection. This setup could foster a clear arbitrage route between the ETF and futures, offering a robust bridge between the ETF and the futures market. Based on the emerging evidence from academics and industry experts, it can be believed that a US Bitcoin ETF would represent a positive development for both conventional markets and the crypto industry. With careful detailing and proper protections, a Bitcoin ETF could provide immense potential for investors.
João Marco Braga da Cunha, a portfolio manager at Hashdex oversees these developments. He holds a master of science in economics from Fundação Getulio Vargas and a doctorate in Electrical and Electronics Engineering from the Pontifical Catholic University of Rio de Janeiro. His thoughts should not be considered as legal or investment advice.
Published At
11/30/2023 12:04:48 AM
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