What will a Bitcoin spot ETF bring?

Source: Guosheng Securities Research Institute

Abstract

Bitcoin Spot ETF Bitcoin spot is the underlying asset and is a compliant investment tool for traditional capital market investors to hold Bitcoin. Whether spot ETFs can be approved in the United States is the focus of the market's greatest attention. Bitcoin ETFs allow investors to gain exposure to Bitcoin and related assets without having to research, purchase, or store the actual cryptocurrency (or derivative assets), making them ideal for compliance, fees, liquidity, and management costs. The broader capital markets and investors. Therefore, the market has been looking forward to the U.S. SEC’s approval of a Bitcoin spot ETF as soon as possible.

Severe price fluctuations are one of the reasons why the SEC is cautious. The deadline for the latest batch of spot ETF applications is March next year. In the past, Bitcoin spot ETFs submitted by the U.S. capital market have been rejected by the SEC many times, mainly because of insufficient investor protection in the Bitcoin market. On October 16, industry media Cointelegraph published false news on Situations like this are not uncommon in the cryptocurrency market, so the SEC’s concerns are not entirely unfounded. The U.S. SEC has successively postponed its decision on the Bitcoin spot ETF applications of WisdomTree, Invesco, Galaxy, Valkyrie, Fidelity, VanEck, Bitwise and BlackRock. The latest review time for the current 11 major Bitcoin spot ETF applications will be concentrated to mid-October, with a final deadline of March 2024. It can be said that applications for Bitcoin spot ETFs in the US market have entered a peak period, and the Bitcoin halving is expected to be around the end of April 2024. Therefore, whether the spot EFT is approved this time has become the focus of the industry.

With reference to the promotion of gold prices by the launch of gold ETF, the Bitcoin spot ETF is worth looking forward to. The launch of gold ETFs has a positive boost to gold prices, which has positive implications for Bitcoin spot ETFs. It should be noted that the world’s recognition of gold is not generated by spot ETFs. If the Bitcoin spot ETF is approved, it means that the huge traditional wealth world recognizes Bitcoin and even the Web3.0 world, which will further accelerate the two. fusion of those. This is a process from 0 to 1, and the marginal change is far beyond the approval of gold ETF. Of course, another difference is that the total number of Bitcoins is fixed at 21 million, while gold still has continuous new output. The Bitcoin spot ETF was approved in the United States, which is expected to bring incremental funds. Galaxy Digital’s calculations concluded that Bitcoin is expected to rise by 74% in the first year after the spot ETF is approved (taking the Bitcoin price of US$26,920 on September 30, 2023 as a starting point); in the longer term, investing in Bitcoin products The potential funding size is between US$125 billion and US$450 billion.

The information, fundamentals and financial aspects are expected to "resonate" next year. Looking at the three rounds of bull-bear transitions since the birth of Bitcoin, the Bitcoin halving has always been at the starting point of the upward trend. This is an "experience benefit" at the information level, and each round of the market is preceded by a round of industry innovation applications. As fundamental support, of course, the injection of incremental funds is the basis for the upward trend to start. Looking at the current situation: Information: It is expected to usher in the fourth halving at the end of April 2024; Fundamentals: RWA/intent and other innovations drive the birth of new industry applications, and new application innovations are accumulating; Funding: If Bitcoin The approval of spot ETFs will bring huge incremental funds.

Investment advice: It is recommended to pay attention to computing power mining stocks BTBT/DGHI/IREN/RIOT/MARA/BITF/CSLK/HIVE/WULF/BTCM/ARBK/BTOG /MIGI/BTDR, mining machine manufacturer CAN, cryptocurrency exchange Coinbase (COIN), 0863.HK; Tun currency stock MSTR, etc.

Risk warning: The development of the blockchain business model is less than expected; the uncertainty of regulatory policies.

1. Core point of view

Bitcoin spot ETF uses Bitcoin spot as the underlying asset and is a compliant investment tool for traditional capital market investors to hold Bitcoin. Bitcoin spot ETFs have been repeatedly rejected in the U.S. market over the past decade, but with the growth of the cryptocurrency market and the increasing recognition of crypto assets in traditional capital markets. Although there are already Bitcoin spot ETFs in other countries' markets and some Bitcoin futures ETF products in the U.S. market, whether spot ETFs can be approved in the U.S. is still the focus of the market's greatest attention.

Looking at the three rounds of bull-bear transitions since the birth of Bitcoin, the Bitcoin halving has always been in the starting point of the upward trend. This is an "experience benefit" at the information level, and every round of market trends There are innovative applications in the industry as fundamental support. Of course, the injection of incremental funds is the basis for the upward market to start. Judging from the current situation, information is expected to usher in the fourth halving at the end of April 2024; in terms of fundamentals, RWA/intent and other innovations drive the birth of new industry applications, and new application innovations are accumulating; in terms of funds, if Bitcoin The approval of currency spot ETF will bring huge incremental funds.

2. Bitcoin spot ETF applications enter peak period

2.1. Why is Bitcoin spot ETF important< /strong>

Bitcoin Spot ETFUsing Bitcoin spot as the underlying asset, it is a compliant investment tool for traditional capital market investors to hold Bitcoin. Bitcoin spot ETF is an exchange-traded fund with Bitcoin as the underlying asset and an index fund. Bitcoin ETFs allow investors to gain exposure to Bitcoin and related assets without having to research, purchase, or store the actual cryptocurrency (or derivative assets), making them ideal for compliance, fees, liquidity, and management costs. The broader capital markets and investors.

In comparison, the underlying asset of Bitcoin futures ETF is Bitcoin futures contract. The core difference between Bitcoin futures ETF and spot ETF is the underlying asset. From the perspective of price fluctuations, spot ETFs and futures ETFs are very similar, and both aim to accurately track BTC prices and help investors gain BTC exposure; usually futures ETFs have higher fees because they also involve futures contract operations, which are more complex. Therefore, the market has been looking forward to the U.S. SEC’s approval of a Bitcoin spot ETF as soon as possible.

According to coinglass data, as of November 5, the Bitcoin balance in the wallets of 20 mainstream cryptocurrency exchanges was 1.835 million, and 40 listed companies held a total of approximately 208,000 Bitcoins; According to Galaxy Digital's calculations, as of September 30, Bitcoin investment products (also including ETPs and closed-end funds) held a total of 842,000 Bitcoins - if based on the Coinbase (COIN) trading platform Bitcoin on November 5 Calculated at a price of US$35,200, the total value of these Bitcoins is approximately US$29.6 billion.

Existing Bitcoin investment products suffer from high fees, low liquidity and Tracking error and other issues, and more importantly, these products also have compliance and convenience issues for traditional investor groups with stronger funds, not to mention that personally managing Bitcoin also involves wallet/private issues such as administrative burdens such as key management, self-custody and tax filing. Therefore, Bitcoin spot ETF will be a more ideal investment tool.

2.2. The bumpy road of Bitcoin ETF application

The BTC spot ETF can be traced back to 2013 when the Winklevoss twin brothers (Cameron and Tyler) tried to launch a BTC spot ETF. They applied several times over the years, but were unsuccessful. The plan is still there today. Stranded. At that time, in 2013, Bitcoin reached the peak of the first bull market, with a price of US$1,163. As of November 5 this year, the price of Bitcoin has exceeded US$35,000. The attraction brought by rising prices is the most direct factor in the capital market’s attention to Bitcoin spot ETFs. Therefore, many institutions subsequently tried to launch Bitcoin spot ETFs.

In the past, Bitcoin spot ETFs submitted by the U.S. capital market have been rejected by the SEC many times. , the main reason is insufficient investor protection in the Bitcoin market. On October 16, local time, industry media Cointelegraph published news on It subsequently fell back to around $27,900 after an adjustment after the news was confirmed to be false, causing nearly $100 million worth of cryptocurrency positions to be liquidated in less than an hour. Situations like this are not uncommon in the cryptocurrency market, so the SEC’s concerns are not entirely unfounded.

The U.S. Securities and Exchange Commission (SEC) has successively postponed its investigations into WisdomTree, Invesco Galaxy, The Bitcoin spot ETF applications of Valkyrie, Fidelity, VanEck, Bitwise and BlackRock have made decisions. The latest review time for the current 11 major Bitcoin spot ETF applications will be concentrated until mid-October, with the final deadline in March 2024. . It can be said that applications for Bitcoin spot ETFs in the US market have entered a peak period, and the Bitcoin halving is expected to be at the end of April 2024. Therefore, whether the spot EFT is approved this time has become the focus of the industry. Compared with ten years ago, this batch of Bitcoin spot ETF application institutions has included traditional mainstream financial investment institutions such as BlackRock. In other words, it has become a trend for traditional financial institutions to enter the Bitcoin spot ETF. If approved, they will enter Cryptocurrency investment funds are expected to be dominated by traditional financial capital, which is different from the past.

2.3.  Grayscale’s victory in the SEC incident brought new benefits to the market Confidence

Prior to the approval of the Bitcoin spot ETF, Grayscale’s Bitcoin and other cryptocurrency trusts were an alternative to traditional financial markets for investing in cryptocurrency assets. As of November 4, Grayscale has launched a variety of cryptocurrency trusts including BTC, ETH, cryptocurrency market index, etc.

For products like GTBC, investors can directly purchase and trade in the secondary market GTBC shares, but as a closed fund, there are currently no clear redemption rules. For a long period of time, GTBC has maintained a negative premium. To solve the liquidity problem, Grayscale tried to convert GBTC into an ETF. On June 29, 2022, the SEC rejected Grayscale’s application to convert its Bitcoin Trust (GTBC, Grayscale Bitcoin Trust) into an ETF. After Grayscale appealed, on October 23, 2023, the Washington, D.C. Circuit Court of Appeals made a decision issued a final ruling, ordering the SEC to cancel the decision to reject Grayscale’s Bitcoin spot ETF application, arguing that the SEC’s decision to reject Grayscale’s attempt to convert its Grayscale Bitcoin Trust (GBTC) worth approximately $17 billion into a spot ETF was “arbitrary and capricious". This means that the SEC must re-accept Grayscale’s application to convert GBTC into a spot ETF. Of course, the result may still be rejected, but the SEC must give new persuasive reasons. In order to show the importance of ETFs to Grayscale, Grayscale specially opened a litigation page section on its official website to display its litigation with the SEC in the form of a timeline. This also reflects Grayscale’s persistence and determination in the Bitcoin spot ETF. .

Although Grayscale wins the lawsuit, it does not mean that GBTC will be freely converted into ETF immediately. However, the market believes that the Bitcoin spot ETF is getting closer, and this victory has injected great confidence into the market. Affected by this series of news, as of November 4, the negative premium rate of Grayscale Bitcoin Trust continued to narrow to 12.77%.

Grayscale’s victory shows that the launch of a Bitcoin spot ETF is not legal at all This "faulty injury" has brought great confidence to the market. Therefore, applications for Bitcoin spot ETFs have entered the peak period, and the market's expectations for this have also shown considerable enthusiasm.

3. What is the existing Bitcoin ETF market like?

3.1． The situation of Bitcoin spot ETF

Although the application for Bitcoin spot ETF in the U.S. market is not smooth, in fact, several other countries’ capital markets have approved Bitcoin spot ETF before the United States. Among them, the top-ranked Bitcoin spot ETFs include:

• Purpose Bitcoin ETF (BTCC) was launched in February 2021. The ETF was launched in Toronto Trading on the TSX has always been very popular;

• 3 iQ CoinShares Bitcoin ETF (BTCQ) is another Bitcoin spot ETF trading on the TSX;

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•  QBTC 11 by QR Asset Management (QBTC 11) is Latin America’s first Bitcoin ETF, launched on the Brazilian Stock Exchange (BVMF) in June 2021. As of November 4, 2023, the QBTC 11 ETF held 727 Bitcoins.

These Bitcoin ETFs could be a good Gain exposure to Bitcoin by following the performance of Bitcoin spot prices and thus owning ETFs that successfully demonstrate strong investor demand. Based on the Bitcoin price of US$35,200 on the Coinbase (COIN) trading platform on November 5, Bitcoin has a market value of approximately US$700 billion. Compared with this, the size of ETFs undoubtedly has a lot of room for growth. Although Bitcoin ETFs can already be traded in countries or regions such as Canada, Brazil, and Europe, spot Bitcoin ETFs in the U.S. market still face regulatory obstacles and are the most anticipated products in the market.

3.2． Bitcoin futures ETF has already taken the lead

As Bitcoin leads the growth of the cryptocurrency market, crypto assets have gradually entered the vision of traditional financial investment institutions. On December 18, 2017, the Chicago Mercantile Exchange (CME), one of the world’s largest futures exchanges, launched Bitcoin futures contracts, and just 8 days ago (December 10, 2017), the Chicago Board Options Exchange (CBOE) )’s online Bitcoin futures contract became the world’s first (traditional financial market) Bitcoin futures contract.

Although there is currently no Bitcoin spot ETF listed in the United States, there are already some Bitcoin futures ETFs listed in the United States. As of November 4, the total assets under management of the five major Bitcoin futures ETFs, BITO, XBTF, BTF, BITS and DEFI, have reached US$1.19 billion. Among them, BITO, officially issued by ProShares in October 2021, is the largest futures ETF within the statistical scope, with total assets reaching US$1.08 billion. Secondly, the total size of XBTF and BTF issued by VanEck and Valkyrie are US$58.66 million and US$31.94 million respectively.

The underlying assets tracked by these Bitcoin futures ETFs are usually traded on the Chicago Mercantile Exchange (Chicago Mercantile Exchange, CME) Bitcoin futures contracts. Among them, BITO, the largest, is the only futures ETF that is fully allocated with CME futures contracts and implements the strategy of "rolling" futures contracts. In addition, other futures ETFs allocate a certain proportion of other assets on the basis of CME futures contracts. For example, XBTF and BTF allocate U.S. Treasury bonds, and BITS allocates blockchain ETFs issued by other institutions.

Before the United States approved Bitcoin spot ETF, futures ETF It partially meets the investment needs of some investment institutions for Bitcoin-related assets, but the scale of US$1.19 billion is obviously far from enough to meet the market demand compared to Bitcoin's market value of nearly US$700 billion. That’s why spot ETFs attract so much attention from the market.

4. What will Bitcoin spot ETF bring

After summarizing the experience of the launch of gold ETF, U.S. Global Investors, It is believed that after the launch of the gold spot ETF in 2004, as liquidity and programmatic trading increased, the price of gold rose by 420%. The experience of gold shows that spot ETFs are indeed important, which provides an understanding of the market impact after the launch of the Bitcoin spot ETF. Empirical reference and inspiration; therefore, it is believed that the launch of Bitcoin spot ETF will also open up space for related sectors to rise.

It should be noted that the world’s recognition of gold did not come from spot ETFs. If the Bitcoin spot ETF is approved, it means that the huge traditional wealth world has no interest in Bitcoin and even Web3. .0 world recognition will further accelerate the integration of the two. This is a process from 0 to 1, and the marginal change is far beyond the approval of gold ETF. Of course, another difference is that the total number of Bitcoins is fixed at 21 million, while gold still has continuous new output.

Bitcoin spot ETF is approved in the United States and is expected to bring Certain incremental funds. As of October 2023, the total assets managed by brokers ($27.1 trillion), banks ($11.9 trillion) and registered investment advisers ($9.3 trillion) in the U.S. wealth management market reached a total of $48.3 trillion. GalaxyDigital calculated based on this and concluded that:

• Bitcoin is approved in spot ETFs It is expected to rise by 74% in the first year (taking the Bitcoin price of US$26,920 on September 30, 2023 as a starting point);

• In the longer term, the potential of investing in Bitcoin products The funding size ranges from US$125 billion to US$450 billion.

Looking at the three rounds of bull-bear transitions since the birth of Bitcoin, the halving of Bitcoin is always in the starting area where the market turns upward. This is the information "Experiential benefits" at the level of the market, and each round of market trends is preceded by a round of industry innovative applications (respectively, the emergence of competing Bitcoin products, preliminary exploration of industry applications driven by Ethereum smart contracts, innovations brought about by innovative applications such as DeFi/Metaverse) ) as fundamental support, of course, the injection of incremental funds is the basis for the upward market to start. Judging from the current situation:

• Information: It is expected that the fourth halving will be ushered in at the end of April 2024 ;

• Fundamentals: RWA/intent and other innovations drive the birth of new industry applications, and new application innovations are accumulating;

• Funding: If the Bitcoin spot ETF is approved, it will bring huge incremental funds

Therefore, we believe that standing in the three-party driving model From a perspective, if the Bitcoin spot ETF is approved, it is expected to bring positive factors to the market.

As the SEC’s final approval deadline approaches, the market is paying more attention to the results of this approval and the specific opinions on the approval. According to a Fox Business reporter, the SEC put forward new conditions for ETF approval of spot Bitcoin during a meeting with ETF applicants, including requiring the ETF to be created using cash. This means that Bitcoin spot ETFs continue to advance in the U.S. capital market, which is the most concerning issue in the cryptocurrency market.

Investment advice: Pay attention to cryptocurrency-related sectors

We believe that if the Bitcoin spot ETF is approved, its significance will not only bring benefits to Bitcoin investment Instead of traditional financial capital, it promotes traditional financial capital to enter the entire cryptocurrency market and even the Web3.0 world. Therefore, it is recommended to pay attention to listed companies related to cryptocurrency and Web3.0.

There are currently four main categories of relevant listed companies:

1) Computing power mining stocks: carrying out Bitcoin mining business by holding/managing computing power;