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5th April 2022 > > Spot BTC ETF in the US.


Spot based BTC ETFs in the US – and it is not all good news.

Market Snap (at time of writing)

Market Wrap

Not a lot to see to be honest.

Curious Cryptos’ Commentary – Spot BTC exchange traded fund (ETF) in the US

Many countries around the world have approved spot BTC ETFs for retail and institutional clients, notably Canada but also Germany, Singapore, and Mexico amongst others, if my memory serves me right.

Last year several futures based BTC ETFs were approved in the US, but that is an entirely different beast. Previous editions of the CCC have spelt out in detail the reasons why a futures ETF is likely to have a significantly worse performance than a spot ETF (see CCC 24th October 2021 amongst others) but the single biggest problem is contango and quarterly roll.

Prior to the introduction of a futures ETF the underperformance of a hypothetical futures ETF was of the order of 28% compared to spot. This performance is degraded even further by the introduction of such futures ETFs as they provide an ongoing bid not just to the next roll, but ones further out too, hence exacerbating contango all along the maturity curve.

Even if BTC markets occasionally went into backwardation (an extremely unlikely scenario in my view) that could never make up the performance difference.

You will also recall that the introduction of the very first futures based BTC ETF by ProShares kicked off the last leg of the rally to an all-time high of $69k on 9th November 2021.

I believe I made a comment at the time that this price exuberance because of the futures ETF was overdone.

You can just imagine the price enthusiasm with which a spot based BTC ETF will be met.

And in that situation the response will be entirely justified.

Gary Gensler, Chair of the SEC, has continually rejected all applications for a spot ETF. At some point, that stance must change. It might be wise to recognise that change upfront rather than after the event.

One of the straws in the wind pointing to the potential approval of a spot based BTC ETF has been identified by James Seyffart, a senior analyst at Bloomberg Intelligence.

On January 26th 2022, the SEC suggested a change to its own definition of an exchange.

This amendment sought to include “Communication Protocol Systems that make available for trading any type of security” which on the face of it appears to be designed to include centralised crypto exchanges such at Coinbase and Binance.

You may be wondering why this wording change has such significance.

The answer lies both in the reasons expressed by the SEC for the approval of a futures ETF and rejection of a spot ETF.

In the former case, the SEC pointed to the controls and regulations over BTC futures exchanges, primarily the Commodities Futures Trading Commission. In Gary’s eyes – and he is far more qualified to comment than I – this significantly reduces the possibilities for market manipulation.

In contrast, the SEC pointed out that the spot market for BTC – conducted as it is on largely unregulated exchanges – is susceptible to market manipulation.

It is a strong argument, especially if one is a regulator and/or lawmaker who is primarily concerned with a bit of arse bottom-covering if things go tits-up awry.

To spice things up a little, Gary made some prepared remarks just yesterday for the Penn Law Capital Markets Association Annual Conference.

He highlighted the fact that SEC staff are actively working on the framework for getting centralised crypto exchanges registered:

“Crypto may offer new ways for entrepreneurs to raise capital and for investors to trade, but we still need investor and market protection. We already have robust ways to protect investors trading on platforms. And we have robust ways to protect investors when entrepreneurs want to raise money from the public. We ought to apply these same protections in the crypto markets.”

And the clincher is this:

"There’s no reason to treat the crypto market differently just because different technology is used."

As always, the bureaucratic wheels turn oh so very slowly.

The amendment to the definition of an exchange is expected to be approved after November 2022.

At that point, centralised exchanges that provide on-ramp for fiat into the crypto world will have to be compliant with SEC rules.

Once exchanges are compliant the SEC will have no choice but to approve a spot based ETF for BTC in the US.

I think the conclusion is a simple one.

The road to approval of a spot based BTC ETF in the US has been clearly signposted. The direction of travel towards one of the most significant developments for institutional and retail adoption of cryptos is transparent.

But this is not going to happen in 2022, a very disappointing outcome for all of us.

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