- Crypto derivative trader Gordon Grant suggested that one could draw a significant parallel between this and the launch of the first gold ETF to understand its importance.
- Grant stated that as an accredited financial product, a spot Bitcoin ETF would contribute as an investment product for both retail and institutional investors.
- He also proposed that multiple trading layers, including options, futures, and pure volatility trading, could create a complex value chain.
The entire market is debating whether or not spot Bitcoin ETFs will be approved: Why have these ETFs become so crucial for the market?
Implications of Spot Bitcoin ETFs on the Sector
All eyes in the crypto sector are currently focused on the contenders racing to launch the first spot Bitcoin ETF in the U.S. So, why is the creation of such a financial product such a significant event? Here’s what it offers in terms of access and its potential effects.
Crypto derivative trader Gordon Grant suggested that one could draw a significant parallel between this and the launch of the first gold ETF. Following the creation of gold spot ETFs, Grant mentioned that trading volumes on various gold instruments, from ETFs to futures and options, including both OTC and listed, along with associated intermediaries, increased on large scales over the years. Grant added that similar conditions could result for Bitcoin under suitable circumstances.
Alex Thorn, the Firmwide Research Head at Galaxy Digital, speculated on how this could happen. “An ETF can see a minimum of $14.4 billion of inflow within its first year and can increase it to $38.6 billion by the third year. At these levels, we may see BTC/USD appreciate by 75% in the year following approvals,” he said.
Creating an Entire Value Chain
Grant argued that as an accredited financial product, a spot Bitcoin ETF would contribute as an investment product for both retail and institutional investors. He added, “Traders may not have a view on Bitcoin; they may be indifferent to it, but ETFs and/or inclusion of a physical Bitcoin ETF into an investment strategy will have a view on effective portfolio theory and the implications of these inclusions.”
Moreover, a spot Bitcoin ETF could trigger multi-layered financial activity in the sector. Grant explained that the gold ETF paradigm is valid, and trading can occur not only at the foundational asset level but also in derivative markets that develop on top of it, such as ETF options and futures.
“You’re going to have a new trading layer above the foundational layer, which will probably be options trading on ETFs. Then, a bit more abstractly, that will be the volatility component of the option market that market makers and other participants will need to naturally hedge against, allowing us to trade futures and futures options accordingly,” he said.
Grant suggested that multiple trading layers, including options, futures, and pure volatility trading, could create a complex value chain. “Suddenly, you have four or more layers of this trading dynamic, and an entire value chain is created based on this new product,” he said.
Facilitating Access to Bitcoin
Luke Nolan, Research Partner at CoinShares, said that a spot Bitcoin ETF would simplify institutional investors’ access to Bitcoin. “There won’t be a need for concerns like safeguarding keys or safeguarding a seed phrase, as an institution usually has to incur extra costs in developing an in-house solution to custody their crypto,” he said.
Nolan mentioned that a spot Bitcoin ETF would influence the distribution channels of institutional capital inflow and make it easier for those managing 401(k) retirement plans or investing on behalf of companies to include Bitcoin in their portfolios.
Nolan pointed out that the current method for institutional exposure is through futures ETFs, but approval of a spot ETF could provide lower cost rates to investors as it doesn’t require the rollover of futures contracts.
Nolan stated that the Bitcoin futures market is usually in contango, a condition where futures prices are higher than spot prices, which often results in futures ETFs underperforming compared to Bitcoin. Contango bleed is shown as one of the major reasons for weak performance of futures ETFs in comparison to Bitcoin.
Bitcoin ETFs could have a significant impact on the market, making cryptocurrency more accessible for institutions in the United States. However, the SEC continues to hesitate. Nevertheless, according to Bloomberg analysts, there is a 75% chance of approval this year, and according to JPMorgan analysts, one could come within a few months. Yet, nothing is certain until Form 19b-4 approval is obtained from the SEC.
