Spot Bitcoin ETF Challenges
The impending launch of spot Bitcoin exchange-traded funds (ETFs) in the U.S. holds the potential to introduce two significant challenges, highlighted by Coinbase researchers in a recent podcast.
Insights from Coinbase Researchers
According to Coinbase’s David Duong, head of institutional cryptocurrency research, in his 2024 cryptocurrency market forecast report, cryptocurrency market capitalization has more than doubled this year, signaling the end of the “crypto winter.” He believes the industry needs to focus on building a reliable and innovative cryptocurrency ecosystem.
Duong predicts institutional investors will continue focusing on BTC in early 2024. He also anticipates that BTC may outperform traditional asset classes. Duong highlights the two potential impacts of a BTC spot ETF approval in the U.S., which could lead to significant market changes by lowering the investment threshold and attracting more institutional investors as cryptocurrency regulations evolve.
No Risk, No Gain!
The first concern centers around a potential shortage of “regulated” Bitcoin supply needed to support the ETFs. Institutions responsible for the ETFs may face difficulties acquiring enough Bitcoin from regulated sources due to overwhelming demand, raising questions about their ability to meet the necessary Bitcoin requirements.
Sutton noted the 2nd risk of the “basis trade.”—a prominent institutional trading method. The rise in spot Bitcoin and futures trading volume has increased basis trade profitability to 20% in recent weeks. However, the launch of spot ETFs granting institutional investors direct exposure to Bitcoin may cause the basis to narrow significantly.
SEC’s ETF Prospects and Grayscale’s Move, Full of Surprises?
Presently, 13 applications for spot Bitcoin ETFs are pending with the Securities and Exchange Commission (SEC). Analysts forecast potential approval as early as January 10, with estimations by Bloomberg’s Eric Balchunas and James Seyffart indicating a 90% chance of approval.
On the flip side, Seyffart’s latest update spilled the beans on a Grayscale twist. The crypto giant is rallying for in-kind redemptions, waving them as the better alternative over cash creation. Why? Because it could make life easier and cheaper for ETF issuers.
Hot Take
As the crypto community awaits potential ETF approvals, these highlighted risks could significantly impact Bitcoin markets and institutional trading strategies, prompting a cautious outlook among market participants.
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