Bitcoin Spot ETF

What are the Bitcoin spot funds

Structurally, the currently popular funds related to Bitcoin spot in the market are generally divided into two types: one is the Bitcoin trust funds represented by Grayscale GBTC; the other is the true Bitcoin spot exchange-traded fund (ETF) represented by BlackRock’s application for the iShares Bitcoin Trust.

Both are based on Bitcoin spot and track Bitcoin’s market price. However, GBTC does not have redemption functionality; whereas Bitcoin spot ETFs can redeem Bitcoin spot at any time.

Bitcoin Trust Fund - GBTC The Grayscale Bitcoin Trust (GBTC) developed by Grayscale is theoretically the first compliant Bitcoin spot fund product on the market. It is essentially a trust fund.

In simple terms, GBTC has two subscription methods: physical subscription and cash subscription.

Physical subscription: Investors give Bitcoin to Grayscale in exchange for a certain amount of GBTC. Cash subscription: Investors give cash to Grayscale, which then buys Bitcoin and sends the corresponding amount of GBTC to the investors. After subscribing to GBTC, investors will undergo a 6-month lock-up period, and after unlocking, they are not allowed to redeem Bitcoin from Grayscale. In other words, the redemption mechanism of GBTC is one-way; it can be exchanged out but not back in. It can only be traded on the secondary market.

This means that GBTC is essentially decoupled from Bitcoin; its price mainly depends on trading activity in the secondary market.

When the market is booming, GBTC will have a premium, and its total market value will exceed the value of Bitcoin within the trust. When the market is sluggish, GBTC will have a discount, meaning its market value is below the value of Bitcoin in the trust.

In other words, GBTC’s market value cannot anchor the market value of Bitcoin. Therefore, GBTC cannot be considered a Bitcoin spot ETF, nor is it a “perfect” Bitcoin spot fund product.

Bitcoin Spot ETF A Bitcoin spot ETF is an exchange-traded fund product whose price closely tracks the Bitcoin price index. It tracks Bitcoin’s real-time market price and can redeem Bitcoin spot at any time. Compared to GBTC, Bitcoin spot ETFs generally do not have premiums or discounts, and their prices are closer to Bitcoin’s market price.

Additionally, Bitcoin spot ETFs tend to have lower fees, usually between 0.5-1%; whereas GBTC’s annual management fee is 2%, nearly double that of a spot ETF. Moreover, Bitcoin ETFs do not have lock-up periods, and their liquidity is stronger.

Overall, Bitcoin spot ETFs outperform GBTC in price tracking and cost. At the same time, like GBTC, they help investors conduct compliant Bitcoin investments without the need to purchase and store Bitcoin directly.

However, it is worth noting that due to regulatory, price manipulation risks, and other factors, the SEC has not approved any ETF products holding Bitcoin spot. That is, as of now, there are no truly listed Bitcoin spot ETFs in the United States.

2023 Application Status of Bitcoin Spot ETFs

In June 2023, asset management giant BlackRock submitted an application for the iShares Bitcoin Trust, initiating a new round of Bitcoin spot ETF application competition. Under BlackRock’s influence, many investment/asset management institutions joined this race. As of August 2023, including BlackRock, eight institutions have applied for Bitcoin spot ETFs with the SEC.

Summary of 2023 Bitcoin Spot ETF Information

According to the SEC’s published process for Bitcoin spot ETF applications, after the SEC releases Form 19b-4 in the Federal Register, the decision timeline for the ETF begins.

The SEC’s decision period for Bitcoin spot ETF applications is 240 days. There will be three public responses in between. The response dates are spaced at 45 days, 45 days, 90 days, and 60 days. That is, before the SEC makes a final decision (approve or reject), it has three opportunities to delay the ETF application outcome. The SEC also has the authority to approve or deny the application at any time during the decision process.

The specific application process for Bitcoin spot ETFs is as follows: Bitcoin Spot ETF Application Process Taking BlackRock as an example, on July 19, the SEC published the 19b-4 rule change document for the iShares Bitcoin Trust in the Federal Register. Therefore, 45 days after July 19 is the deadline for the first response for the iShares Bitcoin Trust, which is September 2. If the SEC decides to delay the decision before this deadline, the next response will be postponed by another 45 days. The final response date for the iShares Bitcoin Trust is March 15, 2024, 240 days after July 19.

Below, we list the specific application information for these 8 institutions, including the project name, listing exchange, sponsor, trustee, custodian, relevant application dates, and previous application history.

BlackRock ETF Name: iShares Bitcoin Trust

Exchange: Nasdaq

Sponsor: BlackRock Fund Advisors

Trustee: Delaware statutory trust

Bitcoin Custodian: Coinbase Custody Trust Company, LLC

Cash Custodian: Bank of New York Mellon

The Bitcoin custodian and cash custodian together are collectively called the custodians.

Relevant application dates:

Nasdaq submitted the proposed rule change to the SEC on June 29, 2023. Notification published in the Federal Register on July 19. First response date: September 2. Previous application history: None.

Fidelity ETF Name: Wise Origin Bitcoin Trust

Exchange: Cboe BZX

Sponsor: FD Funds Management LLC

Trustee: Delaware Trust Company

Manager: Fidelity Service Company, Inc. (FSC)

Transfer Agent: Third-party organization (no clear information yet)

Market Agent: Fidelity Distributors Corporation

Bitcoin Custodian: Fidelity Digital Assets Services, LLC (FDAS)

Relevant application dates:

Cboe BZX submitted the proposed rule change to the SEC on June 30, 2023. Notification published in the Federal Register on July 19. First response date: September 2. Previous application history:

Fidelity submitted a spot ETF application in May 2021, which was rejected in February 2022.

Ark Invest ETF Name: ARK 21Shares Bitcoin ETF

Exchange: Cboe BZX

Sponsor: 21Shares US LLC

Trustee: Delaware Trust Company

Cash Transfer Agent: Bank of New York Mellon

Manager: Bank of New York Mellon

Market Agent: Foreside Global Services, LLC

Custodian: Coinbase Custody Trust Company, LLC

Market Assistant: ARK Investment Management LLC

Relevant application dates:

Cboe BZX submitted the proposed rule change to the SEC on April 25, 2023. Notification published in the Federal Register on May 15. First response date: June 29 (SEC decided to delay the decision). Rejection reason: The committee believed that more time was needed to review issues in the rule change, so it decided to postpone the decision.

On June 30, the exchange submitted Amendment No. 2; on July 11, Amendment No. 3.

Second response date: August 13 (SEC decided to delay the decision). On August 11, the SEC issued a document seeking comments on Amendment No. 3, delaying the decision again.

Previous application history:

Ark Invest previously submitted two spot ETF applications in 2021 and 2022, both rejected.

Invesco ETF Name: Invesco Galaxy Bitcoin ETF

Name “Galaxy” comes from the ETF tracking the Bloomberg Galaxy Bitcoin Index.

Exchange: Cboe BZX

Sponsor: Invesco Capital Management LLC

Trustee: Delaware Trust Company

Custodian: Third-party trust company and qualified custodian (no clear info yet)

Manager: Established global fund manager (no clear info yet)

Transfer Agent: Third-party organization (no clear info yet)

Relevant application dates:

Cboe BZX submitted the proposed rule change to the SEC on June 30, 2023. Notification published in the Federal Register on July 19. First response date: September 2. Previous application history:

Invesco and Galaxy jointly submitted a spot ETF application in September 2021, which they withdrew the same year.

WisdomTree ETF Name: WisdomTree Bitcoin Trust

Exchange: Cboe BZX

Sponsor: WisdomTree Digital Commodity Services, LLC

Trustee: Delaware Trust Company

Manager/Transfer Agent: U.S. Bank Global Fund Services

Custodian: U.S. Bank, National Association

Relevant application dates:

Cboe BZX submitted the proposed rule change to the SEC on June 30, 2023. Notification published in the Federal Register on July 19. First response date: September 2. Previous application history:

WisdomTree previously submitted two spot ETF applications in March 2021 and January 2022, both rejected.

VanEck ETF Name: VanEck Bitcoin Trust

Exchange: Cboe BZX

Sponsor: VanEck Digital Assets, LLC

Trustee: Delaware Trust Company

Manager/Transfer Agent: The State Street Bank and Trust Company

Market Assistant: Van Eck Securities Corporation

Bitcoin Custodian: Third-party qualified custodian (no clear info yet)

Relevant application dates:

Cboe BZX submitted the proposed rule change to the SEC on June 30, 2023. Notification published in the Federal Register on July 19. First response date: September 2. Previous application history:

VanEck first submitted a Bitcoin spot ETF application in June 2018, which was withdrawn in September 2019. Later, it submitted applications in March 2021 and June 2022, all rejected.

Valkyrie Project: Valkyrie Bitcoin Fund

Exchange: Nasdaq

Sponsor: Valkyrie Digital Assets, LLC

Trustee: Delaware Trust Company

Bitcoin Custodian: Third-party qualified custodian (no clear info yet)

Manager/Transfer Agent: U.S. Bank Global Fund Services

Relevant application dates:

Nasdaq submitted the proposed rule change to the SEC on July 3, 2023. Notification published in the Federal Register on July 21. First response date: September 4. Previous application history:

Valkyrie submitted a spot ETF application in April 2021, which was rejected in December 2021.

Summary Ark Invest’s ARK 21Shares Bitcoin ETF is the earliest among this round of applications and has already experienced two responses, both delayed. The first response dates for the remaining ETFs are all in early September. Except for BlackRock, the others have application experience for Bitcoin spot ETFs. Among them, VanEck has the most extensive experience, with three applications since 2018. All eight ETF application documents include the previously mentioned rejection reasons from 2021, such as the Surveillance-Sharing Agreement (SSA). All eight applications propose trading on one of three exchanges: Nasdaq, Cboe BZX, or NYSE Arca. Among these, Cboe BZX accounts for the largest proportion, with 5 out of 8. This may be related to Cboe BZX’s expressed positive attitude toward crypto assets and derivatives. The application details of the eight ETFs vary slightly. For example, Valkyrie and VanEck do not disclose detailed custodian information.

Will Bitcoin Spot ETFs Be Approved?

There is a high probability that this round of Bitcoin spot ETF applications will be approved, mainly due to BlackRock’s high success rate and the inclusion of the Surveillance-Sharing Agreement (SSA).

BlackRock ETF Success Rate BlackRock is known for issuing index-tracking funds. Its flagship fund, (iShares), holds nearly 50% of the US ETF market share. BlackRock has extensive experience in successfully obtaining ETF approvals. According to statistics, its ETF approval success rate is nearly 100%, with 575 approvals out of 576 applications. The only failure was a jointly submitted actively managed ETF with Precidian Investments, which was rejected by the SEC due to lack of profit transparency.

Surveillance-Sharing Agreement (SSA) All eight institutions’ ETF applications this time include the SSA, which was frequently cited as a reason for previous rejections of Bitcoin spot ETFs.

SSA, or Surveillance-Sharing Agreement, is an agreement between cryptocurrency exchanges and market regulators. It allows both parties to share trading data and information to monitor trading activities. If suspicious trading data or information is detected, it is simultaneously pushed to regulators, ETF issuers, and exchanges.

SSA is typically used in the context of ETFs and other financial products. It enhances the effectiveness of market surveillance, helping regulators monitor market manipulation, fraud, and other misconduct.

Including SSA in the current applications greatly increases the likelihood that the SEC will relax its stance on fraud and manipulation prevention. At least, the SEC cannot give the same rejection reasons as in 2021.

Which ETFs Are Likely to Be Approved? Looking at the application dates, except for Ark Invest, the other seven institutions submitted their applications to the SEC almost simultaneously. This suggests they may have received some information indicating that the SEC might approve Bitcoin spot ETFs this year. Although we cannot verify such information, the attitude conveyed is undoubtedly positive.

Furthermore, because the response dates are close, multiple ETFs might be approved or delayed simultaneously. The proposed rule change documents for these ETFs are quite similar and all include the SSA. Therefore, the SEC has little reason to approve one and reject another. If BlackRock’s Bitcoin spot ETF is approved, there is a high chance that the other applications will also be approved.

Approval Time Prediction Based on previous Bitcoin spot ETF approvals, it is very unlikely that the ETF will be approved in the first or second response period. The SEC generally delays the full 240 days before making a rejection. Although the SEC cannot use the same reasons to reject the current applications, given its consistent attitude toward the crypto market, it is likely to look for other reasons to postpone the decision, ultimately waiting until near the final response date to make a decision.

Another key factor influencing SEC’s decision may be the choice of Bitcoin custodian. For Bitcoin spot ETFs, custodians need to have significant influence and experience in crypto and be recognized by the SEC (able to supervise trading). For example, BlackRock explicitly states Coinbase as the Bitcoin custodian in its application. However, Coinbase’s previous lawsuit with the SEC might impact the final decision, potentially causing delays. Although this lawsuit is not directly related to Bitcoin, it could still influence the application process.

Therefore, the most likely approval time for this round of Bitcoin spot ETFs is around 240 days after the publication of the Form 19b-4 announcement in the Federal Register.

Failures of Bitcoin Spot ETF Applications

Historically, most Bitcoin spot ETF applications occurred in 2021. Data shows that about 13 traditional and crypto asset management firms attempted to submit Bitcoin spot ETF applications to the SEC in 2021, including Fidelity, SkyBridge, Grayscale, Ark Invest, Invesco, and others.

This wave of applications was mainly driven by the influence of Gary Gensler’s appointment as SEC Chair. Gensler, a strong supporter of cryptocurrencies and Bitcoin at the time, brought positive sentiment to the market, sparking the competition for Bitcoin spot ETFs.

However, he soon became a “backstabber” in the crypto market. If you’re interested in Gensler’s story, check out our biography series: “Is Gary Gensler Still Worth Expecting in the Crypto Market?”

Due to the immature state of the Bitcoin market and SEC’s concerns over regulation, all these applications failed. The competition for Bitcoin ETFs ended in institutional failure.

Let’s look at two examples and analyze the main reasons for their failure.

Fidelity In May 2021, Cboe BZX submitted an application for the Wise Origin Bitcoin Trust. The ETF was initiated by Fidelity, with Fidelity Service Company Inc. as the manager, Fidelity Digital Assets Services, LLC as the custodian, and Delaware Trust Company as trustee.

After a lengthy 240-day review, the SEC rejected the application on February 1, 2022. The reason was that the SEC believed that a Surveillance-Sharing Agreement (SSA) was necessary to meet regulatory requirements.

SSA, or Surveillance-Sharing Agreement, is an agreement between cryptocurrency exchanges and market regulators. It allows both parties to share trading data and information to monitor trading activities. If suspicious data or information is found, it is simultaneously shared with regulators, ETF issuers, and exchanges. SSA is typically used in ETF and other financial product contexts to enhance market surveillance and prevent manipulation and fraud.

In the application at that time, Cboe BZX did not adopt SSA. Therefore, the SEC believed that the ETF might pose risks of fraud and market manipulation, leading to rejection.

Grayscale In October 2021, NYSE Arca submitted an application for the Grayscale Bitcoin Trust (GBTC) to convert it into a standard Bitcoin spot ETF. If approved, GBTC would support redemption, and its price would be anchored to Bitcoin’s real-time price.

The ETF was initiated by Grayscale, with Grayscale Investments, LLC as the sponsor, Coinbase Custody Trust Company, LLC as the custodian, and Delaware Trust Company as trustee. In July 2022, the SEC rejected the application, citing the same reasons as Fidelity: potential risks of fraud and market manipulation. Although Grayscale filed a lawsuit afterward, the application ultimately failed.

Other Bitcoin spot ETF applications submitted in 2021 and 2022 were also rejected by the SEC, citing the lack of a Surveillance-Sharing Agreement (SSA).

What is a Bitcoin ETF?

A Bitcoin ETF is an exchange-traded fund composed of Bitcoin or assets related to Bitcoin’s price, tracking Bitcoin or related assets’ prices. An ETF (Exchange-Traded Fund) is an open-ended investment fund product that tracks a specific market index, commodity, or asset class (such as the price of a single commodity or a collection of securities). ETFs are traded like stocks, listed on stock exchanges, and can be bought and sold at any time during trading hours.

For example, Bitcoin spot, Bitcoin-related stocks, futures contracts, commodities, and other assets are all related to Bitcoin’s price. Therefore, Bitcoin ETFs include Bitcoin futures ETF, Bitcoin spot ETF, Bitcoin commodity ETF, and others. Buying a Bitcoin ETF is equivalent to indirectly investing in Bitcoin. When Bitcoin’s price rises, the ETF’s price rises; when it falls, the ETF’s price falls.

The concept of Bitcoin ETFs originated in the early development of cryptocurrencies. As cryptocurrencies gained popularity and Bitcoin’s price surged, more retail and ordinary investors saw Bitcoin’s potential and wanted to invest. However, due to the high risks of the crypto market and factors like legal entry and exit, most investors preferred not to invest directly in Bitcoin. They hoped to invest in Bitcoin through a low-risk, legal channel. This gave rise to Bitcoin ETFs, which aim to help traditional financial investors indirectly invest in Bitcoin in a compliant manner.

Currently, Bitcoin ETFs are mainly divided into two categories: Bitcoin futures ETF and Bitcoin spot ETF.

Bitcoin Futures ETF A Bitcoin futures ETF is an exchange-traded fund based on Bitcoin futures contracts.

In traditional finance, futures contracts are standardized agreements where both parties agree to exchange a specific amount of an asset at a specific price on a future date. Bitcoin futures contracts are similar derivatives based on Bitcoin. The contract stipulates that both parties agree to buy or sell a fixed amount of Bitcoin at a specific price on a certain day. Bitcoin futures ETFs create contracts based on Bitcoin’s current price and trade on designated exchanges. Simply put, if the Bitcoin futures contract purchased by an investor is worth more at expiration than the agreed price, the investor profits; otherwise, they lose.

Among all Bitcoin ETFs, Bitcoin futures ETFs are the most widely issued. They are available in the US, Hong Kong, Canada, and other regions. Currently, in the US alone, there are seven Bitcoin futures ETFs, including ProShares’ Bitcoin Strategy ETF ((BITO)), Valkyrie’s Bitcoin Strategy ETF ((BTF)), and VanEck’s Bitcoin Strategy ETF ((XBTF)).

The most famous Bitcoin futures ETF is ProShares’ Bitcoin Strategy ETF (BITO), launched on NYSE Arca. It was approved by the SEC on October 19, 2021, and is the first Bitcoin ETF in the US.