VettaFi Voices On: BlackRock's Leap Into Spot Bitcoin ETF Race

This week the VettaFi Voices took on cryptocurrency, the recent surge in bitcoin prices, and the filing for a physical bitcoin ETF by BlackRock’s iShares arm. Is Bitcoin going to see renewed interest? Did iShares’ filing speed up the timeline for the SEC’s approval of a spot bitcoin ETF? And has everyone forgotten about the promise of blockchain?

Todd Rosenbluth, head of ETF research: BlackRock has restarted the [physical]bitcoin ETF race with its filing, and I think we have three other filings as firms seek to get ready in case the SEC changes its view on a spot bitcoin ETF. I’ll expand more, but in short: The SEC has been consistent for years on concerns about fraud and manipulation in the spot bitcoin market. They have rejected ETF filings for more than ten years. I don’t think this time it is different, but clearly, BlackRock seems to think so.

The SEC has been defending its rejection of Grayscle converting GBTC into an ETF and yet approving futures-based ETFs like the ProShares Bitcoin Strategy ETF (BITO). To them, it is different. Speaking of BITO, investors are not interested in it despite the ETF rising nearly 80% in 2023. The fund has just $86 million of net inflows. I’m sure Roxanna Islam Swan can broaden this to blockchain-related ETFs that are up sharply but ignored by investors.

Tom Lydon, vice chairman: Bitcoin is back above $30,000. It’s up 20% since the filing. Reputable companies are coming together with BNY Mellon and Coinbase. This provides custody and the Nasdaq surveillance sharing agreement for greater security.

Does Gensler approve this? Can he get Coinbase to register as an exchange?

No Spot Bitcoin ETF Likely in 2023

Rosenbluth: I agree, Tom, that BlackRock bringing in partners will help credibility. However, I still think the SEC is not eager to open the door to a US-listed ETF. I recently wrote about how Canada is where ETF innovation is happening. In the US, there is much more hesitancy. And yes, while I have no inside knowledge of the approval process, I am putting my money where my words are. I don’t think a spot Bitcoin ETF will be approved in 2023, and I will take Eric Balchunas out for a steak, if I’m wrong.

Roxanna Islam Swan, associate director of research: All of this has helped boost Bitcoin prices. Still, I think it’s still really uncertain whether it will help increase interest and flows in crypto ETFs. If it is approved, how many new investors will we see vs. how much of it will just be shares taken from BITO and other futures-based bitcoin ETFs? I think crypto is just done for many investors. Especially for the newer investors who got in when prices rose a couple of years ago and maybe lost a lot of money in late 2022.

We’ve seen this with the blockchain/crypto equity ETFs this year. These are different since they don’t directly track the price of Bitcoin (although it’s pretty close). They’re more like industry/thematic investments. These have been top performers this year, but flows haven’t matched up. Something like Valkyrie Bitcoin Miners ETF (WGMI), the top-performing equity ETF YTD is barely in the top third when ranked by inflows. It’s been up about 170% YTD, but many investors still don’t want to risk it. They’re more interested in AI or big tech/semiconductors this year.

I think a spot Bitcoin ETF would revitalize some interest. However, I’m not sure if it would change everyone’s views on crypto and revitalize interest back to where it was in 2020/2021.

Investor Interest in Bitcoin

Rosenbluth: In late 2022, VettaFi did a survey with Bitwise.  Here are some of the takeaways I wrote back then:

The survey found that while most advisors have clients invested in crypto, only 15% are managing their clients’ crypto investment strategies. Many respond that they do not have access to crypto strategies on behalf of their clients. There is a key opportunity for better access to this space to enable advisors to serve their clients better. Meanwhile, despite market volatility, 78% of advisors who currently have an allocation in client accounts plan to either maintain or increase that exposure in 2023.

So if there’s regulatory clarity and the SEC does approve an ETF, I think it will be popular. BlackRock is not only the global ETF leader, but advisors use its ETFs widely in asset allocation strategies. It’s a cash haul if 1% is put into a BlackRock spot ETF.

Heather Bell, managing editor: Personally, I think BlackRock throwing its hat into the physical Bitcoin ETF ring is HUGE. They’ve stayed out of the scrum for years. It almost seems like they waited for the dust to settle after all that stuff with FTX before filing.

Yes, the SEC and Gensler have held firm on the idea that there are not enough investor protections on Bitcoin for them to approve a spot Bitcoin ETF. But this is BlackRock — the largest asset manager in the world. They have no doubt studied this out the wazoo. Plus, I’m going to go out on a limb and speculate they have likely thrown more resources at this research than the government-funded SEC. If they are stepping into the crowded field of issuers looking to launch spot bitcoin ETFs, they have carefully decided that the benefits outweigh the risks. I think that has to put more pressure on the SEC and Gensler to figure things out.

Roxanna, I think you could be right about investors getting burned and then just being done with Bitcoin. But I also think investors may be staying away from BITO because every day, the probability of a physical Bitcoin ETF being approved increases. If you insist on getting your bitcoin exposure through an ETF, why invest in BITO when a better solution is likely to happen soon? The true crypto believers already hold physical Bitcoin directly. Those who want the buffer of a fund structure may have decided they want the best version without worrying about insane problems like losing their holdings due to a forgotten password.

So yeah, many of those assets might come out of BITO. However, we really don’t know how much pent-up demand there is from investors just waiting on the sidelines.

Rosenbluth: ETF-oriented advisors want to own an ETF for simplicity and ease of use to make allocation changes rather than owning spot bitcoin directly. But I don’t think the SEC is ready to make it available.

A Realistic Outlook

Islam: By the way, I’m not trying to sound overly negative. I just don’t want to sound overly positive since I think that was a widespread crypto issue in the past! It would definitely be a game-changer. Many believe that if a spot Bitcoin ETF existed, we wouldn’t have had issues like what happened with FTX. So maybe a lot of people who invest directly through crypto exchanges would also come over to the ETF side. I agree with Todd, though, I’d be surprised if it got approved so soon.

Bell: Todd and Roxanna, I agree, but I think BlackRock has a lot of sway because of its vast size. It may have put its thumb on the scales with its move and sped up the timeline a bit with that filing. And the fact that there haven’t been any disasters with existing physical Bitcoin ETFs in other countries has always been a huge selling point for approval. And I say that as a crypto skeptic.

Not to derail the subject with my ADHD thinking process, but I think what’s more ominous for cryptocurrencies is that blockchain funds have seen outflows despite doing well this year, which Roxanna touched on. The truly interesting part of the crypto craze is the blockchain technology underlying the concept.

I fully believe that could have such far-reaching implications for how we conduct business in the future. But investors really seem to have lost interest in that technology. BKCH is up more than 100% year-to-date and still has negative flows for that period. Investors shouldn’t be chasing returns. Still, it’s wild that a fund up that much has investors pulling money out of it, especially when blockchain is really a long-term play. If investors aren’t interested in the underlying technology’s potential, that undermines the argument for crypto to a certain degree.

Rosenbluth: Agreed, Heather. I’m still used to a world where money chases performance. And yes, BlackRock has a lot of sway, but they also likely have gotten some bat signals that the SEC would be open to a spot Bitcoin ETF with some safeguards in place at some point. Is that point in the second half of 2023 or further down the road?

Asset managers do not want to waste the SEC’s time, especially if they have other products. Grayscale focuses on crypto, but BlackRock is the leader across all ETFs.

Blockchain a Complex Concept

Islam: Heather, that’s an interesting point about losing interest in blockchain, which undermines crypto. I thought it could be the opposite — investors lose interest in crypto, so they lose interest in blockchain. But I guess it’s kind of like a chicken and the egg thing — it could be either or maybe both. Blockchain has a much farther reach than crypto and can change how businesses operate, and supply chains work. But I think many people view them as the same thing. This is especially since blockchain investments trade so closely with crypto prices.

I think it’s still something you have to explain — blockchain is not an easy concept for a lot of people to understand without taking the time to learn what it is. Something like AI, which is the new topic of the year, seems more tangible. Especially since you can get online and play with ChatGPT or one of the many other apps. It’s easier for people to envision its use cases.

Bell: Oh, for sure, Roxanna. Anyone can play with AI. One of my buddies is creating hysterically funny pictures of his puggle in different costumes just for his own amusement. AI will be integrated into social media, and familiarity will spread that way. But nobody on social media is excited about fun new ways to record contracts online. You can’t make a meme out of that. So that’s going to keep blockchain out of mainstream conversations.

Lydon: Great debate, gang! Heather, I agree. BlackRock can keep its finger on the pulse and calculate the odds. Institutional money will come and trust BlackRock. Retail investors have also lost interest, but cycles always happen this way. If BTC gets to $40,000, we might see them come running back.

Jen Nash, economic and market research analyst: I published my weekly crypto piece yesterday, with data through 6/20, where the headline read “Bitcoin Rallies Past $28K“. Bitcoin closed out beyond that threshold for the first time in three weeks. So, I figured the title captured the exciting rally. A few hours after my piece was published, BTC cleared $30,000 for the first time since April, so I guess if I waited one more day to post, the headline would have been even more newsworthy.

Bitcoin has obviously been performing well over the past week since the Blackrock filing, up 20%, as Tom said. On a larger scale, Bitcoin has been doing really well for all of 2023. It has been in the green thus far this year, and the general trend is upward. I also want to point out that the current excitement around Bitcoin has spread to other coins, as a handful of others have seen a surge over the last week, like Ether, Cardano, and Solana, to name a few.

BlackRock’s Filing in Perspective

Dave Nadig, financial futurist: I’ve spent the past few days chatting with folks on the ETF side and the Crypto side, and I think the inherent distrust of the crypto community around TradFi is showing in many places. I genuinely do not believe that BlackRock has some sort of inside track on the process. Nor do I think anything in the filing as I read it is so revolutionary as to somehow be a “magic key.” The surveillance sharing proposed isn’t novel to ETF filings, the party for the SSA isn’t named (everyone assumes it’s Coinbase).

The only thing that’s truly “new” here is that it’s BlackRock/NASDAQ/Coinbase in a combo filing, in my opinion. I am still taking bets on the “under” side of any approval in this calendar year, and honestly, I think the odds of approval under this SEC Chair are basically nil.

The second argument – that this is line-positioning for a potential Grayscale victory, I definitely buy. That’s the most logical reason for filing, the timing makes a certain amount of sense, and at the moment, I’m just over the edge of “Grayscale probably wins.”

However, Grayscale winning isn’t an instant floodgate, and I am a bit of an outlier in believing that should the SEC lose, how they “fix” things is more likely by shuttering the futures-based products than just allowing the GBTC conversion or letting everyone else launch.

Rosenbluth: I love that Dave is talking to smarter people than him on this (that’s hard to find) while I’m going on gut. And yet we agree that approval of a Spot Bitcoin ETF in 2023 is unlikely.

Dave, if the SEC fixes things by shuttering existing futures-based ETFs like BITO, that would be wild. I’m not aware of the SEC forcing the closure of existing products before

Nadig: All that said, I desperately want to be wrong, and if this is, in fact, BlackRock having some sort of inside track that leads to approval, I think that’s both good (yay, Spot Bitcoin ETF!) and bad (I mean seriously, everyone knows who’s done the years of work with the SEC in the spot bitcoin mines, and it’s the folks we’ve seen in the filing cue for years: Grayscale, Bitwise, VanEck, NYDIG, Valkyrie, WisdomTree, etc…

Todd, regulation changes change product makeup all the time. We don’t sell portfolio insurance anymore, after all. And once upon a time, currency ETNs were all the rage.

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