What does BlackRocks Bitcoin ETF mean for cryptocurrencies?

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Bryan Armour: BlackRock BLK shocked the financial world when it filed for the iShares Bitcoin Trust on June 15, becoming the largest filer for a cash bitcoin ETF after years of strategy rejection by the Securities and Exchange Commission the United States. The surprise filing came on the heels of the SEC lawsuit against Coinbase COIN and Binance, making the timing of BlackRocks’ partnership with Coinbase and the filing even stranger.

BlackRock would make Bitcoin legit

As the world’s largest asset manager, BlackRock would immediately lend legitimacy to a bitcoin market that needs it. Between the SEC’s crackdown on the flawed, high-fee bitcoin ETFs currently in the market, an iShares spot bitcoin ETF would be a welcome facelift. Whether that means investors should buy this fund if it hits the market is another question. Bitcoin is highly volatile and its future is uncertain. There is no fundamental value for investors to rely on, so this consideration should trump all others, including fund structure.

Besides the merit of the investment, it is worth understanding where a spot bitcoin ETF would fit in with other offerings available in the United States. Currently, the bitcoin ETF market is made up of three types of fund-granting trusts, futures-based ETFs, and bitcoin-adjacent equity funds. A bitcoin spot ETF like the one offered by BlackRock would create a fourth bucket because it doesn’t fit into the others.

Who are BlackRrocks’ competitors in the Bitcoin space?

Currently, the largest bitcoin offering in the United States is Grayscale Bitcoin Trust, ticker GBTC. It operates more like a closed-end fund than an ETF, which means investors have had to deal with significant premiums and discounts to its price over net asset value that have nothing to do with bitcoin. . The iShares Bitcoin Trust would have rolling offers like other ETFs, meaning authorized participants could create and redeem shares at NAV at any time. This would help keep the ETF price in line with its net asset value. Grayscale does not currently allow redemptions. Thus, investors’ only option is to sell at the prevailing price, which is currently heavily discounted.

How will BlackRocks Bitcoin ETF work?

Futures-based bitcoin ETFs do a better job of tracking the price of bitcoin, but they also introduce other differences from holding bitcoin. First, the intention of these funds is to hold the first month futures contracts. But futures contracts expire. Each month, portfolio managers must roll in the next month’s futures contract, often at a slightly higher price. This creates an additional cost to the fund that a spot bitcoin ETF would not. The exchange that lists bitcoin futures contracts, the CME, also imposes position limits to prevent one company from controlling the market too much. If this happened, as it did in 2021 when ProShares Bitcoin Strategy ETF, ticker BITO, was launched, portfolio managers had to move further down the futures curve by buying futures contracts at higher long term. Generally, the longer a futures contract is to expiration, the less closely it will follow the asset spot market.

In terms of being able to track the price of bitcoin, a spot bitcoin ETF like the one offered by BlackRock would clearly be an upgrade over the options currently available. It would probably also come with lower fees. Grayscale charges a 2% fee, while BITO charges 95 basis points, and this is a cause for investors that is very likely to improve if BlackRocks spots the bitcoin ETF in the market.

Why is BlackRock depositing a Bitcoin ETF now?

The ultimate question is why now for the BlackRocks deposit? There have been over 30 previous filings for spot bitcoin ETFs, but this is BlackRocks first. Perhaps it could be due to Grayscales’ looming lawsuit against the SEC regarding the rejection of a spot bitcoin ETF, or perhaps BlackRock thinks it has the right oversight approach to appease. SEC concerns over bitcoin market manipulation. We’ll all stay tuned to find out.

The author or authors do not own shares in the securities mentioned in this article. Learn about Morningstars editorial policies.

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