Tl;dr — the first spot Bitcoin ETF application was submitted in 2013 by the Winklevoss twins. Numerous attempts at securing a spot ETF have been met with failure. However, numerous futures BTC ETF products have come to market, while other countries have beat the United States by launching their own spot BTC ETFs. This article goes into the background and hurdles preventing a US-based spot ETF, and potential work around solutions.
Background: Applications to the SEC for a spot Bitcoin (BTC) ETF submitted by numerous parties have been met with numerous rejections since the very first application in 2013 by the Winklevoss twins.
What is the difference between a futures and spot-based BTC ETF?
Why is a spot BTC ETF important?
What is the significance?
The first futures BTC ETF approved October ’21 — (BITO) attracted greater than 1 billion in capital inflows on opening day.
Since then, funds including ProShares, Grayscale, Bitwise, Valkyrie, VanEck, and Global X Blockchain & Bitcoin Strategy ETF are some of the institutions with (futures) price exposure to BTC through ETFs.
A futures-based ETF theoretically allows investors indirect exposure to BTC price via the futures markets, as opposed to direct exposure to BTC directly via institutional custody.
A spot BTC ETF would allow investors to directly hold BTC via regulated financial institutions, giving investors direct exposure to BTC in their portfolios.
Moreover, the spot BTC ETF would allow investors access to larger capital markets in the framework of investor protections when investing with regulated financial institutions.
Concerns of the SEC regarding a spot BTC ETF:
In evaluating proposals for a spot ETF, the SEC has cited two requirements including preventing market manipulation and price discovery.
A futures BTC ETF falls under the jurisdiction of the CFTC with price discovery occurring on the CME as opposed to the exchanges, whereas a spot ETF would be under the jurisdiction of the SEC.
If other countries such as Canada, Europe, and Australia currently have their own spot BTC ETFs, why doesn’t the United States?
Could it be political and regulatory in nature?
Regardless of the reasons, the recent regulatory actions of the SEC have set the United States behind on financial innovation.
This is not the first case for the United States to lose out on innovation (semiconductors, 5G, blockchain).
Grayscale launched a lawsuit against the SEC after rejecting its application for a spot BTC ETF disputing the SECs current claims.
I expect there to be additional battles which will ultimately end up in the hands of the courts to decide the answers to many of these complex questions.
Current options to get direct exposure to BTC:
- Purchase spot BTC ETFs from Canada, Germany, Sweden, and Australia
- Hold BTC, Eth and other cryptos directly either via centralized exchanges such as Coinbase or self-custody your own crypto via Web3 crypto wallets. The problem with self custody is the extremely high barriers to entry (you have to know what you are doing) and a high probability of loss through (losing private keys, hacks, scams, and thefts). Therefore, many large investors would prefer to hold their large crypto holdings with a reputable, large, trusted, regulated, centralized, third party.
- Continue to invest in futures-based ETFs, while waiting on spot ETF approval. It is interesting to note that many of the US-based ETFs invest in the international spot ETFs to gain direct exposure to BTC for their clients.
At the end, government regulators may not be able to handle these issues on their own, and the legal system along with Washington may have to chart the course for digital assets and financial innovation, which they have begun doing.
About: Dr. Christopher Loo is a physician who became financially free at the age of 29, and retired early at the age of 38, as a result of making strategic investments after the 2008 financial crisis. A graduate of the MD-PhD program offered jointly through the Baylor College of Medicine and Department of Bioengineering at Rice University, he is the author of “How I Quit My Lucrative Career and Achieved Financial Freedom Using Real Estate”, and is the host of the Financial Freedom for Physicians Podcast. He is a regular contributor to KevinMD and has spoken about the importance of financial literacy for Passive Income MD, the White Coat Investor, Board Vitals, SEAK Non-Clinical Careers, SoMe Docs, Doximity, Medpage Today, FinCon, and other high-profile financial brands geared towards high-income professionals. He is passionate about the role that crypto, fintech, and innovation will play in enabling financial freedom, economic inclusion, access and opportunity for the entire world in the upcoming decades.
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