The prospect of a US spot Bitcoin exchange-traded fund (ETF) has piqued the interest of cryptocurrency enthusiasts, who believe it could attract more than $50 billion in demand from a new generation of investors. Applications led by financial behemoth BlackRock have reignited speculation that the Securities and Exchange Commission (SEC) will finally approve a Bitcoin ETF, resulting in a 20% increase in Bitcoin prices since mid-June.
Sceptics argue that a US spot ETF may not be the game changer that supporters envision. Existing Bitcoin ETFs already track futures contracts and have been available for more than two years, albeit not flawlessly. They question whether the introduction of a spot ETF would have the transformative effect that its supporters claim.
The introduction of the first Bitcoin futures-backed ETFs in the United States in October 2021 sparked significant interest, with the ProShares Bitcoin Strategy ETF (BITO) generating an impressive $1 billion in turnover upon launch, propelling Bitcoin to an all-time high of nearly $69,000. Despite the initial enthusiasm, the fund was unable to maintain the same level of inflows over time.
While early momentum may attract billions of dollars, Jillian DelSignore, managing director and head of strategic growth and solutions at FLX Networks, noted that it is unclear whether this growth will continue or eventually taper off. JPMorgan also chimed in, claiming that a US spot Bitcoin ETF approval would have little impact because similar products have already existed in Canada and Europe without attracting significant inflows. According to strategist Nikolaos Panigirtzoglou, the failure of existing funds to benefit from outflows from gold ETFs demonstrates a lack of investor interest.
Bloomberg Intelligence analysts Athanasios Psarofagis and James Seyffart, however, disagree, pointing out that the larger ETF market and higher vehicle usage in the US may result in stronger demand than in Canada and Europe. If crypto ETFs in the US follow a similar trajectory, they estimate an asset potential of around $54 billion, based on the current $137 billion in US commodity ETFs.
The hype surrounding the hypothetical spot fund has reached epic proportions, with many crypto supporters arguing that its approval would not only simplify Bitcoin investments but also signal the industry’s mainstreaming. BlackRock’s CEO, Larry Fink, previously a crypto skeptic, expressed his belief in Bitcoin’s diversification potential and its ability to transcend national currencies.
There are several reasons why a spot fund might be more popular than a futures-based fund. It may provide financial advisors with easier access, lower costs than futures ETFs, and fewer restrictions associated with contracts embedded in futures products. According to Nate Geraci, president of the advisory firm The ETF Store, the pre-launch hype will be met with record demand, as investors prefer the “real deal” and are wary of significant tracking errors, which have been observed in certain futures-based Bitcoin ETFs.
Despite the optimism surrounding the potential spot ETF, investor enthusiasm has been dampened by the crypto market’s fallout from the 2022 crash and numerous industry collapses. Scams and frauds cost retail investors billions of dollars, causing trading volumes and liquidity to plummet. As a result, the number of potential investors interested in Bitcoin has declined significantly since its peak several years ago, when the cryptocurrency was gaining popularity.
Alex Coffey, senior trading strategist at TD Ameritrade, discusses the lack of interest among everyday investors, who may not be as actively involved in the market as they once were. While the prospect of a Bitcoin ETF remains appealing, investor appetite for cryptocurrencies is still being influenced by uncertainties surrounding regulatory approvals and broader market sentiment. Only time will tell if the launch of a US spot Bitcoin ETF lives up to the enormous hype and ushers in a new era of mainstream adoption.
