Deadline for bitcoin ETF decision looms as countdown begins

The countdown to January 10th is underway in the crypto world, as digital-money advocates eagerly await the potential redemption offered by a leap into traditional finance after the FTX incident. This optimistic outlook revolves around the possibility of US regulators approving a physically-backed Bitcoin ETF, a decision that must be made by the Securities and Exchange Commission. Among the first applicants are Cathie Wood’s ARK Investment and 21Shares, with over 10 other companies also striving to obtain approval for ETFs that directly hold Bitcoin.

If the approval finally happens, it would be a significant moment for the digital assets industry, which is still in recovery mode after the massive failures of 2022, including the collapse of the FTX hub.

“This crucial date has been the focus of Bitcoin investors’ attention since October and is a very important date to watch,” K33’s Vetle Lunde wrote in a note about the January deadline. He predicts that the funds will receive a regulatory blessing.

Although issuers have been trying to get a spot Bitcoin product accepted since 2013, the excitement has increased this year, especially with the entry of Wall Street heavyweights such as BlackRock, Invesco and Fidelity into the race. Cryptofans argue that the launch of such a fund will help the digital asset space grow into a larger part of traditional finance, as money managers will be able to buy ETFs for clients more easily. Bloomberg Intelligence estimates that the spot Bitcoin ETF market has the potential to grow into a $100 billion juggernaut in time.

“Previous periods have been considered the era of institutionalization of Bitcoin,” Lunde said. “However, nothing has come close to the 2023 changes.”

Dan Morehead, founder and CEO of Pantera Capital, echoed the same point. “Institutional adoption has accelerated. The headline news has been immediate approval of spot Bitcoin ETFs sponsored by big names in traditional finance — such as BlackRock and Fidelity — and blockchain ETF leader Bitwise,” he wrote in a note. “Similar to the first international gold ETF in 2003 and the US gold ETF in 2004, this opens a new channel for traditional capital to flow into ‘digital gold’ that may not have participated before.”

All of this has led to big gains in cryptocurrencies, with Bitcoin more than doubling this year to once again trade above $40,000. Other smaller coins have also increased. Mark Newton of Fundstrat claims that the so-called “crypto winter” – the extended period of decline and falling prices – is over.

“Bitcoin seems to be sending strong signals that the crypto winter that has kept most coins in a bear market for the past couple of years has finally run its course,” he said.

Still, it appears that regulators are struggling as the final ETF data appears to be collating with issuers. One of the biggest controversies centers on in-kind versus fund cash redemptions, a mechanism that is a feature of ETFs.

For in-kind redemptions, the ETF issuer exchanges the fund’s underlying securities with a market maker to create and redeem shares instead of cash. In another scenario, fund managers take responsibility for selling securities to distribute cash to redeeming shareholders. Regulators hardly allow in-kind payments for Bitcoin ETFs because they don’t want brokers to have to deal with Bitcoin, which means that issuers are now likely working to solve this problem.

Crypto-centric exchange-traded products have come on the back of rising prices and general exuberance in the industry. The ProShares Bitcoin Strategy ETF (ticker BITO), which tracks Bitcoin futures, has received more than $200 million this quarter, and its assets have surpassed $1.5 billion, a record for the fund. Meanwhile, Volatility Shares’ leveraged futures product, the 2x Bitcoin Strategy ETF (BITX), which launched in June, recently surpassed more than $100 million in assets.

Overall, crypto-focused ETFs round out the list of the 10 best-performing debt-free equity ETFs in the US this year, with the top-performing VanEck Digital Transformation ETF (DAPP) up more than 200%. In the leveraged portfolio, the GraniteShares 1.5x Long COIN Daily ETF (CONL) has been a standout with an annual gain of around 500%.

Yet trading volumes, while picking up amid Bitcoin ETF speculation, remain depressed. And retail investors remain apathetic – their presence in the market has actually decreased this year, according to K33. The researcher cites crypto exchange website traffic that has continued to decline.

“The biggest excitement is about the end of this long arduous process,” Bloomberg Intelligence’s James Seyffart said of potential Bitcoin ETF launches. “Issuers first applied for this over a decade ago, and many have spent years working with the SEC and arguing against it. It’s taken a tremendous amount of man-hours. So if approval comes in January, it might be more of a relief than a thrill for some.”