BlackRock, the world’s largest asset manager, surprised many late last week by filing a Bitcoin ETF application. In this post, I share what you need to know about this major development and how it could impact bitcoin’s price.
Key Takeaways
- BlackRock’s filing of a spot bitcoin ETF is one of the biggest stories of 2023 so far.
- This proposed bitcoin ETF differs from the dozens that the SEC has previously rejected.
- There are strong arguments for the SEC approving or rejecting the proposed ETF. If I was forced to predict, based on the available information, I think it gets rejected.
- If the SEC approves it by year-end, I’d expect bitcoin’s price to soar by at least 30%.
- The SEC has 45 days from the filing to make a decision (i.e. approve or reject) or delay a decision. If the SEC uses all of its delays, a decision will come in February.
Refresher on Bitcoin ETFs in the U.S
(For those unaware, an ETF is a type of investment product that tracks a particular asset, sector, index, commodity or other asset. They have become increasingly popular in the past 20 years among institutional and retail investors.)
The U.S. Securities and Exchange Commission (SEC) has never approved a spot bitcoin ETF. Given the U.S. has the world’s strongest capital markets, approval of a spot bitcoin ETF would be monumental. It would, among other things, further legitimise bitcoin as an asset and make it more convenient to invest in.
The SEC has rejected dozens of proposed bitcoin ETFs since the first was filed in 2013 by the Winklevoss twins.
While progress was made in 2021 when the SEC approved the first bitcoin futures ETF, they differ from spot ETFs because the issuer holds futures contracts.
That is, no matter how popular the futures ETF becomes, it does not impact the demand for bitcoin. With a spot ETF, the issuer must keep buying ‘actual’ bitcoin as demand for the ETF increases.
Why BlackRock’s Proposed ETF Is Different
Firstly, the most significant difference is the fact that BlackRock is proposing a spot bitcoin ETF. While other reputable asset and fund managers (e.g. VanEck, Fidelity) have unsuccessfully proposed bitcoin ETFs in the past, BlackRock is arguably in a league of its own due to its size and political clout.
Secondly, BlackRock is the first to feature a surveillance-sharing agreement in its proposed bitcoin ETF. Surveillance-sharing agreements allow certain entities to share information about trading, clearing and customer identification. This is significant because, historically, the SEC has cited concerns over market manipulation when rejecting proposed spot bitcoin ETFs.
With respect to BlackRock’s proposed ETF, page 36 of a related filing by Nasdaq—where the ETF would be listed—explains that Nasdaq “expects to enter into a surveillance-sharing agreement with an operator of a U.S.-based spot-trading platform for bitcoin.” (Interestingly, the filing doesn’t name the exchange, but it must be Coinbase, given how much more liquid it is than its U.S.-based competitors like Gemini or Kraken.)
Page 36 of Nasdaq’s filing (Source)
Key Dates to Watch
The SEC gets an initial period of 45 days to make a decision (i.e. approve or reject it) or delay a decision. If it delays, a second period of 45 days starts. After that, it can delay for 90 days and then for 60 days.
After this 60-day period (i.e. 240 days in total), the SEC must approve or reject the application. Historically, the SEC usually delays a decision on proposed bitcoin ETFs multiple times.
Regarding BlackRock’s application, if the SEC postpones a decision, even once, the likelihood of an approval would fall considerably, according to Eric Balchunas, senior ETF analyst at Bloomberg, in an interview with Luke Martin. “If it gets delayed, that’s bad. That would mean the SEC wasn’t really into (the application), and it would go into this traditional (cycle of multiple delays).”
BlackRock filed its application on June 15. Therefore, the SEC’s first deadline is Monday, July 31. To be clear, it can approve or reject the application before the deadline.
My Take & Prediction
I’m still struggling to come to terms with the fact the world’s largest asset manager just filed for a spot bitcoin ETF even after the catastrophic 12 months for crypto.
Why did BlackRock do this now? There are many potential reasons, including some not-so-good ones. When it comes to these sorts of things, I like to apply Occam’s razor.
I feel the most straightforward reason is this: BlackRock sees long-term potential in bitcoin and, therefore, it wants to file its ETF application now in the hope that the SEC approves it by the time a bull market returns.
As for my prediction on whether the SEC approves BlackRock’s proposed ETF, it’s a genuine 50:50. There are strong arguments for approval and rejection. If I was forced to go either way, based on the current information, I think it gets rejected. If I’m wrong, and the SEC approves it, I’d fully expect BTC to soar by at least 30% in the days after the approval.
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