Early Investing

Bitcoin ETFs Are Almost Here

Bitcoin ETFs Are Almost Here
By Adam Sharp
Date October 1, 2021

This week Coinbase sponsored an article in the prestigious Institutional Investor publication titled “Expect Growth in Crypto Funds and SEC-Approved ETF Soon.”

Here’s an interesting excerpt from the article.

…Confidence remains high among many market watchers that a crypto ETF will get regulatory approval in the U.S. in either 2021 or 2022, bolstered by the successful launch in Canada of three crypto ETFs in February…

“We believe Canada’s approval of bitcoin ETFs will nudge along regulators elsewhere as part of the initiatives to bring crypto into the financial landscape fully,” Coinbase wrote in its GFM report.

It’s a sponsored article, so take it with a grain of salt, but it’s an interesting development either way. I highly doubt Coinbase would risk its reputation claiming that a bitcoin ETF is coming soon without solid proof.

According to CoinDesk, more than a dozen companies have applied for bitcoin ETFs. Once the SEC finally starts to approve them, I expect it to be a very bullish development for bitcoin. The more funds that are approved, the more big financial institutions that will have a vested interest in bitcoin succeeding. 

With so many different ETFs, competition on fees should be intense. It wouldn’t surprise me to eventually see management fees in the 0.45% range. 

Currently, the only publicly traded bitcoin fund is the Grayscale Bitcoin Trust (GBTC), which carries a roughly 2.5% annual fee. Fees that high have a huge effect on returns over the long run due to the reverse-compounding effect. 

I expect Grayscale’s high fees are due to the unique nature of the fund and the fact that it’s the only game in town. Once the SEC allows crypto ETFs, Grayscale plans to convert GBTC to an ETF. And it will almost certainly lower its fees.

One of the major benefits that true bitcoin ETFs will have over GBTC is the fact that they should track bitcoin’s price much more closely. GBTC is a strange fund and has traded at anywhere from a 15% discount to a 20% premium vs. the value of the underlying coins. 

Today GBTC trades at a roughly 15% discount — so it’s actually attractive currently. But those who bought when the premium was 20% are probably not loving it. GBTC is a clunky, expensive way to own BTC. But as the only game in town, it currently holds $27 billion worth of coins. 

Bitcoin ETFs will be a huge step forward for the industry. People will have an easy way to get exposure in their retirement accounts, and institutional adoption will accelerate.

ETFs will also give hedge funds and other short-term traders an excellent trading vehicle. So it will be interesting to see if volatility increases once they are approved.

Psychologically Important

It’s not just the fact that bitcoin ETFs will dramatically expand access and reduce costs. It will also have huge psychological implications. While the SEC’s stamp of approval may not mean much to the average crypto owner, it does still mean a lot to institutional investors. 

Approval will make it a lot easier for traditional investment firms to make the case for crypto exposure internally. I am sure there are heated debates over whether to invest in crypto at most big institutional firms today. Once the SEC approves crypto ETFs, that will push many firms to take the plunge.

Finally, let’s look at a recent tweet from one of my favorite crypto traders, known pseudonymously as Light on Twitter. I think he does an excellent job here making the bitcoin bullish case.

I think that pretty much sums it up. Bitcoin is in a very nice spot today. Inflation is picking up, the Fed is still printing money, bonds are yielding -4% or more in real terms and financial censorship is rearing its ugly head. While these are all worrying trends, they also make a strong case for further bitcoin adoption.

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