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Does a Spot Bitcoin ETF Spell the End of Coinbase, Binance and Others?

Last Updated September 5, 2023 12:44 PM
Teuta Franjkovic
Last Updated September 5, 2023 12:44 PM

Court SEC Key Takeaways

  • Bitcoin ETF approval in the US may disrupt important cryptocurrency exchanges.
  • In contrast to the Gold ETF, a Bloomberg analyst thinks purchasing ETFs might be more cost-effective.
  • He emphasizes that all labor is done by investment firms.
  • This also includes keeping cryptocurrency secure and ensuring tax compliance.

The adoption of a spot Bitcoin exchange-traded fund (ETF) in the United States, according to Bloomberg analyst Eric Balchunas, may have a negative effect on important cryptocurrency exchanges.

Balchunas emphasized  the benefits of purchasing ETFs rather than trading Bitcoin directly while the US Securities and Exchange Commission (SEC) still needs to approve it.

Future of Crypto Exchanges Is Uncertain

In a recent episode of the “Unchained Crypto” podcast, Bloomberg analyst Eric Balchunas predicted  that, within a few years, purchasing Bitcoin ETFs on stock exchanges would replace conventional crypto purchases. Exchanges that do not adjust their costs to remain competitive will be particularly vulnerable to this trend.

“This is why we say to the crypto exchanges this is going to be a threat to their business. Coinbase and these other exchanges charge a lot per trade,” he said.

He added that ETFs have a “long history” of displacing excessive fees and forecasted that this trend will continue over the next five years.

“In 3-4 years from now, you are going to be able to buy a liquid cheap Bitcoin ETFs and it is going to be powerful.”

Balchunas made it clear that consumers will save money by buying an ETF. He cited the example of the Gold ETF. The charge for this ETF, according to him, is between “35 and 40 basis points,” or roughly 0.35% and 0.40%.

In contrast, pricing structures for cryptocurrency exchanges vary, with some giving appealing introductory rates or having no fees for the first month. However, after this initial period, certain exchanges may start charging transaction fees of up to 1.5%.

Balchunas added that the investing company “handles all the work” on your behalf. He pointed out that this also entails keeping the digital assets safe and ensuring tax compliance. “It is going to be a very high-value proposition,” he predicted.

Approval to Come Soon

Balchunas also added he was confident that approval of a Bitcoin ETF will come soon.

Many X users, though, quickly defended the notion that ETFs wouldn’t be a threat to exchanges. One person said :

“I disagree, there will always be a place for decentralized exchanges. Sure the bottom line could be impacted, but this just caters for a different audience, with a different level of risk.”

Balchunas has maintained his belief that a Bitcoin ETF will be approved by the US SEC.

On August 30, following the court decision that the SEC erred in rejecting Grayscale’s application for a Bitcoin ETF, he said :

“James Sayffart and I are upping our odds to 75% of spot Bitcoin ETFs launching this year (95% by end of ’24). While we factored Grayscale win into our previous 65% odds, the unanimity and decisiveness of ruling was beyond expectations and leaves SEC with very little wiggle room.”

Advantages of Crypto ETFs

Recently, the SEC decided to postpone making a decision on seven applications to launch Bitcoin ETFs. The hearing for the decision is now scheduled for mid-October.

After losing to Grayscale Investments in a legal battle, the SEC must approve multiple companies’ spot Bitcoin ETF applications, say JP Morgan analysts led by Nikolaos Panigirtzoglou.

A federal court’s ruling requires the SEC to reevaluate its decision to reject Grayscale’s attempt to convert its Bitcoin trust into an ETF.

Court labeled SEC’s decision as “arbitrary and capricious” because the organization failed to provide justification for the disparate treatment of spot and futures-based Bitcoin ETFs.

The analyst opined that the SEC would need to revoke its earlier approvals of futures-based ETFs in order to deny Grayscale’s applications for a spot Bitcoin ETF and a trust conversion.

But why are ETFs better than traditional investments?

  • Convenient

The primary advantage of cryptocurrency ETFs over direct investments is that investors can avoid handling the underlying assets. While cryptocurrency exchanges have simplified the process, barriers to widespread adoption remain, such as managing digital wallets and understanding private and public keys.

Cryptocurrency ETFs enable investors to access this asset class through their existing brokerage accounts.

  • Safe(r)

All ETFs are subject to strict regulation because they are traded on conventional exchanges. As a result, authorities can keep an eye on and evaluate their performance while also guarding against price gouging on the ETF markets.

Traditional cryptocurrency exchanges can be vulnerable to price manipulation and security risks, including theft and hacking. Crypto ETFs provide insulation from these risks since you don’t own the underlying cryptocurrency, and some ETFs use futures backing.

  • Cheaper

Building a diverse cryptocurrency portfolio involves creating accounts on multiple exchanges and managing numerous digital wallets, a time-consuming and complex process. Crypto ETFs offer exposure to a range of assets through a single investment, albeit indirectly, and often at lower fees compared to traditional managed funds.

Why Did the SEC Reject Spot Bitcoin ETFs?

The SEC asserted that the size or maturity of the Bitcoin market was insufficient to support ETF market demand when it initially rejected VanEck’s spot Bitcoin ETF.

The regulator added that the market might be vulnerable to fraud and manipulation due to the price volatility and insufficient level of trading oversight.

BlackRock’s entry, however, has led some market analysts to assume that there is a significant probability that SEC will approve a spot Bitcoin ETF.

The difference between a futures ETF and a digital asset itself is that the first is based on futures contracts. It is simpler for the SEC to approve such ETFs because the futures markets are already extensively regulated to avoid market manipulation.

The issuer’s demand to include a “surveillance-sharing agreement” with a sufficiently substantial and regulated Bitcoin-related market lies at the core of these spot ETF rejections. These agreements are essential for enabling the SEC to carry out thorough investigations should there be any market irregularities.

One major concern leading to the rejection of spot Bitcoin ETFs is the regulator’s ability to oversee and ensure continuous asset safety and custody. To address this, the United States must enhance its legal and regulatory framework to instill confidence in the SEC and other parties involved in permitting an ETF provider to manage it.

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