BlackRock's Bitcoin ETF: A Game-Changing Development

Ah, look who's here! BlackRock (BLK) made its entrance into the conversation in the early part of last year, and now it has finally found its voice.

On Thursday afternoon, BlackRock's iShares division submitted documentation to the U.S. Securities and Exchange Commission (SEC) to establish an exchange-traded fund (ETF) focused on bitcoin (BTC) trading in real-time.

Just like anything that exists in the perpetual online realm, numerous individuals are getting entangled and stumbling over the finer details. Is this newly suggested fund truly an ETF, or is it simply a trust? The question may seem peculiar, but the upper echelon of BlackRock's S-1 filing showcases the proposed fund under the name: iShares Bitcoin Trust.

Prior to delving deeper into the topic, as Eric Balchunas from Bloomberg pointed out on Twitter, the operational structure of the SPDR Gold Shares ($GLD) ETF functions in precisely the same manner. While it operates as a trust, its functionality mirrors that of an ETF. Without delving into intricate details, if the iShares Bitcoin Trust receives approval and operates with daily creations and redemptions, it would essentially adopt the appearance and functionality of an ETF. Consequently, does it truly matter if it is technically classified as a "trust"?

The term "many people." can be used to describe the answer. The market expresses concerns regarding the use of the word "trust" in relation to publicly-traded bitcoin instruments, primarily due to the Grayscale Bitcoin Trust (GBTC). GBTC functions by holding bitcoin, and individuals can acquire its shares over-the-counter to gain exposure to the underlying bitcoin. The reason for concern stems from the fact that GBTC shares are traded at a significant discount compared to their net asset value.

In simpler terms, according to the information on Grayscale's website, each share of GBTC is worth $13.40 in the market, even though the value of bitcoin held per share is $23.00 (as of June 15, 2023).

(Disclosure: Grayscale is a subsidiary of Digital Currency Group)

There are several reasons why this is problematic. However, such occurrences should not occur with BlackRock's product, as it is essentially an ETF. Nevertheless, the intriguing discussion surrounding this product, which can be considered a trust in technical terms but functions like an ETF, revolves around its impact on exchanges and paper bitcoin.

Trading above bitcoin’s cap

Bitcoin liquidity has been severely impacted following the discontinuation of Binance's zero-fee bitcoin trading program earlier this year, and the collapse of FTX in November last year. While the reasons behind Binance's decision are widely known, documents relating to FTX reveal that their bankruptcy team has been unable to locate almost all of the bitcoin owed to customers by the failed exchange. The extent of this missing bitcoin raises concerns over the possibility that a significant portion of it may have been mere "paper bitcoins" or IOUs.

Not to mention the bear market, which has frightened off market participants, and that's just the tip of the iceberg.

The presence of market illiquidity has led to significant fluctuations in prices. However, the approval of the iShares fund and BlackRock's entry into the bitcoin market could potentially address any concerns regarding liquidity. It is crucial to emphasize the enormous impact a BlackRock-sponsored bitcoin ETF would have. As the world's largest asset manager, BlackRock's involvement alone would bring a sense of credibility and subsequently attract substantial capital inflows.

Perhaps that could potentially drive up the price of bitcoin, but aside from that, there are two crucial factors that I will closely monitor moving forward.

Initially, exchanges should instill a sense of caution. When new investors seek to gain price exposure to bitcoin without valuing its unique features (such as its utility), their primary objective becomes acquiring bitcoin at the lowest possible cost. In such cases, these investors would prefer paying a minuscule portion of the fees charged by an exchange through an ETF, rather than paying a 1% fee. This choice arises from their lack of interest in utilizing bitcoin for practical purposes.

Furthermore, the introduction of a spot ETF by BlackRock could potentially amplify the proliferation of paper bitcoin, capitalizing on the fixed supply characteristic of bitcoin. While the Bitcoin protocol dictates a limited quantity of bitcoin, the financial markets operate under different rules. In these markets, the creation of complex financial instruments is permissible, enabling the representation of virtually any value, including varying amounts of bitcoin.

The U.S. dollar market price of bitcoin is directly influenced by the amount of U.S. dollars that an exchange is willing to offer in exchange for bitcoin. This value is determined by the market dynamics. However, there is a concern that the market could be vulnerable to significant speculation in derivative markets, leading to an increase in the effective supply of bitcoin beyond its predetermined finite cap. In essence, there may be no substantial barrier preventing this scenario from occurring.

While there is ongoing discussion regarding the approval of BlackRock's offering by the SEC, it is worth noting that the regulatory agency has previously declined all spot market bitcoin ETF proposals due to concerns about potential market manipulation within the bitcoin market. Nevertheless, BlackRock's submission includes enhanced market surveillance measures, leading some analysts to believe that this could be the inaugural spot bitcoin ETF to receive approval. Furthermore, considering the reputation and stature of BlackRock, it raises the question of whether the SEC would reject their proposal.

Regardless of the outcome, whether it leads to an increase or decrease in the price of bitcoin or wherever it may end up, the approval of the iShares Bitcoin Trust will have a significant impact.

Source Coindesk