Bitcoin ETFs are Now Available. Who Is Sure to Become Rich?
Investors may see a gold rush if spot bitcoin ETFs, a new method to follow the price of bitcoin, are approved in the US. However, a select group of middlemen will also profit handsomely in the background.
A new financial product approved by US authorities will allow customers to invest in bitcoin through their stockbroker for the first time like a stock.
The SEC has allowed BlackRock and Fidelity to establish spot bitcoin exchange-traded funds (ETFs) that monitor bitcoin prices. After a hijacker exploited the agency’s X account to prematurely announce the ETFs on January 9, market turmoil ensued and the SEC issued a retraction.
Investors are celebrating the advent of spot bitcoin ETFs as a source of new demand for the commodity, now more accessible, which might raise the price. However, much of the financial gain will be absorbed off-market.
ETF issuers charge a portion of investor funds for management. Further down, middlemen that offer the infrastructure for a spot bitcoin ETF stand to profit. Custodians store bitcoin for issuers, while authorized participants (APs) create new ETF shares and cash in old ones. Market makers assist price ETFs appropriately and guarantee seamless public market trading.
James Seyffart, ETF research analyst at Bloomberg Intelligence, says the number of organizations that execute trading-related services is restricted due to the capital needed to handle enormous amounts of assets coming in and out. The Venn diagram of willing and competent custody candidates is further limited by bitcoin’s technical rails, which are distinct from normal shares. “It’s a whole different area,” adds Seyffart.
At launch, spot bitcoin ETF issuers will share a few service providers. For most new ETFs, Coinbase and Gemini will offer custody. At now, only major financial services organizations JPMorgan, Cantor Fitzgerald, Virtu Financial, and Jane Street are APs.
The popularity of ETFs and the intensity of trading will determine these players’ earnings. Coinbase head of institutional services Brett Tejpaul said billions of dollars will pour into US spot bitcoin ETFs, calling the opportunity “enormous.”
Since 2021, US residents have had a loose proxy for bitcoin investment via bitcoin futures ETFs, whose value is tied with the crypto currency. However, spot bitcoin ETFs are the closest thing to investing directly without the danger of manual crypto storage.
The SEC had been wary of spot bitcoin ETFs for years due to price volatility and the lack of regulated trading platforms. The SEC reversed its decision to deny asset management Grayscale’s request to convert its bitcoin trust into a spot ETF in August 2023 after a US judge found the agency had erred.
Seoyoung Kim, professor of finance at Santa Clara University’s Leavey School of Business, said operators will compete for investment after the SEC approved all eleven spot bitcoin ETF applications. She thinks BlackRock and other “usual suspects” with the biggest reach and greatest reputation are in ideal position. Intermediaries may benefit from these firms’ relationships.
The US crypto businesses that store bitcoin for ETF issuers have clashed with authorities over their consumer-facing services in the recent year, so the new revenue stream might be crucial. The SEC sued Coinbase in June for running an unregistered US securities exchange. The New York attorney general charged Gemini with a $1.1 billion crypto deposit interest scam in October. Both corporations deny the claims and will battle them in court. However, expanding their custody operations might help mitigate the regulatory crackdown’s impact on US consumer crypto trading.
Kim suggests that crypto businesses currently serving as custodians may become APs or other ETF plumbing components. Head of institutional product Greg Tusar says Coinbase will lean toward crypto-specific offerings but not rule out the possibilities. Marshall Beard, Gemini’s chief strategy officer, said the company will reassess its offerings as spot bitcoin ETFs mature.
According to FalconX head of business Austin Reid, traditional financial institutions may “cannibalize portions of the market,” including crypto custody, as they get more acquainted with bitcoin’s technological complexity. He adds firms with crypto knowledge may service ETF issuers and have “opportunities for growth” in the meantime.
Tejpaul adds the potential would multiply if new spot bitcoin ETFs spawn varieties. ETFs might be a “giant building block,” he argues, on which derivative products may be created, increasing custodian and intermediary fees.
