Bitcoin ETFs are set to shake up crypto markets
Even as bitcoin holds around $30,000, and other cryptoassets seem to be trading in cautiously optimistic ranges, the real change is still on the horizon. In late June there were multiple applications filed with the Securities and Exchange Commission to launch spot bitcoin exchange traded funds; this is not the big news in and of itself. With similar applications having been filed (and rejected) previously, the real difference is which institutions have submitted these applications. These include some of the largest financial firms in the world, with Blackrock and Fidelity serving as the headliners of this current crop of application.
The market need for more comprehensive crypto trading solutions is simultaneously obvious to most market participants and difficult to achieve following the litany of failures in the sector. The world’s largest crypto exchange, Binance, continues to face significant headwinds when seeking to establish new offices across the globe. Even Coinbase, the only U.S. publicly traded crypto exchange, is facing down lawsuits from the SEC; the path forward does not seem to be driven from the crypto-native sector. Rather, and evidenced by both these recent ETF applications and continued investment in tokenized asset applications, TradFi is seemingly coming around to the market appetite and opportunities to be founds in cryptoassets.
Speculation aside, there are several concrete ways that a spot bitcoin ETF will change crypto trading; let’s take a look at a few of them.
Lower Commissions
The first and most obvious way that spot ETF products will change the marketplace, especially those supported by firms such as Blackrock, is that this will cause downward pressure on trading fees and commissions. Coinbase, the leading U.S. crypto exchange, has a tiered trading fee structure that can vary significantly, but can be as high as 3% for retail traders. Contrasted with the average fee of 0.01% for ETF trading, and the impact on profits could be significant. For example, a trader would pay $300 (3%) on a $10,000 trade versus paying $1 at the average 0.01% fee for ETF trades.
Sticking with Coinbase specifically for the time being, it is important to note that Blackrock has enlisted the firm to operate as its custody partner for this proposed product.
More Automation And AI
As a direct result of lower fees and trading commissions it is almost a given that more automation, and potentially AI-based trading, will be coming to the crypto sector sooner rather than later. In fact the former President of FTX U.S., Brett Harrison, has founded a new crypto exchange that will be infused with AI to facilitate trading, market making, and other operations. Architect, borrowing from the playbook embraced by many TradFi institutions, will make use of ChatGPT to enhance AI offerings. Regardless of whether it is generative AI, or more mundane automation of back office tasks, the lower fees that will begin to permeate the marketplace will lead to greater adoption of automation across the crypto sector.
Less Currency Use
A reality that is set to irritate members of the bitcoin maximalist community is that the submission and approval of a bitcoin ETF, and the inflows of capital that will follow as portfolio managers and asset managers rebalance accordingly, will further diminish the likelihood of bitcoin being used as a currency. As the appeal of bitcoin as an asset class continues to move into the mainstream and be leveraged by individuals and institutions alike, i.e., forecasting higher prices, entrepreneurs and other businesses are less like to take and make payments in this token.
Notably, according to 2023 analytics from research firm Glassnode, over 50% of bitcoin have not moved in over two (2) years, indicating that the holding for the long term was – and continues to be – a leading strategy in the bitcoin market.
Less Self-Custody
Another fundamental change that will be accelerated as the result of major institutions achieving ETF approval is that custody will also change in a major way. As a bearer asset, bitcoin and other crypto advocates have emphasized the importance of self-custody and key management for years. Scandals and centralized exchanges and operators have highlighted the importance of this topic; cold wallet manufacturers such as Tezor saw dramatic jumps in sales following the failure of multiple centralized and decentralized exchanges in 2022.
Assuming a spot ETF is approved, this means that the custody over both the bitcoin and cash component of this product will be handled by an external third-party. Even more telling is that the proposal submitted by Blackrock, itself the largest asset manager in the world, involves Coinbase for bitcoin custody and shares cash custody responsibilities amongst the largest banks in the U.S. All of this might help this ETF obtain approval from the SEC, and assuage investor concerns, but means that self-custody is off the table.
Whichever way the applications for a spot ETF submitted by Blackrock (and others) are analyzed, it looks positioned to dramatically change the crypto trading landscape going forward; investors should keep a close eye our for future developments.
