The Bitcoin exchange-traded fund (ETF) market has been eagerly awaiting a green light from the US Securities and Exchange Commission (SEC) for a long time. Many applications have been filed, rejected, or delayed, but the hope remains that one day, the SEC will approve a Bitcoin ETF that can offer investors exposure to the leading cryptocurrency in a regulated and convenient way.
One of the companies that has submitted a Bitcoin ETF application is Valkyrie Investments, a digital asset management firm that already offers several crypto-related products and services. Valkyrie’s Chief Investment Officer, Steven McClurg, recently shared his insights and expectations on the Bitcoin ETF landscape in an exclusive interview.
McClurg believes that the chances of a Bitcoin ETF approval are higher than ever, especially after the SEC approved the first Bitcoin futures ETFs in October. He thinks that the SEC is more comfortable with the futures market than the spot market, as it has more oversight and regulation. However, he also acknowledges that futures ETFs have some drawbacks, such as higher fees, contango, and tracking error, compared to spot ETFs.
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That’s why McClurg is optimistic that Valkyrie’s spot Bitcoin ETF application, which was filed in June and is currently under review by the SEC, will eventually get approved. He says that Valkyrie has done extensive research and due diligence to address the SEC’s concerns regarding market manipulation, custody, valuation, liquidity, and investor protection. He also points out that Valkyrie has partnered with Coinbase, one of the largest and most reputable crypto platforms in the world, to provide custody and execution services for its spot Bitcoin ETF.
McClurg expects that the SEC will make a decision on Valkyrie’s spot Bitcoin ETF by the end of November, as that is the statutory deadline for the agency to either approve or deny the application. He says that he is confident that Valkyrie has presented a strong case for its product and that it meets all the criteria and standards that the SEC requires. He also hopes that the SEC will recognize the benefits and advantages of a spot Bitcoin ETF over a futures ETF for investors who want to gain exposure to Bitcoin in a simple and cost-effective way.
McClurg concludes by saying that he is excited about the future of Bitcoin and the crypto industry as a whole, and that he believes that a spot Bitcoin ETF will be a game-changer for the market. He says that Valkyrie is committed to providing innovative and accessible crypto solutions for investors of all types and sizes, and that he looks forward to seeing more adoption and acceptance of digital assets in the mainstream financial world.
However, there are also some drawbacks and risks associated with bitcoin ETFs that investors should be aware of before jumping in. Here are some of them:
Regulatory uncertainty: Bitcoin ETFs are subject to the rules and regulations of the jurisdictions where they are listed and traded, which may vary widely and change frequently. For example, in the US, the Securities and Exchange Commission (SEC) has not yet approved any bitcoin ETFs, citing concerns over market manipulation, fraud, custody, and investor protection.
The SEC has also recently warned that it may sue Coinbase, a leading cryptocurrency exchange, over its plans to launch a lending program involving crypto assets. These regulatory hurdles and uncertainties may affect the availability, performance, and legality of bitcoin ETFs in different markets.
Tracking error: Bitcoin ETFs aim to track the price of bitcoin as closely as possible, but they may not always succeed due to various factors such as fees, expenses, liquidity, supply and demand, market volatility, and technical issues. Tracking error is the difference between the return of an ETF and the return of its underlying asset. A high tracking error means that the ETF is not accurately reflecting the price movements of bitcoin, which may result in losses or missed opportunities for investors.
Premium or discount: Bitcoin ETFs may trade at a premium or discount to their net asset value (NAV), which is the value of their underlying holdings. A premium means that the ETF is trading at a higher price than its NAV, while a discount means that it is trading at a lower price than its NAV.
These price discrepancies may occur due to supply and demand imbalances, market inefficiencies, or arbitrage opportunities. Investors who buy an ETF at a premium may end up overpaying for their exposure to bitcoin, while investors who sell an ETF at a discount may end up receiving less than their fair share.
Tax implications: Bitcoin ETFs may have different tax implications than holding bitcoin directly, depending on the tax laws and regulations of each country. For example, in the US, bitcoin is treated as property for tax purposes, which means that investors have to report any capital gains or losses when they sell or exchange it.
However, bitcoin ETFs may be treated as securities or commodities for tax purposes, which may have different tax rates and reporting requirements. Investors should consult their tax advisors before investing in bitcoin ETFs to understand the potential tax consequences.
Counterparty risk: Bitcoin ETFs involve intermediaries such as fund managers, custodians, brokers, exchanges, and regulators, who may pose counterparty risk to investors. Counterparty risk is the risk that one party in a transaction fails to meet its obligations or perform its duties, resulting in losses or delays for the other party.
For example, a fund manager may mismanage the assets of an ETF, a custodian may lose or compromise the private keys of the bitcoin holdings, a broker may default on its trades or charge excessive fees, an exchange may suffer a hack or outage, or a regulator may impose sanctions or restrictions on an ETF. These scenarios may affect the security, liquidity, and value of bitcoin ETFs.
Bitcoin ETFs are not a perfect solution for investing in bitcoin. They have their own advantages and disadvantages that investors should weigh carefully before making a decision. Bitcoin ETFs may offer convenience, diversification, and exposure to bitcoin, but they also come with regulatory uncertainty, tracking error, premium or discount, tax implications, and counterparty risk.
There are several potential benefits of a spot Bitcoin ETF, such as:
Liquidity: A spot Bitcoin ETF would trade on a regulated stock exchange, making it easier and cheaper for investors to buy and sell shares. This would also reduce the risk of price manipulation or fraud that may occur on some unregulated platforms.
Accessibility: A spot Bitcoin ETF would open up the market for Bitcoin to a wider range of investors, especially institutional ones, who may have legal or operational constraints that prevent them from holding the cryptocurrency directly. A spot Bitcoin ETF would also lower the barriers to entry for retail investors, who may not have the technical knowledge or resources to deal with the complexities of Bitcoin.
Diversification: A spot Bitcoin ETF would offer investors a way to diversify their portfolio with an asset that has a low correlation with other traditional assets, such as stocks and bonds. This could help improve the risk-return profile of their portfolio and hedge against inflation or currency devaluation.
Transparency: A spot Bitcoin ETF would provide investors with clear and accurate information about the value and performance of their investment, as well as the fees and expenses involved. A spot Bitcoin ETF would also be subject to the same regulatory and reporting standards as other ETFs, ensuring a high level of oversight and accountability.