The largest asset management company in the world, BlackRock, has expressed interest in the cryptocurrency sector by applying for a spot Bitcoin exchange-traded fund (ETF) on June 15, 2023. Creating a well-structured ETF that complies with market norms and legal regulations may benefit from BlackRock’s experience managing investment funds and its vast network in the financial sector.
Additionally, by adding Bitcoin (BTC) among other investment assets, a BlackRock Bitcoin ETF aims to offer investors an opportunity for diversification. Moreover, it could be an alternative investment vehicle that competes with the Grayscale Bitcoin Trust and other existing cryptocurrency investment options.
Bitcoin ETF, explained
A Bitcoin ETF is a financial product that allows investors to gain exposure to Bitcoin’s price movements without owning the cryptocurrency directly. Bitcoin ETFs track the performance of Bitcoin as an underlying asset.
Investors that purchase Bitcoin ETFs are, in essence, buying shares or units of the fund that uses Bitcoin as its underlying asset. The value of the ETF is intended to reflect Bitcoin’s performance, giving investors an alternative method to invest in Bitcoin without having to set up and maintain a digital wallet or use cryptocurrency exchanges.
One of its main advantages is that a Bitcoin ETF offers a regulated and well-known investment structure. It allows investors to track changes in the price of Bitcoin within the confines of established financial markets, while also gaining access to the ETFs’ liquidity and transparency.
Because a Bitcoin ETF often holds a basket of Bitcoin rather than a single unit, investing in one can have certain advantages, such as diversification. It also allows daily buying and selling of shares, similar to other publicly traded securities.
However, it is crucial to remember that the accessibility of Bitcoin ETFs may differ depending on the jurisdiction and legal framework. Before making any investment selections, investors should carefully analyze aspects, including fees, tracking precision and the custodian arrangements of the ETF.
BlackRock’s iShares Bitcoin Trust
BlackRock, the world’s largest fund manager, applied for a spot Bitcoin ETF on June 15, 2023. The application coincided with the United States Securities and Exchange Commission’s (SEC) lawsuits against Coinbase and Binance — two prominent crypto exchanges. The iShares arm of BlackRock is requesting approval for the iShares Bitcoin Trust, a spot Bitcoin ETF.
On Jan. 10, 2024, the SEC approved BlackRock’s spot Bitcoin ETF, the iShares Bitcoin Trust (IBIT), along with 10 other ETFs. IBIT is designed to mitigate obstacles and operational complexities, providing a direct avenue for diverse investors, ranging from asset managers to financial advisers, to engage with BTC.
The ETF intends to use custodian services offered by cryptocurrency exchange Coinbase. BlackRock aims to follow Bitcoin prices using the CME CF Bitcoin Reference Rate, which gathers information from reliable cryptocurrency exchanges around the world, according to the official filing. Kraken’s subsidiary, CF Benchmarks, is in charge of gathering price information.
In addition to considering its investment potential, it is important to evaluate the position of a spot Bitcoin ETF within the existing offerings in the U.S. market. Grantor trusts, futures-based ETFs and Bitcoin-adjacent equity funds are the three main types of funds available on the Bitcoin ETF market, as explained below:
- Grantor trusts held actual Bitcoin but often traded at a premium or discount.
- Futures-based ETFs invest in Bitcoin futures contracts rather than the cryptocurrency itself and are subject to tracking errors.
- Bitcoin-adjacent equity funds focus on companies in the Bitcoin and cryptocurrency sectors rather than direct Bitcoin investment.
Introducing a spot Bitcoin ETF — such as the one proposed by BlackRock — would create a distinct fourth category because it does not fit within the existing options.
How will BlackRock’s Bitcoin ETF work?
Futures-based Bitcoin ETFs, in contrast to spot-based Bitcoin ETFs, aim to track the price of Bitcoin as closely as possible, but with some notable differences in their approach.
First, futures-based ETFs frequently hold front-month futures contracts that must be rolled over each month, incurring extra expenses. Furthermore, futures contracts have expiration dates, necessitating ongoing management and repositioning by portfolio managers.
To prevent market manipulation, futures exchanges such as the Chicago Mercantile Exchange (CME) also set position restrictions on futures contracts. When position limits are reached, portfolio managers of futures-based Bitcoin ETFs are obligated to buy longer-dated futures contracts to comply with the restrictions. This ensures that they can continue to manage the fund’s positions within the regulatory framework and avoid concentration risks.
However, these variances affect how Bitcoin’s price is tracked and may cause variations in the spot market. For instance, the contract’s accuracy in tracking the spot market decreases with time until its expiration date.
In contrast to existing choices, BlackRock’s spot Bitcoin ETF is expected to offer improved price tracking and potentially lower fees. Managed by BlackRock, iShares will impose a 0.25% sponsor fee for its Bitcoin investment product, IBIT, with a one-year waiver that reduces the fee to 0.12% on the initial $5 billion of assets under management (AUM).
The sponsor fee is a charge by BlackRock for managing the iShares Bitcoin Trust, covering operational costs, and the AUM represents the total value of IBIT’s assets. IShares Delaware Trust Sponsor LLC acts as the sponsor, with support from BlackRock Investments LLC, both linked to BlackRock Inc.
Coinbase Custody Trust Company LLC serves as the Bitcoin custodian, independent from BlackRock Inc. Notably, the sponsor isn’t accountable for losses arising from the trust’s BTC being lost, stolen, destroyed or compromised.
For investors in the cryptocurrency market, the launch of BlackRock’s spot Bitcoin ETF may result in several favorable improvements, including more accurate tracking of Bitcoin values and possibly more affordable investment options, which could enhance the overall investor experience.
What does the BlackRock Bitcoin ETF mean for crypto?
The introduction of a BlackRock Bitcoin ETF may have a significant impact on the cryptocurrency sector. Here are a few possible effects:
Increased adoption
BlackRock’s participation in the cryptocurrency industry through an ETF may attract more institutional and retail investors. It could increase the legitimacy of Bitcoin as a form of investment and lure more conventional investors into the market.
Liquidity and price impact
An ETF may give investors a regulated and accessible way to get exposure to Bitcoin without buying and storing the digital currency directly. As demand for the ETF shares would reflect investor sentiment, this may increase Bitcoin market liquidity and affect its price.
Regulatory attention and investor protection
BlackRock’s submission and approval for a Bitcoin ETF draws regulatory attention and emphasizes the significance of clear rules and safety nets for the cryptocurrency sector. The involvement of a well-known financial institution in providing a regulated investment vehicle emphasizes how important it is to have clear frameworks that put investor protection first.
These innovations have the potential to provide an open, safe environment for investors as they go through regulatory evaluation, which would eventually assist the market’s long-term stability and expansion.
Market risk and volatility
While a Bitcoin ETF would increase market liquidity and mainstream involvement, it might also raise market risk and volatility. A sudden sell-off or sizable institutional investments could impact the price of Bitcoin because ETFs are subject to market swings.
The ripple effect on other cryptocurrencies
The decision to submit an ETF application by BlackRock sparked a general market uptrend in the crypto sector. Positive news and developments from influential companies like BlackRock foster positive sentiment beyond BTC. As a result of investors looking to profit from the market’s rising trend, several cryptocurrencies have experienced price hikes and increased trading volumes.
Similarly, Bitcoin lingered near 21-month highs following the approval of a spot Bitcoin ETF by U.S. regulators. Simultaneously, the second-largest cryptocurrency, Ether (ETH), experienced gains amid optimism that ETFs linked to it might be the next to secure regulatory approval.
How to trade BlackRock’s iShares Bitcoin Trust (IBIT)
BlackRock’s iShares Bitcoin Trust (IBIT) trades on the Nasdaq. Investors looking to trade in IBIT must start by opening an account with a brokerage firm offering access to Nasdaq-listed securities. They should thoroughly investigate the trust before investing, learning about its composition, correlation to Bitcoin’s value, associated risks and the fees involved.
Interested investors can place an order to purchase shares in IBIT after funding their brokerage account, selecting between a market order, which allows them to buy at the current price, and a limit order, which will enable them to establish a specific price for the purchase.
When investors decide to sell their shares in IBIT, the process mirrors the purchases. Despite the benefits provided by IBIT, monitoring one’s investments is crucial when considering the volatile nature of Bitcoin and the overall market conditions.
It is also important to note that the trust’s shares don’t represent guaranteed deposits or obligations by BlackRock Inc or its affiliates and lack insurance from entities like the Federal Deposit Insurance Corporation. Furthermore, investors should be aware of their trades’ tax implications and ensure that their portfolio aligns with their investment strategy and risk tolerance to prevent substantial losses.
The road ahead
BlackRock’s iShares Bitcoin Trust marks a pivotal step in the cryptocurrency sector, which provides investors with better price tracking and possible cost benefits. The approval of BlackRock’s spot Bitcoin ETF could lead to greater adoption, increased liquidity and regulatory interest in cryptocurrencies.
Although IBIT is a notable addition to the growing pool of cryptocurrency investment possibilities, it also involves market risks and volatility, impacting the broader cryptocurrency landscape. Moreover, the prospect of BlackRock securing the top position among its 10 competitors in the spot Bitcoin ETF space is uncertain and remains to be seen.
Written by Jagjit Singh