BlackRock’s Bitcoin ETF: How it works, its benefits and opportunities

The largest asset management company in the world, BlackRock, has expressed interest in the cryptocurrency sector by filing an application for a Bitcoin spot exchange-traded fund (ETF). 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 might offer investors an opportunity for diversification. Moreover, it could offer 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.

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. Introducing a spot Bitcoin ETF — such as the one that BlackRock is proposing — 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.

Compared with current options, BlackRock’s proposed spot Bitcoin ETF is anticipated to provide better price tracking and possibly lower fees. BlackRock’s competitors, such as ProShares Bitcoin Strategy ETF and Grayscale, charge 95 basis points and 2%, respectively. 

For investors in the cryptocurrency market, the launch of BlackRock’s spot Bitcoin ETF is likely to 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 could 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 would 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 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 increase 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.

Ripple effect on other cryptocurrencies

The decision by BlackRock has also 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.

When will BlackRock’s Bitcoin ETF be approved?

The value of BTC has soared, reaching its highest point in a year, on the expectation that BlackRock would be able to overcome U.S. authorities’ long-standing opposition to Bitcoin spot ETFs. Optimism among cryptocurrency traders has increased due to BlackRock’s filing.

According to Eric Balchunas, a senior ETF analyst for Bloomberg, there is a 50% chance that BlackRock’s spot Bitcoin ETF will be approved. This forecast follows a comment by Elliott Stein, a senior litigation analyst for Bloomberg Intelligence.

Balchunas also asserts that approving an ETF from a respected and established institution like BlackRock may be seen as a positive step for the SEC in maintaining its credibility, in contrast to the ongoing case involving Grayscale. However, given the SEC crackdown on cryptocurrencies, it remains uncertain when or if the BlackRock Bitcoin ETF will be approved.

Written by Jagjit Singh