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(Kitco News) - Recent amendments to the spot Bitcoin (BTC) exchange-traded fund (ETF) applications filed by some of the largest asset managers in the world have stoked optimism in the crypto community that the next major bull run is imminent as institutions are about to enter the market in force.
But with the Securities and Exchange Commission’s (SEC) history of rejecting such applications due to concerns related to fraud and market manipulation, there is no guarantee that a spot BTC ETF will be approved any time soon.
To gain more insight into the topic, Kitco Crypto spoke with Martin Leinweber, digital asset product strategist at MarketVector Indexes, the indexing arm of VanEck and one of the original indexing pioneers in the industry.
According to Leinweber, the primary obstacle to a spot BTC ETF in the U.S. continues to be regulatory uncertainty, as the SEC “has voiced concerns about market manipulation, liquidity, and custody of the underlying assets.” These concerns remain despite the recent applications coming from some of the most reputable names in the custodian business.
“While a reputable prime institutional-grade custodian can address the custody issue, there's still no regulated exchange comparable to the NYSE,” he said. “The definition of a ‘market of significant size’ is also unclear. Does it only include the USD pair, or does it extend to stablecoin pairs as well? This significantly impacts the choice of exchanges.”
The addition of Coinbase as the surveillance sharing agreement (SSA) partner on the applications “enhances the chances of approval,” Leinweber said, as the agreement “enhances transparency and oversight, potentially mitigating some of the SEC's concerns about market manipulation.”
“This feature was absent in former filings and appeared the first time with BlackRock's initial filing,” he said.
To help create a better chance of approval and to ensure their products have a fair and transparent valuation, Leinweber said that ETF issuers should utilize “trustworthy and regulated pricing sources, implement solid valuation methodologies, and provide investors with clear and comprehensive disclosures.”
He added that regular audits and compliance checks are also an essential piece. “For instance, the NAV [net asset value] valuation can be based on a regulated index that uses vetted exchanges and a reliable index price algorithm,” he said. “That’s the reason why we’ve developed a Bitcoin Benchmark Rate at MarketVector.”
Another key piece in securing approval for a spot BTC ETF is reference rates. “The reference rate must be reliable, transparent, and immune to manipulation,” said Leinweber. “For instance, MarketVector uses a volume-weighted median price based on top-rated crypto exchanges. This methodology is extremely resistant to manipulation, as it would require tampering with all exchanges over multiple time periods, which is highly improbable.”
On the topic of how the approval of a spot BTC ETF could lead to the approval of additional institutionally-backed crypto products, Leinweber said such an approval “could open the door for ETFs based on other cryptocurrencies like Ether.”
He noted, however, that each application will be evaluated on its own merits according to the prevailing regulatory environment.
“In the U.S., Bitcoin is the only coin deemed a commodity by the SEC,” he said. “There are indications that ETH could also be classified as a commodity. The SEC has intentionally remained silent on ETH, the CFTC has futures on it, and the new EDX exchange is listing ETH as well, so there's a high likelihood that an ETH ETF could be approved.”
When it comes to other coins that are more likely to be labeled securities, Leinweber said the creation of ETFs for these tokens “depends on how the SEC will evolve.”
“But remember, crypto is a global phenomenon,” he noted. “In Europe, there are already many multi-token baskets. It'll come to the U.S. as well, but the timing is still uncertain and unlikely in the near future.”
Despite the challenges that remain, Leinweber said the outlook for institutional adoption of Bitcoin, crypto, and blockchain technology is positive.
“The BlackRock application indicates potential demand,” he said. “They wouldn't proceed if they only expected to get 100 million USD in AUM. When Larry Fink speaks positively about crypto, it signals to other asset managers that the perceived career risk is lower. This is evident in the filings that followed BlackRock's.”
He added that recent developments in Hong Kong show that the Asia market “is opening up” to crypto, while the passage of the Markets in Crypto Assets (MiCA) bill in Europe will create a “large region with regulatory clarity.”
“All these are positive signs for institutional adoption,” he said.
Since the BlackRock filing, Leinweber said there has been a significant increase in institutional interest in the asset class.
“This is evidenced by the growing number of institutional-grade products and services, as well as the increasing volume of institutional capital flowing into the space,” he said. “Especially crypto stocks like Microstrategy, Marathon Digital, or Coinbase had a strong rally, as institutions can easily buy these stocks and they have a high beta to crypto. So, they serve as a crypto proxy for institutions that can't buy crypto yet.”
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While he refrained from giving a price prediction for Bitcoin in the event that a spot ETF is approved, Leinweber said “The approval or rejection of the ETF applications will significantly influence the price of BTC.”
“Approval could increase investor confidence and demand, potentially driving prices higher,” he said. “The first Bitcoin Futures ETF garnered 1 billion USD AUM in two days. I expect a similar figure, if not higher, for the first spot Bitcoin ETF. It could follow a similar trajectory as the first gold ETF, GLD, which now has over 100 billion USD in AUM.”
For newcomers just beginning to dip their toes into the world of crypto, Leinweber emphasized that “Education is paramount. Begin by understanding the technology behind digital assets, the different types of digital assets, and the associated risks. An initial small allocation to digital assets within a diversified portfolio could be an interesting strategy.”
Before looking to invest in Bitcoin or other cryptocurrencies, he said investors should consider each asset’s historical price performance, volatility, correlation with other assets, regulatory developments, and the overall market sentiment towards cryptocurrencies.
“This new asset class offers a unique risk-return potential and, over a longer timeframe, is an excellent diversifier for a traditional 60/40 portfolio,” he added.
While Leinweber is optimistic about the future of cryptocurrencies as an asset class, he stressed that it is “crucial for readers to understand that while digital assets offer significant potential, they also come with considerable risks. It's vital to conduct your own research, understand what you're investing in, and consider seeking advice from a financial advisor.”
