When the spot bitcoin ETF begins trading, here's what happens.

The Securities and Exchange Commission is expected to approve a number of spot bitcoin applications on Wednesday, which crypto investors are eagerly anticipating.

As a spot bitcoin ETF becomes increasingly likely, the focus is shifting to the specifics of its trading, pricing, the extent of the bitcoin price surge resulting from pulled-forward demand, and whether it will be undervalued or overvalued.

Fees are competitive and will get more so

Bitcoin ETF issuers are already engaged in a modest price war, with nearly a dozen competitors vying for attention. For instance, Cathie Wood's ARK Invest, which is partnering with 21Shares to launch a bitcoin ETF, initially announced a fee of 0.8% but on Monday announced no fee for the first six months.

Several issuers, including Bitwise, ARK, Invesco, and Grayscale, are offering discounted prices on their cryptocurrency products. Bitwise and ARK are offering 0% fees for the first six months, while Grayscale is charging 1.5%.

The fees for spot bitcoin ETFs vary, with Bitwise (BITB) charging 0.0% after the first six months, and Franklin Bitcoin ETF (EZBC) charging 0.29% after July 31, 2024. Other options include Invesco Galaxy Bitcoin ETF (BTCO) at 0.0% after the first six months, and Grayscale Bitcoin Trust (GBTC) at 1.5%. It's important to note that fees may change after the first six months or a year, and some ETFs charge higher fees for longer holding periods.

The expense ratio for Invesco's Galaxy Bitcoin ETF is initially 0.0% for the first six months and $5 billion in assets, then increases to 0.39%.

Source: Bloomberg/SEC.gov

How will a spot bitcoin trade relative to bitcoin and bitcoin futures?

What is one of the primary concerns regarding a spot bitcoin ETF's ability to accurately reflect the price of bitcoin and bitcoin futures?

Simeon Hyman, ProShares' global investment strategist who oversees the largest bitcoin futures ETF, BITO, launched in October 2021, stated that bitcoin futures ETFs have closely followed bitcoin. However, he also emphasized that the spot market for bitcoin is still immature, while the futures market is regulated and mature. As a result, it remains to be seen how well they will track each other.

Will bitcoin ETFs trade at a premium or discount to their net asset value? Some worry that the creation and redemption process for spot bitcoin ETFs may cause them to trade at a premium to their NAV.

Reggie Brown, GTS co-global head of ETF trading and sales, stated that some ETFs will initially trade at a premium, but as investors gain a better understanding of the complexities, we will filter out the intricacies and minute details.

Most market participants believe that any premiums will be small.

In 2021, the first bitcoin ETF to launch in Canada was managed by Som Seif.

"Our product has very tight spreads and trades efficiently, with no impact on trading efficiency due to a broad range of players and a highly liquid underlying asset," Seif informed me.

Matt Hougan, CIO of Bitwise Asset Management, one of the applicants for a bitcoin ETF, stated that the underlying market is very liquid. He added, "We have been in the market buying and selling bitcoin for years. The main issues are who gets the liquidity and who wins on expenses."

How much money will these ETFs attract?

The amount of new money that will be attracted when a spot bitcoin ETF is traded is uncertain.

In the past two years, two ETF-related events have contributed to the growth of interest in bitcoin.

The launch of the first bitcoin futures ETF in October 2021 helped push bitcoin from near $45,000 in September 2021 to over $60,000. The largest bitcoin futures ETF, ProShares Bitcoin Strategy ETF (BITO), has recently surpassed $2 billion in assets under management.

On June 16, 2023, Blackrock's application for a bitcoin ETF caused bitcoin's price to rise from approximately $25,000 to $30,000 in a short period of time.

Brown predicted that the combined ETFs could experience substantial inflows in the coming months. He stated to Bloomberg that within the next thirty days, it could attract between $2 billion to $3 billion in new assets, with a potential range of $10 billion to $20 billion in new assets this year.

Despite the current market capitalization of bitcoin being close to $900 billion, the inflow into the Canadian spot bitcoin ETF, Purpose Bitcoin ETF, is not significant as it has only $400 million in assets after more than two years.

What’s next?

Whether big institutions and financial advisors will permit their clients to trade bitcoin through their platforms is the next issue, according to Hougan.

The launch of a bitcoin ETF does not guarantee JP Morgan's participation.

The next major events are the bitcoin halving in April and any interest rate cuts from the Federal Reserve, according to Hougan.

Non-yielding assets like bitcoin or gold are negatively affected by higher interest rates, as stated by him. He pointed out that a 5% return on cash presents tough competition.

Note: The latest version reflects updated fund fees from a previous version.

The story has been revised to show that the correct ticker symbol for the Bitwise spot bitcoin ETF is BITB. Additionally, the bitcoin prices in 2021 were incorrect in a previous version.