Research Summary
The report discusses the upcoming launch of spot Bitcoin ETFs in the US and the SEC’s decision to allow only “cash-only” creations and redemptions, rather than “in-kind”. It explores the potential impact of this decision on the effectiveness of these ETFs and provides an analysis of over 10,180 ETF products worldwide to understand the prevalence and performance of cash-only ETFs.
Key Takeaways
SEC’s Stance on Bitcoin ETFs
- Evolution of Bitcoin ETFs: The SEC initially allowed non-redeemable Bitcoin Trusts like Grayscale’s GBTC, which traded with a high premium and discount. Later, it permitted Bitcoin ETFs that only participate in Bitcoin futures markets, such as the Proshares BITO ETF. However, these ETFs underperformed Bitcoin, potentially causing investors to lose out.
- Upcoming Spot Bitcoin ETFs: The SEC is now set to approve spot Bitcoin ETFs but has stipulated that the creation and redemption process will be on a “cash-only” basis. This decision is believed to be due to concerns about potential AML violations if Authorised Participants (typically Investment Banks) deal in Bitcoin.
Impact of Cash-only Creations
- Reduced Competition: Cash-only creations can reduce competition in buying and selling Bitcoin, potentially making the product less efficient. While Authorised Participants still compete with each other to create and redeem units, they compete over fewer functions.
- Tracking Error: The report’s analysis of over 10,180 ETF products shows that cash-only ETFs tend to have higher tracking errors, indicating that they may not track their benchmark as closely as ETFs that allow in-kind creations.
Prevalence of Cash-only ETFs
- By Number of Products: Cash-only products account for 21.7% of the total number of ETFs, representing 2,208 ETFs. Many of these are cash-only due to the issuer’s choice, not a regulatory requirement.
- By Assets: When broken down by assets, cash-only products are far rarer, accounting for just 7.4% of the total assets in the ETF industry.
Actionable Insights
- Monitor the Performance of Spot Bitcoin ETFs: Given the SEC’s decision to allow only cash-only creations and redemptions, it will be crucial to monitor the performance of the upcoming spot Bitcoin ETFs to understand the impact of this decision on their effectiveness.
- Consider the Impact of Cash-only Creations on Investment Decisions: Investors should consider the potential impact of cash-only creations on the efficiency and tracking error of ETFs when making investment decisions.
- Stay Informed About Regulatory Developments: The report suggests that there may be more regulatory and legal battles with the SEC in 2024. Staying informed about these developments can help investors understand potential changes to the ETF landscape.
