NEW YORK, October 23, 2023 - The potential launch of a Bitcoin spot ETF has generated significant buzz among investors, both individual and institutional. But how exactly does this process work?

When BlackRock filed an application for the creation of a spot Bitcoin ETF with the SEC, the crypto market reacted positively, viewing this as a significant step toward mainstream adoption. Although some crypto purists might view the involvement of traditional financial institutions (TradFi) skeptically, the reality is that these large institutions are crucial for widespread acceptance of cryptocurrency.

The excitement around BlackRock's spot ETF application has overshadowed the multiple other similar applications submitted recently. On October 16th, news (later proven false) that BlackRock’s ETF had been approved caused Bitcoin’s price to briefly surge above $30,000. This event underscored the market's optimism and the high expectations tied to institutional players like BlackRock, which boasts an almost 100% success rate with previous ETFs.

How ETFs Are Submitted

The process of submitting an ETF might seem confusing, especially given the numerous rejections and delays faced by Bitcoin ETFs. However, this process has been successfully completed thousands of times for other types of ETFs. Here’s a summary of how it works:

Sponsor Submission: The prospective ETF manager, known as the sponsor, files a plan with the SEC to create an ETF. This is the stage where Bitcoin ETF applications have been repeatedly stalled, as the SEC has continually rejected them.

Authorized Participant: For recent applications like BlackRock’s, the sponsor and authorized participant (usually a large institutional investor) are likely the same entity. If the application progresses, the authorized participant acquires the underlying asset, places these assets in a trust, and uses them to form ETF creation units.

Despite this seeming complexity, the U.S. has nearly 3,000 ETFs worth almost $10 trillion, highlighting the unusual steadfast rejection of Bitcoin ETF applications.

How Bitcoin Spot ETFs Are Different

Bitcoin spot ETFs differ from trust offerings like the Grayscale Bitcoin Trust in several key ways:

Redeemability: Trust products generally cannot be redeemed for the underlying asset, causing price discrepancies between the trust product and the asset itself. In contrast, a spot ETF operates as an open-end fund, offering flexibility to issue new shares and better track the spot price of Bitcoin.

Liquidity and Tax Treatment: Spot ETFs provide improved liquidity and favorable tax treatment for investors, making them more attractive to a wide range of investors.

Who Approves ETFs

The SEC is responsible for approving ETFs, and it has approved thousands of such products since their introduction. This history makes the lack of a Bitcoin spot ETF particularly frustrating for many. Despite approving ETFs with more exotic underlying assets, the SEC, under Gary Gensler, has consistently opposed a Bitcoin spot ETF, citing concerns about market maturity, volatility, and investor protection.

Why There Is No Bitcoin ETF

The reasons behind the absence of a Bitcoin spot ETF in U.S. markets are varied:

SEC Concerns: The SEC has repeatedly stated that Bitcoin’s volatility, the prevalence of fraud in the crypto industry, and insufficient investor protections make the market unsuitable for an ETF product

Crypto Proponents' View: Many in the crypto community argue that the lack of a spot ETF reflects an anti-crypto stance among some U.S. policymakers. The SEC's numerous enforcement actions and lawsuits against crypto firms further fuel this perception.

As the likelihood of a spot Bitcoin ETF approval increases, it's crucial for investors and entrepreneurs to understand how the ETF process works, who is involved, and why this process has taken so long. Whether the SEC approves a spot Bitcoin ETF or not, the decision will have significant implications for the crypto market and its participants.