How Will Bitcoin React in the Event of Spot ETF Approval?

The latest influx of bitcoin spot ETF applications in the U.S. is certainly generating excitement, but some analysts are divided on whether this excitement is justified. While many argue that approval will invite a new wave of investor capital into the asset, others believe it could merely represent a ‘sell the news’ event.

The pessimistic case for bitcoin spot ETF

In an interview with Bloomberg, FLX Networks CEO Jillian DelSignore questioned whether the bitcoin spot ETF would attract significant capital in the first few days after launch.

She cited the ProShare Bitcoin Strategy ETF (BITO), a bitcoin futures ETF that was listed on the NYSE in October 2021. While the bitcoin spot ETF supports its shares with actual bitcoin, the futures ETF is backed by bitcoin futures contracts.

BITO had the second-largest opening day in BITO’s history, attracting over a billion dollars, but largely ceased to absorb capital after a few days.

– I think we will definitely see more billions of dollars. I think it will be very early asset growth driven by momentum, and then it’s a question mark for me what will happen from there. Will it settle down? – said DelSignore regarding the potential spot ETF.

JP Morgan strategist Nikolaos Panigirtzoglou agrees. In a letter this month, the strategist stated that spot ETFs have existed in Canada and Europe for years and have failed to attract significant capital, not benefiting from the outflow of investors from gold ETFs.

Acknowledging that there could be some benefits from holding spot ETFs, the strategist predicted they would be ‘quite marginal’.

The positives of the spot ETF

In contrast, Bloomberg Intelligence ETF analysts, including Athanasios Psarofagis and James Seyffart, see great potential for the spot ETF.

When looking at existing Canadian crypto ETFs, analysts note that they have already attracted 1 percent of the ETF market in the country. If a roughly similar share of U.S. ETF capital were to flow into a U.S. bitcoin spot ETF, it would amount to $54 billion. In context, the total U.S. commodity ETF market is $137 billion.

Furthermore, Nate Geraci, president of advisory firm The ETF Store, believes that the spot ETF provides significant benefits to investors over the futures ETF, noting that the latter does not perfectly track the price of bitcoin. While BITO has fallen 63 percent since its launch, bitcoin has only fallen 53 percent since then.

– Investors want the real deal. They don’t want the hassle of potentially significant tracking error – said Geraci.

Grayscale Bitcoin Trust (GBTC), the world’s largest bitcoin fund holding over 650,000 bitcoins under management, is also facing issues with price tracking. The share price is currently trading 26 percent below the value of the underlying bitcoin, due to the inability to easily redeem shares for bitcoin in the way an ETF can.

The fund is embroiled in a legal battle with regulators for the transition to a spot ETF, in a case where the share price would immediately return to parity with bitcoin.

BlackRock’s entry into the bitcoin ETF race last month has managed to boost the price of bitcoin in recent weeks, raising optimism that the spot ETF could finally be approved. The company’s CEO, Larry Fink, who was once skeptical of bitcoin, said last week that bitcoin may have the power to ‘outlast any currency.’