November 9, 2021
Allowing GBTC to convert to a spot ETF will increase investor protections in several ways. First, it will give non-tech savvy investors a safer way to gain direct bitcoin exposure. No private keys to lose, no risk of wallets being hacked, and no need for cold storage or other protection mechanisms.
Second, a spot ETF mitigates investor risks and costs associated with futures ETFs. Some of these risks are outlined in the ProShares BITO Prospectus:
Margin Volatility (High margin requirements could prevent the Fund from obtaining sufficient exposure to bitcoin futures and may adversely affect its ability to achieve its investment objective. Further, FCMs utilized by the Funds may impose limits on the amount of exposure to futures contracts the Fund can obtain through such FCMs.)
Contango and Backwardation Arbitrage / Roll Costs (Bitcoin futures have historically experienced extended periods of contango. Contango in the bitcoin futures market may have a significant adverse impact on the performance of the Fund and may cause bitcoin futures to underperform spot bitcoin. Extended period of contango or backwardation may cause significant and sustained losses.)
Increased Liquidity Risk (The market for bitcoin futures contracts is still developing and may be subject to periods of illiquidity. During such times it may be difficult or impossible to buy or sell a position at the desired price. Market disruptions or volatility can also make it difficult to find a counterparty willing to transact at a reasonable price and sufficient size. Illiquid markets may cause losses, which could be significant. Any type of disruption or illiquidity will potentially be exacerbated due to the fact that the Fund typically invests in bitcoin futures contracts.)
Third, a spot ETF will protect thousands of current investors by eliminating GBTCs extreme tracking error, drastically reducing its management fee, and putting US investors on equal footing with those in countries where spot BTC ETFs are already available such as Canada, Germany, Switzerland, and Brazil.
A spot ETF will also allow many investors to gain direct exposure to bitcoin in their tax-advantaged retirement accounts and improve their risk-adjusted returns through diversification into an asset with very low correlation to stocks, gold, etc. Although futures ETFs offer some of these benefits, they are in many ways inferior and increase investor risk compared to a spot ETF, as discussed above.
Further, there is no evidence that the risk profile of a spot ETF is meaningfully different than futures ETFs. Indeed, the SEC has yet to identify any significant risks unique to a spot ETF. As detailed in Grayscales proposal (SR-NYSEArca-2021-90), the SECs previously stated concerns also apply to futures ETFs and are even more effectively addressed by the proposed spot ETF.
To date, only one comment submission opposes SEC approval (https://www.sec.gov/comments/sr-nysearca-2021-90/srnysearca202190-261907.htm). It asserts that bitcoin is highly concentrated to suggest that there is something wrong with early adopters profiting from their investment. But early investors deserve to profit from the enormous risks they take to help pioneer disruptive technologies that bring incredible value to users, create new markets, and drive economic growth. The shares of many publicly traded companies are concentrated in the hands of few controlling shareholders. There is nothing wrong with that.
The submission also asserts that the use of collateralized stablecoins to purchase bitcoin facilitates price manipulation. Recent settlements with Tether, Kraken, and Bitfinex, however, along with bitcoins classification as a commodity, demonstrate the CFTCs jurisdiction and authority to regulate this form of margin trading and to punish bad actors who try to use it to manipulate bitcoin price. The proposed spot ETFs index price methodology also stems concerns around wash trading and order book spoofing.
Delaying the approval of a spot ETF in the name of investor protection will only continue to harm US investors. As Commissioner Pierce recognized (https://www.sec.gov/news/speech/speech-peirce-091218):
A key purpose of financial markets is to permit investors to take risks, commensurate with their own risk appetites and circumstances, to earn returns on their investments. They commit their capital to projects with uncertain outcomes in the hope that there will be a return on their capital investment. The SEC, as regulator of the capital markets, therefore should appreciate the connection between risk and return and resist the urge to coddle the American investor.
As the world becomes increasingly integrated, asset classes that were once uncorrelated grow more correlated. This shift creates an appetite for new asset classes that can help to diversify portfolios. Cryptocurrencies may be one such asset class.
We never do the investors analysis for her. Implying that we do does nothing to advance investor protection. The investor contemplating putting her money at risk needs to conduct her own due diligence.