‘Grayscale without question paved the regulatory path for everyone to bring spot bitcoin ETFs to market,’ says the ETF Store’s Nate Geraci
Anticipation about the launch of spot bitcoin ETFs is peaking late Wednesday after the Securities and Exchange Commission greenlit such funds for trading on U.S. exchanges.
Todd Rosenbluth, head of research at VettaFi, said in a phone interview that he’s watching for one or more spot bitcoin exchange-traded funds to come to market as soon as Thursday.
“Given that there are so many horses in this race,” said Rosenbluth, “you want to come out strong.”
Several firms, including the world’s largest asset manager, BlackRock, have filed regulatory documents to list spot bitcoin ETFs. Typically, once an ETF receives SEC approval, the fund is cleared to launch as soon as the next trading session or in the coming days or weeks, according to Rosenbluth.
It depends on what the asset manager deems appropriate as it lines up “seed capital” and prepares for distribution, but with high investor anticipation surrounding this history-making listing of spot bitcoin ETFs, asset managers may feel compelled to move extraquickly, Rosenbluth said. “Anybody that doesn’t launch on the first day” risks being at a “significant disadvantage,” as investors who have been eager to gain exposure to the spot, or up-to-the-minute, price of bitcoin can be expected to buy in fast, according to Rosenbluth.
Liquidity matters
For investors, the cost of the funds will be among the “key things to evaluate,” along with their liquidity, level of assets and how closely they track the spot price of bitcoin, according to Nate Geraci, president of wealth-management firm the ETF Store.
Grayscale Investments’ spot bitcoin ETF would have “built-in liquidity” as it would be converted from the firm’s existing Grayscale Bitcoin Trust GBTC, which already has a “massive” investor base, Geraci said in a phone interview. The fund had almost $29 billion in assets under management as of Tuesday, according to data posted on its website.
“Grayscale without question paved the regulatory path for everyone to bring spot bitcoin ETFs to market,” said Geraci.
Like Rosenbluth, Geraci said he was anticipating that the spot bitcoin ETF sponsors could move to launch as soon as Thursday. “We remain ready to operate GBTC as an ETF upon receipt of appropriate regulatory approvals, and have never been more optimistic about GBTC’s future,” a spokeswoman for Grayscale said in an email on Wednesday.
After spot bitcoin ETFs launch, VettaFi will be watching the amount of “seed capital” they have lined up, as well as the funds’ trading volumes during their first days on the market and a week after listing, said Rosenbluth.
A spot bitcoin ETF’s “liquidity” would be particularly important for “tactical” investors who want to see tight bid-ask spreads on shares of a fund that they may be buying and selling more frequently than long-term holders would, according to Geraci.
Many crypto hedge funds, which saw huge gains last year, have been tuned in for approval of spot bitcoin ETFs as that step stood, in their view, to make the cryptocurrency “a lot more liquid and tradable,” Ken Heinz, president of HFR, told MarketWatch.
But liquidity is also important for longer-term investors, who may want to sell shares of the ETF to reduce or exit their exposure to bitcoin. “You want to be able to get out, even if your time horizon is in a year or five,” said Rosenbluth. “You want to have confidence that you can get out.”
Bitcoin prices are volatile. While the cryptocurrency was trading at nearly $46,000 on Wednesday afternoon, its price had plummeted below $17,000 in 2022 after climbing to a 2021 peak approaching $70,000, according to CoinDesk data.
Geraci said the level of assets gathered by competing spot bitcoin ETFs would matter, as gaining traction with investors “minimizes the closure risk of a fund,” which would cause a “tax event” for clients. He also urged caution.
While financial advisers may find some comfort with clients getting bitcoin exposure through a “regulated vehicle,” he said, investors need to understand the risks of the volatile cryptocurrency and “there needs to be a strong rational and investment case” for putting it in their portfolios.
To Geraci’s thinking, the spot bitcoin ETF may become “a satellite holding in a diversified stock and bond portfolio.” While the size of that exposure would vary depending on the individual investor, he said a rule of thumb has been 1% to 5% of a portfolio among investors do desire it. “We hear from a lot of younger investors inquiring about bitcoin exposure,” Geraci.
Some clients may feel confident “going directly to Coinbase” to manage their own bitcoin wallets, said Geraci. But, by using a spot bitcoin ETF, investors can consolidate their tax reporting and view the performance of their bitcoin exposure alongside their stock and bond holdings in a single statement, he said.
Most major crypto exchanges — but not all — track and report capital gains and losses to account holders and the Internal Revenue Service, according to Matt Metras, a cryptocurrency tax expert who owns MDM Financial Services in Rochester, N.Y.
Tax reporting is simpler with ETFs, in that brokers issue a 1099-B to the account holder and the IRS, Metras said by phone. The tax agency then matches its numbers against the return. By contrast, when cryptocurrencies are held in a digital wallet, he said, the Treasury Department bureau may have less information at its fingertips, which could translate into more IRS scrutiny.
‘Fear of missing out is not a good investment strategy’
A bitcoin ETF has been expected to be far more accessible to investors than directly held bitcoin, with fund fees potentially beating out the trading fees for the cryptocurrency itself, according to Bryan Armour, Morningstar’s director of passive strategies research for North America.
But that’s no reason to rush. “Investors should be honest about why they want to get into bitcoin, because fear of missing out is not a good investment strategy,” Armour said in a phone interview. “Investors should only invest what they are willing to lose.”
No doubt, enthusiasm surrounding crypto sometimes has been met with wariness.
Charlie Munger, the late Berkshire Hathaway vice chairman, offered some advice to a young attendee at the firm’s annual meeting in April 2022. “When you have your own retirement account, and your friendly adviser suggests you blow money into bitcoin, just say no,” Munger said at the time.
People who see a place for bitcoin in their portfolios for years to come should tread lightly when it comes to asset allocation. Somewhere between 1% to 5% sounds roughly like the right level of exposure, Morningstar’s Armour said. Within that range, “it seems like 2% is a fair target,” he said.
Still, a Morningstar research analyst cautioned in an August report that making room for even a 2% sliver of bitcoin in a classic portfolio of 60% stocks and 40% bonds reshapes the overall risk profile.
A lot of investor education will be needed surrounding spot bitcoin ETFs, according to Rosenbluth. With that in mind, he said VettaFi was planning a virtual event Friday on virtual-asset investment with speakers from asset managers such as Grayscale and BlackRock.
A spokesperson for BlackRock declined to comment on when the firm’s spot bitcoin ETF might launch.
Instead of rushing in or shutting down the idea of putting money into a bitcoin ETF, a better approach is “being guarded, being informed, but also being openminded,” said Nick Rygiel, owner of Ironclad Financial in Bryn Mawr, Pa., in a phone interview.
For people who are brand-new to bitcoin, Rygiel recommends an investment allocation that a person could stomach losing entirely. “It’s completely discretionary spending. I could literally see this go to zero and not be affected. That would be a good place to start with.”
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