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Why the SEC should approve a spot bitcoin ETF

·4-min read
In this article:
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After a 50% drop from its all-time high in November, bitcoin is catching investors' eyes again as it surges 34% off its most recent low. Two Wall Street index and ETF veterans are saying it's a great time for the U.S. to finally approve a spot bitcoin ETF.

Currently, the U.S. Securities and Exchange Commission has only approved bitcoin ETFs based on bitcoin futures — and not bitcoin itself. But on Yahoo Finance's Future of Finance, David LaValle, Grayscale global head of ETFs. and David Gedeon, Bloomberg's head of multi-asset indices, agreed that should change. "[W]e believe now is the opportune time to have a spot product approved by the SEC and available for all of our investors," said LaValle.

Grayscale manages the world's largest bitcoin exchange traded product, the Grayscale Bitcoin Trust (GBTC). They also manage several other crypto funds, which are only available in the U.S. to accredited investors. Because of their closed-end fund structure, they also frequently experience tracking error. Grayscale has petitioned the SEC for a rule change to convert its GBTC to a spot bitcoin ETF — a process that is pending.

Critics of the bitcoin futures ETF structure point out that holding bitcoin futures and using them for pricing — as opposed to spot bitcoin — can lead to underperformance. Futures tend to trade at a premium to the underlying asset, though they can also trade at a discount.

'The ETF has been battle tested'

The ETF structure was pioneered in the early 1990s by Kathleen Moriarty, an attorney who invented the legal structure for the SPDR S&P 500 ETF (SPY) — the first U.S.-listed ETF. She became known as "Spider Woman" because of the ETF sponsor name, SPDR.

LaValle said the ETF structure has evolved through the years into a robust wrapper product — meaning it wraps around the underlying asset.

David LaValle
David LaValle, Grayscale global head of ETFs, talks about bitcoin ETFs on Yahoo Finance's Future of Finance.

"I know Kathleen quite well, and she is as good as anybody on trust law ... [W]e've gotten to the point where the ETF has been battle tested and really has stood the test of time ... [N]o one's really talking about the ETF in terms of its viability to hold the asset. It's really talking about the bitcoin as being held by the ETF. And that's really something that's exciting. The ETF wrapper is actually a vote of confidence for the underlying asset," said LaValle.

Moriarty pushed for a bitcoin ETF as long ago as 2016.

Gedeon also highlights the ETF structure's evolution. "[W]hether that's new exposures in terms of bringing international securities into domestic investors for the first time — fixed income, futures, base commodities, physical base commodities, systematic factor strategies — there's been so much evolution [that] it's resulted in just massive revolution within the asset management industry," he said.

According to Gedeon, investors are able to save money on fees and access asset classes that aren't typically available to retail investors. "[I]f you think about the amount of money saved for the common investor in terms of what they're able to access now with broad based index funds — compared to the traditional active [investment] side — it becomes a very natural step for new products to be introduced and for the wrapper to be able to handle this," said LaValle.

'Defining a new investment theme'

Bloomberg recently partnered with Grayscale to launch the Bloomberg Grayscale Future of Finance index along with an ETF that tracks it, the Grayscale Future of Finance ETF (GFOF). It tracks companies that represent three pillars of what the sponsors believe is the future of finance: financial foundations, technology solutions, and digital asset infrastructure.

The ETF's five largest holdings are Coinbase (COIN), Silvergate Capital (SI), Robinhood Markets (HOOD), PayPal (PYPL), and Block (SQ). The fund also has exposure to Argo Blockchain (ARB.L), Galaxy Digital (GLXY.TO, BRPHF), Riot Blockchain (RIOT), and Marathon Digital (MARA).

The index and ETF managers avoid companies that simply have large bitcoin holdings on their balance sheet, like Tesla (TSLA) and MicroStrategy (MSTR).

"[O]ne of the things that we set out to accomplish with the index is almost a hallmark of what's not in it —because it is not a bitcoin replication [index]. It is not a crypto basket. It is a basket that's meant to represent the future of finance and what is going on with the digitalization of financial transactions, financial management, [and] asset management," said Gedeon.

LaValle likened the strategy to prior disruptive themes.

"This is about defining a new investment theme. It's not dissimilar to themes that have been defined in the past — that at the time of their launch, really weren't household themes, or household names. Think cloud computing, 5G, robotics and automation. Right?" LaValle added. "The digital economy is a theme that we're defining, and we believe it is going to be the future of how investors really have the opportunity to experience the digital economy."

Jared Blikre is an anchor and reporter focused on the markets on Yahoo Finance Live. Follow him @SPYJared.

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