Opinion: Bitcoin ETF would be a win for BlackRock — but maybe not for crypto investors

How will the crypto markets react to the eventual approval of a bitcoin ETF? For answers, I consulted industry experts who helped shed light on the complexity surrounding BlackRock’s ETF — a financial product that might forever change the industry or become a footnote in the history of digital assets.

A catalyst for transformation?

According to Alex Benfield, a crypto analyst at Weiss Ratings, if it secures the SEC’s approval, BlackRock Bitcoin ETF could be a game-changer — “the single most bullish price catalyst event in the history of the crypto market.” Here are several key factors that could contribute to this monumental shift.

First, Benfield highlights the gravitas of the BlackRock brand within the financial industry. “The fact that BlackRock is putting its name on a spot bitcoin ETF will mean a lot for potential buyers,” he says, adding that BlackRock’s involvement brings a level of legitimacy to bitcoin BTCUSD, +0.78%, as the company invests its “time, resources, and social capital to create an institutional product.”

Second is the sheer volume of bitcoin that BlackRock would need to purchase to back its ETF. Compared to Grayscale’s backing of more than 600,000 bitcoin for its Grayscale Bitcoin Trust GBTC product, Benfield notes that the BlackRock ETF could be even larger. “We’re talking about at minimum six figures of bitcoin, possibly even close to seven figures,” and such purchase could send bitcoin’s market price soaring.

Furthermore, the ETF that wins SEC approval could potentially pave the way for a broader movement of institutional money into the crypto space. Benfield foresees a flurry of other spot bitcoin ETF applications from traditional financial firms, with spot Ethereum ETHUSD, +0.35% ETFs likely to follow. “The institutional crypto product offering won’t stop at spot bitcoin ETFs either,” Benfield opines. In his opinion, BlackRock’s creative strategies will likely expand once the company delves into the crypto space.

Benfield dismisses the notion that the market has fully priced in the potential approval of the BlackRock’s ETF. He is optimistic about BlackRock’s chances, stating, “My best guess is that the BlackRock application gets delayed until the last possible date at which point BlackRock wins approval. After all, I don’t see BlackRock’s 575-1 ETF approval record taking a hit here.”

Dan Hoover and Peter Eberle of Castle Funds outlined several scenarios that might unfold with the approval process for BlackRock’s ETF. They predict continued volatility around futures and options expirations, follow-on price action in non-bitcoin tokens, and additional certainty around the regulatory treatment of digital assets in the U.S.

In addition, they noted potential for a follow-on price action of non-bitcoin tokens that are pledged as collateral for borrowing bitcoin. This reflects a complex and interconnected web of investment strategies that could have ripple effects throughout the crypto market.

Comparing BlackRock’s ETF, formally the “iShares Bitcoin Trust,” to stock-and-bond-based ETFs, Hoover and Eberle highlighted the potential tax implications for investors, as the tax treatment for digital assets is still evolving. They mentioned the risk, tax, and expense implications due to the registration under the Securities Act of 1933. Investors must wait for Schedule K-1 tax forms to be produced and mailed before filing their personal tax returns, even for a holding period of just a few days.

Regarding the recent SEC application correction requests and delay of ETF approval, Hoover and Eberle identified several hurdles that must be cleared, including the segregation of essential market functions, market surveillance, and compliance with regulations related to “clean” vs. “dirty” bitcoin.

In their opinion, the market has not fully priced in “pent-up demand” for a bitcoin ETF, reflecting a significant uncertainty over the timing of events like spot ETF approval or changes in margin requirements.

Lucas Kiely of Yield App, a wealth management platform, highlighted the profound significance of the U.S. approval for a spot ETF for bitcoin, calling it “a momentous occasion.” Compared to the existing spot ETFs for bitcoin in Canada and Europe, the U.S. market provides far greater liquidity. “U.S. asset managers control the vast majority of global assets in one way or another, particularly through pension funds and other foreign investment vehicles,” he said. This underscores the global influence U.S. financial markets wield, and how the approval of BlackRock’s bitcoin spot ETF could reverberate worldwide.

Kiely also elaborated on the prospect of traditional pension funds holding the ETF, recognizing that it could push the digital asset industry in an entirely new direction. 

Challenges and concerns

Yet Kiely doesn’t minimize the challenges and concerns about a crypto ETF. He acknowledged that the SEC is justifiably worried about market manipulation, especially considering the influence that a massive asset-manager like BlackRock could exert on bitcoin. “If we think about the power that an asset manager with trillions of dollars of assets under management has to move a small and illiquid asset like Bitcoin with just a few trades, it’s clear why there is concern.”

Indeed, the sheer magnitude of BlackRock, coupled with the groundbreaking nature of its ETF, cannot be underestimated. While the allure of a market boom, the democratization of cryptocurrency, and a new era of financial innovation are tantalizing prospects, BlackRock’s capacity to move the bitcoin market at will is disturbing.

The approval of BlackRock’s ETF would mark not just an historic moment for cryptocurrency but also a power shift that would place unprecedented control in the hands of a single entity. This amount of control, coupled with the intricate and evolving regulatory landscape, raises profound questions about market integrity and transparency.

This is the precipice of what could be a new era, pitting the excitement of potential growth against caution about a market that might become the playing field for giants like BlackRock. The crypto market, ever wild and unpredictable, may be on the verge of a transformation, but the direction of that transformation hinges on complex dynamics, among which BlackRock’s power may be paramount. 

More: Bitcoin ETF is ‘inevitable,’ says former SEC Chair Clayton

Also read: Bitcoin poised for rally in first quarter of 2024. Before that, expect further consolidation.