The topic of spot Bitcoin exchange-traded funds (ETFs) being launched soon in the US is receiving significant attention, particularly as approvals for ETFs are expected by January 10th. Although the crypto world is optimistic about the effects of these ETFs, Coinbase researchers David Duong and Greg Sutton have warned of two potential risks following the approval of spot Bitcoin ETFs that no one is talking about.
Two Major Risks That May Emerge After ETF Approval
The first potential risk highlighted by Duong and Sutton regarding spot Bitcoin ETFs is based on a “regulated” Bitcoin shortage. It is known that issuers offering spot Bitcoin ETFs will need to acquire significant amounts of BTC to hold in their ETFs. The situation Duong and Sutton fear is one where the demand for Bitcoin reaches a point where issuers cannot provide an adequate amount of BTC.
This shortage could lead to significant problems, potentially causing supply constraints and market disruptions, as issuers are required to purchase BTC from certain regulated sources. The researchers emphasized the importance of not overlooking this source risk after the launch of the ETFs, despite high demand being generally viewed as positive compared to low entries.
The second potential risk highlighted by Coinbase researchers is related to the impact on a popular institutional trading strategy known as “basis trading.” This strategy is based on exploiting the price difference between Bitcoin’s spot price and the futures price. The increase in volume for both spot Bitcoin and futures has led to a significant increase in potential profit in basis trading, reaching 20% in the last two weeks. However, as institutional investors make direct investments in Bitcoin through spot ETFs, this spread is expected to narrow, reducing the profitability of this trading strategy. The narrowing of this spread with increased corporate participation in the spot market could change the dynamics of basis trading and decrease interest in this trading strategy.
Grayscale Meets with SEC for Spot Bitcoin ETF Discussions
In the latest developments regarding the spot Bitcoin ETF, it was announced that crypto asset manager Grayscale met with the SEC to advocate for in-kind redemptions rather than cash creation. This model is considered more efficient for ETF issuers, avoiding bid/ask spreads and broker commissions associated with raising cash through asset sales for share issuance.
As the countdown to the potential approval of spot Bitcoin ETFs continues, market participants are increasingly becoming aware of these nuanced risks that could affect the Bitcoin market and trading strategies in unforeseen ways.
