2 Risks Around Bitcoin ETF Launch That No One's Talking About

Coinbase researchers warn of potential problems with the launch of spot Bitcoin ETFs.


Shortage of Regulated Bitcoin

According to Coinbase researchers, the launch of spot Bitcoin exchange-traded funds (ETFs) in the United States could lead to a shortage of "regulated" Bitcoin. This could create an issue for institutions sourcing BTC as issuers would need to acquire enough Bitcoin to hold in their ETFs. The concern is that if demand is too high, these issuers might be unable to acquire the necessary Bitcoin.

It is worth noting that crypto venture firm Bitwise has predicted that a spot Bitcoin ETF would be the most successful launch of an ETF product of all time.

Impact on Institutional Trading Strategies

Another risk associated with the launch of spot Bitcoin ETFs is the potential impact on institutional trading strategies, particularly the "basis trade." The basis trade refers to taking advantage of the price difference between the spot price of Bitcoin and the price of BTC futures contracts.

Currently, the basis trade has seen significant profitability, with potential profits surging as high as 20% in the last fortnight. However, as institutional investors gain direct exposure to Bitcoin through spot ETF products, the basis will likely narrow, reducing profitability in the trade.

Potential Approval Timeline

There are currently 13 applications for a spot Bitcoin ETF pending with the Securities and Exchange Commission (SEC). It is widely believed that one or more of these products could be approved as early as January 10. Bloomberg ETF analysts Eric Balchunas and James Seyffart estimate the chance of approval at 90%.

Additionally, crypto asset manager Grayscale has reportedly met with the SEC to advocate for in-kind redemptions instead of cash creation. This model is seen as more efficient for ETF issuers as it avoids certain fees and commissions associated with selling assets to raise cash.