The anticipation of spot Bitcoin Exchange-Traded Funds (ETFs) launching in the United States has garnered significant attention, with approvals expected by January 10th. While the crypto community remains optimistic about the impact of these ETFs, Coinbase researchers David Duong and Greg Sutton have highlighted two potential risks that have not been widely discussed following the approval of spot Bitcoin ETFs.
The first potential risk pointed out by Duong and Sutton pertains to a “regulated” shortage of Bitcoin. Issuers of spot Bitcoin ETFs will need to acquire substantial amounts of BTC to hold within their ETFs. The concern is that demand for Bitcoin may exceed the issuers’ ability to supply enough BTC, leading to a scarcity situation.
This shortage could lead to supply constraints and market disruptions as issuers are required to purchase BTC from specific regulated sources. Despite the positive perception of high demand compared to low entries, researchers emphasize the importance of not overlooking this source risk after the launch of the ETFs.
The second potential risk identified by the Coinbase researchers is related to the impact on a popular institutional trading strategy known as “basis trading.” This strategy exploits the price difference between Bitcoin’s spot price and futures prices. With both spot Bitcoin and futures volumes increasing, the potential profit in basis trading has surged to 20% in the last two weeks. However, as institutional investors directly invest in Bitcoin through spot ETFs, this spread is expected to narrow, potentially reducing the profitability of this trading strategy and diminishing interest in it.
Lastly, crypto asset manager Grayscale has reportedly met with the SEC to advocate for in-kind redemptions instead of cash creations for spot Bitcoin ETFs. This model is considered more efficient for ETF issuers, avoiding bid/ask spreads and broker commissions associated with raising cash for share issuance. As the countdown to the potential approval of spot Bitcoin ETFs continues, market participants are becoming increasingly aware of these nuanced risks that could unpredictably affect the Bitcoin market and trading strategies.