The returns earned by these players scale with the popularity of the ETF. The more money you invest and the more frenetic your trading activity, the more profits you will make. Coinbase's head of institutional services Brett Tejpol asserts that the opportunity is “huge,” predicting that trillions of dollars will eventually flow into U.S. spot Bitcoin ETFs. It may be a “slow building process,” he says, but it could mean “a huge expansion of the pie.”
US residents have had access to a loose agency for Bitcoin investments since 2021, in the form of a Bitcoin futures ETF whose value correlates with the price of the crypto token. But Spot Bitcoin ETFs are the closest thing to a direct investment and do not underwrite investments. Risks associated with manually storing cryptocurrencies.
The SEC has long been reluctant to approve spot Bitcoin ETFs due to concerns that price volatility and lack of a regulated trading venue could put investors at risk. However, in August 2023, when a U.S. judge ruled that the SEC had unfairly denied an application by asset manager Grayscale to convert a Bitcoin trust into a spot ETF, the SEC reconsidered its position. I was forced to.
The SEC has currently rubber-stamped all 11 pending applications for spot Bitcoin ETFs, which could lead to a swarm of operators in the future, according to Soyeon Kim, a professor of finance at Santa Clara University's Leavey School of Business. However, in order to attract the most investment. She says the “usual suspects” with the widest influence and highest reputations, companies like BlackRock, are in prime position. Relationships with these companies can be extremely valuable to intermediaries.
The additional revenue stream could be especially important for U.S.-based crypto companies tasked with storing Bitcoin for ETF issuers. ETF issuers found themselves at odds with regulators over consumer services last year. In June, the SEC charged Coinbase with operating an unregistered securities exchange in the United States. In October, the New York State Attorney General indicted Gemini for participating in a $1.1 billion fraud related to a service where customers earned interest on their crypto deposits. Both companies deny the charges and plan to fight the charges in court. But the expansion of the two companies' custody operations could help offset widespread uncertainty over the future of consumer crypto trading in the U.S. amid a regulatory crackdown.
According to Kim, crypto companies that currently only act as custodians could also act in other areas of ETF plumbing, such as APs. Greg Tassal, head of institutional products, said Coinbase hasn't ruled out the possibility, but will focus on services focused on cryptocurrencies. According to chief strategy officer Marshall Beard, Gemini plans to evaluate the services it provides as the Spot Bitcoin ETF matures.
As traditional financial institutions become accustomed to Bitcoin's technical complexity, they could “cannibalize parts of the market,” including crypto custody, says head of business at crypto prime brokerage firm FalconX. Austin Reed says. In the meantime, he says there is a “growth opportunity” for companies with the necessary cryptocurrency expertise to service ETF issuers.
If new spot Bitcoin ETFs start producing variants, the chances will increase many times over, Tejpor says. He said ETFs could serve as a “huge building block” on which a variety of derivative products could be built, increasing the returns visible to custodians and other intermediaries.
However, underlying these predictions is the assumption that the Spot Bitcoin ETF will be successful. Seifert said the issuer was anticipating strong demand for the new ETF, which otherwise wouldn't have been in line for launch. For intermediaries, much will depend on whether this theory holds true in practice, and whether ETFs unleash a wave of pent-up demand for Bitcoin as issuers hope.
“This is just the first step,” Reid says. “Then the question is what to do. [the ETFs] scale. “
