Researchers at Coinbase: Two potential risks of Bitcoin ETF

Jafar224

Coinbase researchers say the launch of a physically-backed Bitcoin exchange-traded fund (ETF) in the United States could lead to a "regulated" Bitcoin shortage, potentially harming a popular trading strategy.

With less than three weeks until the possible approval of a physically-backed Bitcoin ETF, many anticipate trading to commence shortly thereafter. However, Coinbase Institutional Research Director David Duong and Senior Sales Trader Greg Sutton suggest two key risks once trading begins.

In a podcast on December 19, Duong and Sutton noted that the launch could pose problems for institutions purchasing BTC, referring to issuers needing to buy enough Bitcoin to back their ETF holdings.

"You need to purchase Bitcoin from certain regulated places, and what if the demand is so great that these folks can't get the Bitcoin they need?"

Although Duong acknowledges it's a good problem to have compared to low inflows, he emphasizes the need to keep procurement risks in mind for the future.

Sutton points out the second risk involving a more popular institutional trading strategy known as "arbitrage trading," which exploits the difference between the Bitcoin spot price and Bitcoin futures contract prices.

Velo's data indicates that potential profits from arbitrage trading have surged to 20% in the past two weeks due to a significant increase in Bitcoin spot and futures contract trading volumes. However, as institutional investors increasingly gain direct exposure to Bitcoin through spot ETF products, the arbitrage spread will narrow, leading to a significant reduction in trading profitability.

Currently, the U.S. Securities and Exchange Commission (SEC) is awaiting 13 applications for physically-backed Bitcoin ETFs. It is widely believed that one or more of these products could receive approval as early as January 10, with Bloomberg ETF analysts Eric Balchunas and James Seyffart estimating a 90% likelihood of approval.

According to Seyffart's post on December 21, crypto asset management company Grayscale has once again met with the SEC, attempting to push for physical redemption rather than cash creation. Physical redemption is generally considered more efficient for ETF issuers, as it avoids bid-ask spreads and broker commissions incurred by selling assets to raise cash for issuing shares.

Jiten171

Risks can be understood by doing some research.

977Iti

Risks definitely exist; it's about how to mitigate them.

Samiksha

Anticipating risks in advance is like preparing for a battle.

Ritu77

Understanding the two potential risks is still crucial.