Key Takeaways
- • BlackRock filed for the iShares Bitcoin Trust on June 15, 2023, its first spot bitcoin ETF filing, after the SEC had rejected more than 30 prior spot bitcoin ETF applications, according to Morningstar's Bryan Armour.
- • The filing came days after the SEC sued Coinbase and Binance, and BlackRock's partnership with Coinbase makes the timing notable.
- • Morningstar argues a BlackRock spot bitcoin ETF would add legitimacy to the bitcoin market and would fall into a fourth product bucket distinct from grantor trusts, futures-based ETFs, and bitcoin-adjacent equity funds.
- • A spot ETF would address structural drawbacks of existing products: Grayscale Bitcoin Trust (GBTC) trades at large premiums and discounts to NAV and does not allow redemptions, while futures-based funds incur roll costs and CME position-limit effects.
- • Fees on a spot product would likely be lower than current offerings, with GBTC charging 2% and ProShares' BITO charging 95 basis points.
Summary
BlackRock, the world's largest asset manager, filed for the iShares Bitcoin Trust on June 15, 2023, a move Morningstar's Bryan Armour describes as shocking to the financial world. The filing is BlackRock's first for a spot bitcoin ETF, though there have been more than 30 prior filings for such products, all of which the U.S. Securities and Exchange Commission has rejected over the years. The application arrived on the heels of the SEC's lawsuit against Coinbase and Binance, which Armour notes makes BlackRock's partnership with Coinbase and the filing timing appear especially unusual.
Armour argues that BlackRock's participation would immediately lend legitimacy to a bitcoin market that needs it. He notes that existing U.S. bitcoin ETF offerings have drawbacks, and that an iShares spot bitcoin product would be a meaningful improvement. He cautions that bitcoin is highly volatile, has no fundamental value anchor, and that its future is uncertain, so investment merit should outweigh fund structure in any investor decision.
Armour categorizes the current U.S. bitcoin ETF market into three types: grantor trusts, futures-based ETFs, and bitcoin-adjacent equity funds. A spot bitcoin ETF would form a fourth category. The largest U.S. bitcoin product, Grayscale Bitcoin Trust (GBTC), operates more like a closed-end fund, producing large premiums and discounts to net asset value unrelated to bitcoin itself. Grayscale also does not permit redemptions, leaving investors able only to sell at a prevailing price that Armour describes as heavily discounted. A continuously offered iShares product would allow authorized participants to create and redeem shares at NAV, which would help align the ETF's price with its NAV.
Futures-based bitcoin ETFs track bitcoin's price more closely but carry costs and differences from direct holding. Managers must roll expiring front-month contracts, often at slightly higher prices, adding cost a spot fund would avoid. CME position limits can also force managers further out the futures curve, as occurred in 2021 when ProShares Bitcoin Strategy ETF (BITO) launched; longer-dated contracts generally track spot less closely. Armour expects a spot product to offer both better tracking and lower fees, citing Grayscale's 2% fee against BITO's 95 basis points.
Armour closes by questioning why BlackRock is filing now. He suggests the timing could relate to the pending Grayscale lawsuit against the SEC over its rejection of a spot bitcoin ETF, or to BlackRock's surveillance approach addressing the SEC's concerns about market manipulation.
Armour argues that BlackRock's participation would immediately lend legitimacy to a bitcoin market that needs it. He notes that existing U.S. bitcoin ETF offerings have drawbacks, and that an iShares spot bitcoin product would be a meaningful improvement. He cautions that bitcoin is highly volatile, has no fundamental value anchor, and that its future is uncertain, so investment merit should outweigh fund structure in any investor decision.
Armour categorizes the current U.S. bitcoin ETF market into three types: grantor trusts, futures-based ETFs, and bitcoin-adjacent equity funds. A spot bitcoin ETF would form a fourth category. The largest U.S. bitcoin product, Grayscale Bitcoin Trust (GBTC), operates more like a closed-end fund, producing large premiums and discounts to net asset value unrelated to bitcoin itself. Grayscale also does not permit redemptions, leaving investors able only to sell at a prevailing price that Armour describes as heavily discounted. A continuously offered iShares product would allow authorized participants to create and redeem shares at NAV, which would help align the ETF's price with its NAV.
Futures-based bitcoin ETFs track bitcoin's price more closely but carry costs and differences from direct holding. Managers must roll expiring front-month contracts, often at slightly higher prices, adding cost a spot fund would avoid. CME position limits can also force managers further out the futures curve, as occurred in 2021 when ProShares Bitcoin Strategy ETF (BITO) launched; longer-dated contracts generally track spot less closely. Armour expects a spot product to offer both better tracking and lower fees, citing Grayscale's 2% fee against BITO's 95 basis points.
Armour closes by questioning why BlackRock is filing now. He suggests the timing could relate to the pending Grayscale lawsuit against the SEC over its rejection of a spot bitcoin ETF, or to BlackRock's surveillance approach addressing the SEC's concerns about market manipulation.
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