The global market for exchange-traded funds (ETFs) tied to the spot price of bitcoin has swelled to over $4 billion in assets, according to new data from cryptocurrency analytics firm CoinGecko. Yet the United States remains on the sidelines of this booming market segment due to regulatory hurdles.
Nearly Half of Assets in Canadian ETFs
CoinGecko reports that global bitcoin spot ETFs held $4.16 billion in assets as of November 5, 2023. Nearly half of that total, or $2 billion, is invested in the seven bitcoin spot ETFs that have launched in Canada since 2021.
Canada is home to the world’s largest bitcoin spot ETF, the Purpose Bitcoin ETF, which alone accounts for $819.1 million in assets. The U.S. neighbor to the north has embraced bitcoin ETFs while American regulators continue to deny applications.
“Canada has really led the way in terms of getting bitcoin ETF products to market,” said Charles Hayter, CEO of CryptoCompare. “There was clearly strong latent demand from both institutional and retail investors for simple, regulated exposure to bitcoin.”
U.S. Regulators Only Approve Bitcoin Futures ETFs
While Canada and other jurisdictions have welcomed spot bitcoin ETFs, U.S. regulators so far have only approved bitcoin exchange-traded products based on futures contracts. The largest such ETF is the ProShares Bitcoin Strategy ETF, with approximately $1.2 billion in assets.
Proponents argue that futures-based bitcoin ETFs are an imprecise and costlier proxy for bitcoin’s performance. Tracking the spot price requires no derivatives, leading to lower fees and tighter spreads.
“Futures introduce a basis risk relative to the spot price. We’ve seen futures deviate meaningfully from the spot price at times, so it’s not a perfect replacement,” Hayter said.
SEC Denies Spot Bitcoin ETFs Over Manipulation Fears
The U.S. Securities and Exchange Commission (SEC) has denied over 10 proposed spot bitcoin ETFs, repeatedly citing concerns that the bitcoin market is vulnerable to manipulation. The SEC believes applicants have yet to demonstrate adequate protections to shield investors.
“Until platforms have mature surveillance-sharing agreements with significant trading platforms and enter other surveillance-sharing agreements, the Commission cannot adequately monitor the bitcoin market,” the SEC wrote in rejecting a spot bitcoin ETF application from ARK Invest in 2021.
Other Countries Embrace Spot Bitcoin ETFs
While the U.S. lacks a spot bitcoin ETF, other countries have been more receptive. Germany’s ETC Group Physical Bitcoin ETF (BTCE) became the world’s first bitcoin spot ETF when it launched in June 2020. It now commands $802 million in assets, making it the second-largest bitcoin ETF.
Europe is home to 7 additional bitcoin spot ETFs, mainly domiciled in tax havens like Jersey and the Cayman Islands. Smaller bitcoin spot ETFs also trade in Brazil and Australia, reflecting growing global demand.
“It’s clear there is significant interest in bitcoin investment products across both institutional and retail investors,” said Stéphane Ouellette, CEO of FRNT Financial. “Regulatory approval of a spot bitcoin ETF would open the floodgates here in the U.S.”
Massive Latent Demand for U.S. Spot Bitcoin ETF?
Industry experts estimate that a spot bitcoin ETF could attract $1 billion or more in assets on its first day of trading if approved in the U.S. However, predicting demand is challenging.
“There’s huge speculative interest in what kind of assets a U.S. spot bitcoin ETF could raise,” Hayter said. “But it depends on the market context whenever an ETF does get approved. If we’re in a crypto bear market, inflows might disappoint lofty expectations.”
For now, all eyes are on the SEC. Its decision whether to finally approve a spot bitcoin ETF will help determine if the U.S. remains a global laggard — or becomes the world’s largest bitcoin ETF market.