In spot bitcoin exchange-traded fund race, pioneers stick to the sidelines

File picture of a woman selling fruit in a market during a meet-up between local Bitcoin users and foreigners at the closing of Adopting Bitcoin – A Lightning Summit, at El Zonte Beach, in Chiltiupan, El Salvador.
| Photo Credit: Reuters

Despite growing excitement that spot bitcoin exchange-traded funds (ETFs) will soon win regulatory approval, some cryptocurrency ETF pioneers plan to sit out what is expected to be a fierce industry battle for market share.

Demand for a bitcoin ETF, which would allow retail and institutional investors to easily bet on the price of the world’s biggest cryptocurrency, is expected to draw in as much as $3 billion from investors in the first few days of trading and pull in billions more thereafter.

Crowded space

Yet some established names in the blockchain and cryptocurrency space – including ProShares, Amplify Investments and Roundhill – are so far steering clear of launching a bitcoin ETF. They worry that the field is too crowded, the regulatory and marketing costs too high, and that demand will not be strong enough to compensate for that.

Though they remain a small minority in a race where both big and small players are diving in, their skepticism suggests the hype over a spot bitcoin ETF may be misplaced and that the products could prove unprofitable for some issuers rushing into the space.

“This could be the most successful ETF launch in history, but it’s still going to be intensely competitive, requiring a lot of investment up front,” said Dave Mazza, chief strategy officer at Roundhill Investments, which hopes to launch cryptocurrency ETFs but has no plans for a spot bitcoin ETF. “You have to weigh the odds that you’ll end up as one of the winners, or an also-ran,” he reasoned.

The U.S.’s Securities and Exchange Commission (SEC) has long rejected spot bitcoin ETF applications on the grounds they do not meet its investor protection requirements.

Industry hoped that position would shift in June when BlackRock, which has an almost unbroken record of SEC ETF approvals, filed for a spot bitcoin ETF. Then in August, a court ruled that the SEC wrongly rejected Grayscale Investments’ application to convert its Bitcoin Trust into a spot bitcoin ETF and must review Grayscale’s filing.

SEC chair Gary Gensler said last month the agency’s commissioners will consider as many as 10 bitcoin ETF filings, but could not provide guidance on timing.

Even so, ProShares CEO Michael Sapir said he is not convinced the SEC will approve a filing soon. The company’s ProShares Bitcoin Strategy ETF, based on bitcoin futures, was one of the most heavily-traded new ETFs when it first launched in 2021, pulling in $1 billion in its first few days.

ProShares also has a suite of other cryptocurrency ETFs tied to futures, offering options to clients without the need for a spot ETF, said Sapir. When it does approve a bitcoin ETF, executives expect the SEC to approve several at once, so no one has a first-mover advantage.

Prohibitive costs

That would drive up marketing expenses, one of the biggest costs of an ETF debut. Combined with legal, SEC filing, and listing costs, the bill for launching even a simple ETF rings in at about $100,000, according to lawyers. That can climb to millions if the product is complex and takes a long time to secure SEC approval.

“Having the resources and expertise to file for something that doesn’t exist yet in the U.S.,” is costly, said Roxanna Islam, associate director of research at VettaFi, a data firm.

The only prospective issuer to disclose proposed investor fees so far is Ark Investment, which last week announced its spot bitcoin ETF would charge a fee of 0.8%.

“This seems to be strategically priced to attract assets” rather than to cover upfront costs, said Aisha Hunt, a fund lawyer at Kelley Hunt LLC.

To be sure, issuers hoping to launch spot bitcoin ETFs have a more bullish outlook than those sticking to the sidelines. Some of the largest ETF providers, like BlackRock and Invesco, can cross-subsidize costs, and have the marketing scale to reach millions of potential customers.

Market share concerns

But it’s unclear to some ETF providers outside of the top two dozen, like Amplify, that they would be able to grab sufficient market share to make the economics work.

“It will be a game-changer in terms of demand and crypto’s evolution into an asset class, but that doesn’t mean we’d be able to benefit directly,” said Christian Magoon, founder and CEO of Amplify ETFs, whose Amplify Transformational Data Sharing ETF invests in bitcoin miners and other crypto firms.

Roundhill last month filed an SEC application to issue an ETF that seeks to generate income and bitcoin exposure through bitcoin-linked options. Mazza said he is optimistic the product could debut as early as January.

Magoon hopes the buzz surrounding a spot bitcoin ETF will draw more assets to Amplify’s BLOK ETF. That $472 million fund has holdings in crypto companies like Coinbase, as well as CME Group, the exchange where crypto futures trade.

Tom Staudt of Ark Investments, whose bitcoin ETF filing is due for an SEC decision, said the excitement has blinded people from seeing the big picture.