JPMorgan Doubts That the Approval of a US Bitcoin ETF Would Be a Game-Changer

Vildana Hajric and Isabelle Lee, Bloomberg News

Source: JPMorgan , Source: Bloomberg

(Bloomberg) -- Should a exchange-traded fund that invests directly in Bitcoin receive approval in the US, it won’t be the game-changer for crypto markets that many digital-asset advocates have long predicted.

That’s according to JPMorgan strategist Nikolaos Panigirtzoglou, who argues that even though there’s broader optimism a physically backed fund could get regulatory blessing, any approval won’t be transformational for the sector since such products have existed in Canada and Europe for years without having seen tremendous inflows. Bitcoin funds overall have “attracted little investor interest” over the past two years, “failing to benefit from investor outflows from gold ETFs,” he said in a note.

A raft of issuers have in recent weeks submitted applications for spot-Bitcoin ETFs in the US, which the Securities and Exchange Commission has in the past viewed with much skepticism, denying dozens of tries for such a product over the past decade. Regulators have cited the possibility of market manipulation, among other reasons, as to why a Bitcoin ETF shouldn’t trade.

In 2023, however, there is greater optimism that officials could give the green-light thanks to an application by Wall-Street heavyweight BlackRock Inc., which has a near-pristine record of filing for and receiving approval for all manner of exchange-traded funds. That history is giving some market-watchers greater confidence that regulatory acquiescence could happen this time around as the asset manager is seen to only file for products it’s confident could start trading.

In addition, issuers have worked diligently to address regulator concerns, with the latest batches of applications focusing on surveillance-sharing agreements that can be seen to be mitigating worries over market manipulation.

Bitcoin and other cryptos have rallied since BlackRock’s mid-June application. The largest digital token, trading at around $30,200 currently, is up roughly 15% over the past month.

Panigirtzoglou concedes that there could be some advantages from physically backed Bitcoin ETFs, but that such advantages would be “rather marginal.” Such products offer a potentially more secure avenue to get exposure to the largest cryptocurrency, eliminating issues around custody, for instance. Their approval in the US could bring more liquidity to Bitcoin markets, he added. However, their introduction could also cause a migration of trading activity away from Bitcoin-futures markets.

To be sure, approval is far from guaranteed and fans have gone through numerous similar hype cycles, where excitement that a fund will get approved runs high but is then quashed by regulators. And though Bitcoin-futures-based ETFs, which launched in 2021, initially received massive investor interest, activity has died down since then.

“I don’t think you’re going to see massive flows into these spot ETFs,” said David Donabedian, chief investment officer of CIBC Private Wealth US. “I don’t get the sense that there is massive pent-up demand to have Bitcoin exposure.”