BlackRock, the world’s largest asset management company, has submitted an application for a Bitcoin ETF. It has not yet been approved, but the chances are good. by Christoph Bergmann
Anyone who is on the internet and interested in Bitcoin has probably already heard that BlackRock wants to launch a Bitcoin ETF and has filed an application with the US Securities and Exchange Commission (SEC).
The main facts in brief:
- The fund would be issued by BlackRock subsidiary iShares, parent of a large number of ETFs.
- The Bitcoin ETF would track the Bitcoin exchange prices (“spot”) 1:1,
- The coins would be held in custody by the exchange Coinbase, and
- The ETF would be traded on Nasdaq.
The ETF (referred to as “the Trust”) is intended to provide “a simple vehicle to make an investment similar to an investment in Bitcoin without having to buy, hold and trade Bitcoins directly […] The shares have been designed to remove the obstacles created by the complexities and operational difficulties of a direct investment, while at the same time having an intrinsic value equal at all times to the Bitcoins held by the Trust, net of its expenses and liabilities.”
It is an interesting choice of words to ascribe “intrinsic value” to the Trust’s shares because they are based on Bitcoin. In doing so, BlackRock contradicts the widespread resentment that Bitcoin has no intrinsic value of its own.
Why the BlackRock ETF has a good chance of being approved
It seems somewhat odd that Coinbase is currently in a legal battle with the SEC, which has yet to approve the ETF, making the SEC a risk factor. But since SEC boss Gary Gensler has repeatedly stressed that he does not see Bitcoin as security, this should not be an obstacle. The lawsuits are about trading altcoins, not Bitcoin.
More difficult are the previously known problems that have led the SEC to reject ETFs again and again, even from established institutions. The SEC usually argued that the Bitcoin market was too susceptible to manipulation and fraud to serve as the basis for an ETF, and that the rules set by the issuer of the ETF did not sufficiently prevent this.
Therefore, so far only the “Bitcoin Strategy ETF” is allowed in the US, but it does not hold “physical” Bitcoins, only their dollar equivalent, as well as the 1-day futures from Bakkt. Blackrock’s ETF would be the first spot ETF to actually cover shares 1:1 with Bitcoins it buys directly on exchanges.
The value of these Bitcoins is calculated through a specific methodology that is consistent with US accounting principles. The choice of this methodology is entirely BlackRock’s, giving the asset manager some influence over how to quantify Bitcoin’s value. Even with a manageable market capitalisation, the ETF can thus influence the market.
But why should BlackRock succeed where so many other financial institutions have cut their teeth? The most likely answer is: because BlackRock is BlackRock. Investor and market insider Adam Cochran explains this in detail in a series of tweets.
“Larry Fink is a card carrying Democrat, Democrat Super PAC donor and kingmaker. This is one of the bankers who puppets congress members.”
He said that they had now reached a stage where BlackRock had realised that Bitcoin was not going away and was therefore now securing its share of the market. “If Gensler rebuffs Fink, they will sue, they will call in political favours, and they will keep filing the ETF until they win.”
The world’s largest asset manager, with the most politically connected bankers in the world “isn’t just going to decide to wake up one day and then lose a fight.” BlackRock, he said, had “laid the groundwork, called in favours and ploughed the entire political landscape to make it happen”, long before filing.
This is supported by the fact that BlackRock and other banks bought into Bitcoin while markets were still busy digesting the SEC charges against Binance and Coinbase.
For example, BlackRock, Bank of America and Fidelity have been buying MicroStrategy shares in a big way, effectively betting on Bitcoin. BlackRock now holds more than 6 per cent of MicroStrategy shares, making it the third largest owner, followed by Bank of America with 2.37 per cent. This suggests that BlackRock is optimistic about getting the green light from the SEC.
What effect a BlackRock ETF can have
But what would it mean? It’s no longer 2014. More than 20 percent of US adults now hold Bitcoins, and among millenials it’s even around 50 percent. Registering with exchanges like Coinbase is no more complicated than opening a bank account, you can buy Bitcoins from payment service providers like CashApp or PayPal, and for the traditional portfolio there is the strategic ETF and the 1-day futures, in Europe you have several ETNs. An ETF, even if it comes from BlackRock, is no longer the lever that opens the floodgates to the mainstream.
Even BlackRock acknowledges in its filing that the effect will be manageable: It says it is convinced “that the Trust will not be a dominant factor in the pricing of futures or spot markets.” Among the many reasons for this, BlackRock lists market size and liquidity. “The average adjusted daily volume of the bitcoin spot market from 1 January to 12 May 2023 was $8.5 billion,” and order books are deep enough that even large purchases are unlikely to have an obvious impact on prices.
Adam Cochran takes a slightly different view. The ETF can still have a big impact, because it is from BlackRock. It is not so much the product itself but the issuer that plays the main role. He points to the gold market, which was a $1 trillion market before BlackRock got involved and has since risen to $13 trillion.
BlackRock has an army of advisors around the world who get fees for getting their clients into iShares’ ETFs. After BlackRock launched gold ETFs, financial advisers around the world started adding gold to their portfolio models. They told their clients that gold was the perfect rounding off and introduced good protection against inflation and other risks, which caused the demand for gold to grow rapidly.
BlackRock, Cochran concludes, was not the first asset manager to issue a gold ETF. But it was BlackRock that made gold-based financial products the standard inventory of portfolios globally.
Will the ETF become a threat to Bitcoin’s independence?
If BlackRock manages to attract new investors to Bitcoin on a large scale – say, hundreds of billions of dollars worth – the asset manager could amass so many Bitcoins that it becomes a major player in the market. For many Bitcoiners, however, it is already a foregone conclusion that BlackRock will achieve and then exploit this influence simply because of its large size.
One marginal note in the application about forks is particularly worrying. If there is a hard fork in the Bitcoin network, BlackRock said they”will determine which network is the appropriate network for the purposes of the Trust, and this could also adversely affect the value of the Units.” They will make a network decision in good faith, he said. Relevant factors include, among others, “the expectation of how core developers, users, service providers, companies, miners and other stakeholders” will decide. However, there is no guarantee that Black Rock will choose the asset that ends up having the highest value, or that its decision will be in consensus with investors, exchanges and other players.
BlackRock could therefore decide in favour of the version that does not correspond to Bitcoin ideals, and also enforce it thanks to its holdings. As unlikely as this is, the scenario alone shows the problems that come with Bitcoin being seen less as a means of payment and a tool for monetary autonomy than as a store of value that can also be entrusted to asset managers.
Bitcoin needs self-responsible users to remain Bitcoin. Mere investors are not enough.