BlackRock Spot Bitcoin ETF
Observations and what it could mean for bitcoin products, services, and infrastructure development
Last week, BlackRock officially threw its hat in the ring for a spot bitcoin ETF. A lot has already been said about the magnitude of this announcement. Not just because it’s BlackRock, the largest asset manager in the world with nearly $10 trillion in AUM and whose iShares ETF business is the clear leader in the US ETF market with a 33% share and $2.5 trillion in AUM, but also because BlackRock is 575-1 when it comes to success rate of ETF attempts. When BlackRock swings, it does not miss.
After all the recent failures of others to successfully launch a spot bitcoin ETF (e.g. VanEck, Ark / 21Shares, WisdomTree, Grayscale, etc.), why would BlackRock attempt this now? Do they know something others do not? With the recent Binance and Coinbase SEC actions, has it become more clear that the best path forward is a focus only on bitcoin in the midst of regulatory and securities risk surrounding the rest of the “crypto” ecosystem? Or, might BlackRock have just enough influence to get a spot bitcoin ETF over the finish line, despite others’ failures? One cannot be sure, but in any case this is a strong signal to others who have been watching from afar or lurking closely behind the scenes that it’s time to take bitcoin more seriously. The legacy financial incumbents have entered the room, and as expected many others are quickly following suit with similar spot ETF filings so as not to lose any early mover advantage (e.g. WisdomTree, Bitwise, and Invesco Galaxy; likely many others imminent). [Also of note, we just saw Citadel, Fidelity and Schwab announce a new exchange. Momentum from traditional players seems to be building, possibly suggesting a shift in sentiment or hinting at greater regulatory acceptance.]
When reading through the BlackRock S-1, it is unsurprising to see lots of disclosures concerning the risks inherent in investing in a securities product which is meant to closely track the USD price performance of bitcoin. SEC filings like this are meant to provide investors fair disclosures of the risks involved in investing in a given security, and typically the approach is to include “everything but the kitchen sink” as potential risks (many may recall the Coinbase S-1 had 60 pages of risks related to its 2021 direct listing). With this amount of disclosure it’s easy to drown in pages of financial and legal minutiae, but if you carefully read through the BlackRock document in its entirety, there are also some real gems sprinkled throughout that would be easy to overlook, highlighting the slow creep of bitcoin signal being disseminated publicly and entering the mainstream investor consciousness. The following are a selection of verbatim quotes from the S-1, which I thought were noteworthy and telling:
The Bitcoin network is the most established digital asset network. /
Bitcoin was the first digital asset to gain global adoption and critical mass, and as a result, it has a “first to market” advantage over other digital assets. /
The Bitcoin network operates based on an open-source protocol maintained by the core developers and other contributors, largely on the GitHub resource section dedicated to bitcoin development. /
A greater degree of decentralization generally means a given digital asset network is less susceptible to manipulation or capture. /
No single entity owns or operates the Bitcoin network, the infrastructure of which is collectively maintained by its user base. /
Governance of the Bitcoin network is by voluntary consensus and open competition. /
Prior to engaging in bitcoin transactions directly on the Bitcoin network, a user generally must first install on its computer or mobile device a Bitcoin network software program that will allow the user to generate a private and public key pair. /
Private keys must be safeguarded and kept private in order to prevent a third party from accessing the digital asset held in such wallet. /
If the Bitcoin network grows in adoption, it is anticipated that service providers may expand the currently available range of services and that additional parties will enter the service sector for the Bitcoin network. /
BlackRock is working closely with well known custodians in Coinbase and BNY Mellon and also has top tier legal advisors, so one would expect the S-1 to accurately depict the nature of bitcoin in the statements above, but nonetheless the fact that a major incumbent institution accurately described many technical aspects and facets that differentiate bitcoin is still a moment to be recognized. These statements and BlackRock’s stamp of approval are now filed publicly for institutions, investors, RIAs and others to evaluate for themselves.
So what are the implications when a spot bitcoin ETF is finally approved? Of course, the obvious first consequence will be the significant capital inflows seeking exposure to this market. There have undoubtedly been large groups of investors sitting on the sidelines over the last several years, waiting for either an easier or more traditional way to gain bitcoin exposure, greater regulatory clarity on the consequences of doing so, or a clear sign of the maturation of the industry, among other potential factors. Traditional investors like these are generally seeking convenience, familiarity, and assurances/protections from others. On the other hand, those who better understand bitcoin already know investing in a spot bitcoin ETF is a poor substitute for real bitcoin, and at Ten31 we will always recommend users instead acquire bitcoin directly and custody it themselves or through a collaborative custody partner like Unchained. Whereas assets across all other traditional asset classes are either impossible or impractical to directly custody without counterparty risk, bitcoin is uniquely suited for self custody. Bitcoin created the first credibly scarce, digital bearer asset which can be held and controlled with relative ease. Sure, it requires a new way of thinking and a level of personal responsibility which most have become accustomed to handing over to someone else in other aspects of their financial lives, but safely securing bitcoin oneself is in fact easy if one makes the effort to learn and gives it proper mindshare. With bitcoin, removing counterparty risk is the whole point…
With that being said, an ETF will clearly appeal to groups that don’t want that responsibility or don’t fully appreciate (or care) that without holding one’s keys, one does not have actual bitcoin (but rather an IOU that might not be redeemable when wanted or needed). Groups like these will therefore obtain their first bitcoin exposure synthetically through an ETF (and hopefully many will graduate to holding actual bitcoin themselves later on), and I expect fresh capital from these groups will enter the space in droves once a spot ETF is approved. The gold ETF (GLD) launched in 2004 was the most successful ETF launch ever at the time, gathering $1 billion in assets in just three days. The ProShares bitcoin futures ETF (BITO) hit $1 billion in assets in just one day after its launch in October 2021 (admittedly, BITO top-ticked the bull market when BTC/USD was $64,000). With the backing and distribution of BlackRock, a macro landscape with risks across other asset classes which could lead to a flight to quality (or flight to safety) in bitcoin, and the upcoming bitcoin halving early next year, the ingredients are in place for any finally approved spot bitcoin ETF to potentially surpass these benchmarks. Time will tell.
While many market prognosticators are most interested in the impact of the spot bitcoin ETF on the BTC/USD exchange rate, I am most excited about how it could impact the growth of the network and development of the ecosystem, namely around the continued buildout of products, services and infrastructure catering to this market, built by companies focusing on bitcoin. As the BlackRock S-1 stated:
If the Bitcoin network grows in adoption, it is anticipated that service providers may expand the currently available range of services and that additional parties will enter the service sector for the Bitcoin network.
As more people get their first exposure to bitcoin through the ETF, it will inevitably drive increased adoption of the bitcoin network, even if only a small percentage of those buying the ETF graduate to self custody and a fuller understanding of bitcoin. This will lead to increased network activity and demand for products and services built to increase the utility of owning and using bitcoin as an asset. There will be greater demand from business and retail users alike for connecting with and interfacing efficiently with the network and utilizing the asset. This will encompass a diverse group of bitcoin products, services and infrastructure, including:
Bitcoin financial products including trading, lending, and insurance;
Bitcoin payments services, remittances, settlement, and community technology services;
Bitcoin security infrastructure including custody, computing, hardware, networking, analytics, reporting, wallet software, and communications;
B2B and consumer bitcoin applications like rewards, loyalty/marketing, peer-to-peer trading and lending, gaming, and communications / social applications;
Energy and bitcoin mining infrastructure, including on-grid and off-grid mining and mining services and infrastructure.
The last couple years have seen tremendous momentum in the buildout of bitcoin-related infrastructure, as evidenced by all the referenced links above (most of which we are proud are already represented in the Ten31 portfolio). The demand for these services is growing uninhibited by challenging macro factors and broader market illiquidity, and I expect any spot bitcoin ETF will only add fuel to this fire. The foundation for the next big adoption cycle is being built and fortified right now.
Whether BlackRock is eventually successful or it is someone else first to market, this filing is a big deal. Bitcoin is an unstoppable force, and if you zoom out it is clear there’s bitcoin and there is everything else. BlackRock did not file an ETF for ETH or SOL or Cookiecoin or any other unregistered security; they came for bitcoin, the King. Whether they eventually get the approval and how this plays out over the near term remains unknown, but over the long term it is clear the demand for bitcoin products, services and infrastructure will only increase from here. There has never been a better time to be supporting the buildout of the network and ecosystem, and there will be significant economic rewards for those who invest in this future now. If you are not paying attention, you probably should be…