Although the prospect of a Bitcoin spot ETF entering the U.S. market remains uncertain, industry observers say that if approved by the U.S. SEC, it could be one of the largest ETFs ever.

A bitcoin spot ETF could spur investors to grab billions of dollars from Grayscale’s Bitcoin Trust (GBTC), the Canadian Bitcoin ETF, and other crypto products.

Bloomberg Intelligence analyst James Seyffart said in the July 5 episode of the ETF Prime podcast hosted by The ETF Store president Nate Geraci that a Bitcoin spot ETF “could be one of the largest ETFs ever launched.”

Seyffart said the ProShares Bitcoin Strategy ETF (BITO) is one of the most successful ETFs currently. Launched in October 2021, the fund holds Bitcoin futures contracts traded on the Chicago Mercantile Exchange (CME) and grew to more than $1 billion in assets under management in its first two days.

But James Butterfill, head of research at CoinShares, said that a physically-backed ETF meets more due diligence requirements than BITO because it provides bankruptcy protection for fund issuers and closely tracks Bitcoin prices. Therefore, it is reasonable to expect that demand for Bitcoin spot ETFs will increase significantly, especially if it is launched by an asset management giant such as BlackRock.

“There are a fair number of clients who are waiting for competitors to get involved in Bitcoin first to avoid reputational damage from being cannon fodder,” Butterfill said. “If BlackRock issues an ETF, it could eliminate a lot of the negative narrative associated with cryptocurrencies, which could generate significantly higher early investment inflows than Proshares saw in 2021.”

GBTC asset restructuring?

Assets in crypto investment products reached $37 billion last week, the highest level since June 2022, according to CoinShares data.

These assets may be reshuffled after one or more Bitcoin spot ETFs are approved.

Seyffart said: "There is American money in these Canadian ETFs. If the Bitcoin spot ETF is approved, American funds in other areas may flow back, not to mention Grayscale and GBTC, and funds will also flow into the Bitcoin spot ETF."

If approved, investors in the trust could seek to sell their GBTC shares and reinvest them in a bitcoin spot ETF, Dave Nadig, a financial economist at data firm VettaFi, said on the ETF Prime podcast.

Dave Nadig said: "There is $20 billion trapped in a completely collapsed pink sheet trust fund GBTC. I think half of that money will appear in the Bitcoin spot ETF within two weeks."

Geraci believes that a Bitcoin spot ETF would initially generate a lot of interest, noting that its launch could “break” the trading highs previously set by other successful ETFs such as BITO.

“There’s a lot of pent-up demand here that allows financial advisors and even institutional investors to get access to bitcoin through traditional financial services channels,” Geraci said. “ETFs will serve as a bridge between the traditional financial world and cryptocurrencies.”

An April 2022 Nasdaq survey found that 72% of financial advisors would be likely to invest client assets in cryptocurrencies if a spot Bitcoin ETF were offered in the United States.

According to a January report from Bitwise and VettaFi, 32% of financial professionals cited “the lack of easily accessible investment vehicles such as ETFs and mutual funds” as a barrier to allocating to cryptocurrencies.

All approved at once? Who will be the biggest winner?

Seyffart noted that there are currently eight active Bitcoin spot ETF applications. In addition, the podcast participant pointed out that other companies such as Global X, First Trust and Charles Schwab may also want to launch their own Bitcoin spot ETFs.

Seyffart said the SEC should approve the applications simultaneously but noted that letting BlackRock launch first would be a "very bad decision."

Nadig said that if multiple Bitcoin spot ETFs are able to be listed at the same time, factors such as the applicant's brand, capital market depth and number of institutions may be crucial.

For example, Nadig proposed a scenario where BlackRock, Valkyrie, and Bitwise launched on the same day. Which one would get the most volume in the first four days? Nadig thinks it would be BlackRock because BlackRock has these deep connections.

But Butterfill said that if the expected large-scale issuance of Bitcoin spot ETFs occurs, it may "dilute" the asset attraction potential of each Bitcoin spot ETF.

Nadig said that after the Bitcoin spot ETF is listed, exchanges such as Nasdaq, New York Stock Exchange or Chicago Board Options Exchange may get more revenue than the fund's issuer. Because exchanges are mainly paid based on trading volume rather than assets, even if the fund is launched with only $1 billion, it may still be one of the most traded ETFs in history for exchanges.