2 risks around Bitcoin ETF launch that no one’s talking about

In a Dec. 19 podcast, Coinbase researchers warned there are at least two potential problems that could arise with the launch of spot Bitcoin ETFs.

The launch of spot Bitcoin exchange-traded funds (ETFs) in the United States could cause a shortage of “regulated” Bitcoin and hurt one popular trading strategy, according to Coinbase researchers.

Coinbase’s head of institutional research, David Duong, and senior sales trader, Greg Sutton, said two key risks could appear once they begin trading.

In a Dec. 19 podcast, Duong and Sutton said the launch could cause an issue for institutions sourcing BTC, referring to issuers needing to buy enough Bitcoin to hold in their ETFs.

Crypto venture firm Bitwise predicted that a spot Bitcoin ETF would be the most successful launch of an ETF product of all time

While he admitted that this is a good problem to have when compared to low inflows, Duong said the sourcing risk was one worth keeping in mind moving forward.

Sutton said a second risk concerns one of the more popular institutional trading strategies, known as the “basis trade” — which refers to taking advantage of the difference between the spot price of Bitcoin and the price of BTC futures contracts.

Due to the massive uptick in volume on both spot Bitcoin and futures contracts, the potential profit on the basis trade has surged as high as 20% in the last fortnight, according to data from Velo.

However, as institutional investors gain increasingly direct exposure to Bitcoin — by way of a spot ETF product — the basis will narrow, causing there to be far less profitability in the trade.

There are currently 13 applications for a spot Bitcoin ETF pending with the Securities and Exchange Commission (SEC). There is a wide consensus that one or all of these products could be approved by as early as Jan. 10, with Bloomberg ETF analysts Eric Balchunas and James Seyffart pinning the chance of an approval at 90%.

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