As the final approval date for the Bitcoin spot ETF application approaches, the market’s expectation for SEC approval is gradually deepening. However, Coinbase’s research director and senior trader pointed out that once the Bitcoin spot ETF starts trading, the market may face two major risks.
Firstly, there is a risk of insufficient holdings for issuers due to high demand. When the Bitcoin spot ETF is issued, the issuer needs to purchase Bitcoin from specific regulated institutions to meet the ETF’s holding requirements. However, if the demand from institutional investors exceeds expectations, it may lead to difficulties for the issuers in meeting these demands. David Duong stated that this risk largely depends on the liquidity of the Bitcoin market and the purchasing restrictions of regulated institutions. In the case of high demand, if there is insufficient market liquidity or limited supply from regulated institutions, it may be difficult for ETF issuers to obtain the required Bitcoin, resulting in increased market volatility.
Secondly, attention should be paid to the risk of a popular institutional trading strategy called basis trading, which takes advantage of the price difference between Bitcoin spot and futures. With more institutional investors directly investing in Bitcoin through spot ETFs instead of opting for futures or other derivative products, it will increase the demand for Bitcoin spot markets, potentially narrowing the price difference (basis) between spot and futures and making this trading strategy less profitable. This situation may cause some institutional investors to reduce their trading activities in the Bitcoin market, thereby affecting market demand and liquidity.
Although the reduced profitability of basis trading may affect the behavior of some institutional investors, the demand and price of the Bitcoin market are influenced by various factors and do not solely rely on one trading strategy. Therefore, this change is only one potential factor that could impact the market.
With less than three weeks left until January 10, 2024, let us continue to observe the situation.
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ETF
SEC
Basis trading
Bitcoin
Bitcoin spot ETF