Coinbase Researchers: Two Potential Risks of Bitcoin ETFs

Author: Tom Mitchelhill, Cointelegraph; Compiled by: Songxue, Golden Finance

Coinbase researchers say the launch of a spot Bitcoin exchange-traded fund (ETF) in the United States could lead to “regulated” Bitcoin shortage, and hurting a popular trading strategy.

With less than three weeks to go until a potential approval of a spot Bitcoin ETF, many believe trading will begin soon. However, Coinbase director of institutional research David Duong and senior sales trader Greg Sutton said there are two key risks that may arise once trading begins.

In a Dec. 19 podcast, Duong and Sutton said that the launch could cause problems for institutions purchasing BTC, referring to the issuer’s need to purchase enough Bitcoin to Hold its ETF.

“You need to buy Bitcoin from some regulated place, and what if the demand is so great that these people can’t get the Bitcoin they need?”

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Crypto venture capital firm Bitwise predicts that the spot Bitcoin ETF will be the most successful ETF product ever launched.

While he acknowledged it was a good problem to have with low inflows, Duong said it was worth keeping procurement risks in mind going forward.

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The second risk involves a more popular institutional trading strategy known as “basis trading,” which exploits the difference between the spot price of Bitcoin and the price of a Bitcoin futures contract, Sutton said. .

Potential profits from basis trading have soared to 20% in the past two weeks as trading volumes in Bitcoin spot and futures contracts surged, according to data from Velo.

However, as institutional investors increasingly gain direct exposure to Bitcoin through spot ETF products, the basis will shrink, resulting in a significant reduction in trading profitability.

Currently, the U.S. Securities and Exchange Commission (SEC) has 13 spot Bitcoin ETF applications pending. It is widely believed that one or all of the products could be approved as early as January 10, with Bloomberg ETF analysts Eric Balchunas and James Seyffart putting a 90% chance of approval.

Crypto asset manager Grayscale is once again meeting with the SEC in an attempt to push for in-kind redemptions rather than cash creation, according to Seyffart’s Dec. 21 post.

The physical redemption model is generally considered more efficient for ETF issuers because it avoids the bid-ask spread and brokerage commissions that arise from selling assets to raise cash for issuing shares.