As the deadline for the approval of the Bitcoin spot ETF approaches, the market’s expectations of the SEC’s imminent approval are gradually deepening. However, Coinbase’s research director and senior trader point out that once the Bitcoin spot ETF starts trading, the market may face two major risks.
With the increasing expectation that the Bitcoin spot ETF will be approved in January next year, it has driven the continuous rise in BTC prices. However, behind this optimism, there are still hidden risks that the new financial product may face after it is officially approved and starts trading.
Coinbase’s research director, David Duong, and senior sales trader, Greg Sutton, pointed out in a podcast on the 19th that once the Bitcoin spot ETF starts trading, the market may encounter two key risks.
The risk of insufficient holdings by issuers under high demand
The first is about acquiring Bitcoin. 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 institutional investors’ demand for the ETF far exceeds expectations, it may cause difficulties for the issuer in meeting these demands. David Duong pointed out:
This risk mainly 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, this may lead to difficulties for ETF issuers in obtaining the required Bitcoin, resulting in increased market volatility.
Reduction in profits from basis trading may affect Bitcoin market liquidity
Second, attention needs to be paid to a popular institutional trading strategy – basis trading risk. The so-called “basis trading” is an arbitrage strategy based on the price difference between Bitcoin spot and futures.
With more institutional investors directly investing in Bitcoin through spot ETFs rather than choosing futures or other derivative products, this will increase the demand for Bitcoin spot markets, which may narrow the price difference (basis) between spot and futures, making this trading strategy less profitable.
This situation may lead to a reduction in trading activities in the Bitcoin market by some institutional investors, 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 a particular trading strategy. Therefore, this change is only one potential factor that could potentially affect the market.
With less than three weeks left until January 10, 2024, let us continue to observe.
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ETF
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Basis Trading
Bitcoin
Bitcoin Spot ETF