Should exchanges fear a Blackrock ETF?

Key Takeaways

• Blackrock is the biggest asset manager in the world and has filed for a spot Bitcoin ETF
• No guarantee it will be approved, and the SEC has rejected every spot ETF application to date
• Exchanges have been struggling mightily, with layoffs flooding the industry and lawsuits on the rise amid regulatory crackdown
• An approved ETF could pull even more volume from exchanges, writes our head of Research, Dan Ashmore
• Exchanges have seen a staggering outflow of capital over the last year amid crypto winter, and an ETF would provide a low-fee, convenient and easy way for institutions and individuals to gain Bitcoin price exposure

It has been a rough few months for crypto exchanges. 

Actually, it has been a rough year. Coinbase chopped 18% of its workforce last June, three months after spending around $14 million on a Superbowl ad. It then reduced its employee count by a further 20% this January. Kraken and Crypto.com cut 30% and 20% of their workforces respectively post-FTX. 

Even Binance, which said it was bucking the trend by hiring rather than downsizing, and planned to expand further in 2023, announced it was cutting an unspecified amount of its workforce last month. 

This follows a period of staggering decline in the industry which has seen capital flee the space. Coinbase provides a good barometer of the industry’s travails – its share price is down 86% from the price it went public at in April 2021. It has underperformed nearly every conceivable benchmark in the industry. 

And then there is the small matter of regulation. Lawmakers have come in hard on all things crypto in the US. The SEC sued Binance and Coinbase two weeks ago, while SEC chair Gary Gensler has slammed the sector for “mass non-compliance”. As I wrote last week, this is a very big deal. 

Blackrock files for Bitcoin ETF

Something else happened last week which is also a big deal – the world’s largest asset manager, Blackrock, filed for a spot Bitcoin ETF. Perhaps there has been no greater source of false hope in crypto over the years than the always-imminent arrival of the mythical Bitcoin ETF. Thus far, the SEC has batted away every filing. There is no guarantee the same fate won’t befall Blackrock. Still, on the other hand, this is Blackrock: the ten trillion dollar asset manager represents by far the most serious application yet. 

That latter point could be the biggest boon out of all this, should the ETF be approved (which again, is no guarantee). The crypto space has been fighting for legitimacy for years and has ceded ground in recent times as all sorts of scandals, from Terra founder Do Kwon to FTX founder Sam Bankman-Fried, have struck the space. 

With liquidity thinner than it has ever been, the Bitcoin price still 60% off its all-time high (I wrote recently about how the famed stock market-correlation has broken amid this regulatory clampdown, with Bitcoin struggling to keep up with rising asset prices elsewhere), and sentiment fearful across the space, the interest from institutions and trad-fi has evaporated from the hysteria of the bull market. A Blackrock ETF could help restore some of the reputational damage of the last couple of years. 

Exchanges could suffer off the back of an ETF

One interesting angle to all this, and to get back to the crux of this piece, is the knock-on effect for exchanges. Not many people are talking about this, but there is a chance that a Blackrock ETF, despite being a boon for the space, could have detrimental consequences for exchanges. 

Oh, and a quick intermission: the Blackrock ETF is technically a trust, as evident in its proposed name, the iShares Bitcoin Trust. But in reality, it would function exactly like an ETF, with a daily creation/redemption mechanism. That is exactly how the SPDR Gold Shares ETF works, incidentally. So while it would be a trust by definition, this should not change anything, and it can be viewed for all intents and purposes as an ETF. 

But anyway, were an ETF to be approved, would less people trade on exchanges? Sure, there is the drawback with an ETF in that you don’t get the “true” Bitcoin experience. By that, I mean you don’t store it yourself, you can’t do anything with the physical Bitcoin, and you don’t get to participate in the magic of the blockchain. But, so what? I love Bitcoin and I love these things, but how many people truly care? An ETF gives one price exposure, just as a direct purchase would, and I’m willing to bet that that is all that 99% of people care about. 

Then there is the issue of fees. ETFs are notoriously fee-efficient. Exchanges will almost definitely be more expensive. Coinbase’s fee, for example, is currently 0.6%. Would people pay a higher fee to purchase through Coinbase? Again, we need to consider the reputation of the space here, too. Blackrock has incredible name value for Wall Street capital, while crypto firms such as Coinbase have their CEOs on Twitter engaging in a war of words with the SEC seemingly daily. 

Blackrock would provide a no-frills, cheap and safe way to gain price exposure to Bitcoin. Moreover, it would be smooth from a regulatory point of view, and issues of storage and other admin questions would be non-existent, in contrast to actually buying Bitcoin directly (ironically, the ETF proposes using Coinbase as a custodian). 

Were the ETF to be approved (and for the seventeenth time, this is far from guaranteed and every other ETF application has been rejected to date), it would be a huge win for Bitcoin and crypto. By definition, that may mean it would be a win for all firms involved in the space. But for exchanges, it would also provide a new form of competition at a time when liquidity, volumes and prices are down, while layoffs and lawsuits are on the up.