Crypto: Do Not Underestimate These Two Risks Associated with Bitcoin ETFs

Spot Bitcoin ETFs have sparked strong interest among investors over the past few months. With just three weeks remaining before the SEC decides on the matter, the community is abuzz. However, Coinbase researchers warn about the risks of this type of digital asset. They identify two main risks.

Bitcoin ETFs: The Side Effects of Transaction Flows

For many, spot Bitcoin ETFs are the revolution of the moment. But the risks and side effects receive less attention. Coinbase researchers, David Duong, Head of Institutional Research, and Greg Sutton, Senior Commercial Trader, share their opinions. According to David Duong, investors focus too much on the initial flows without considering their side effects. They are mostly concerned about what the flows will look like on the launch day.

Indeed, most banks and analysts have speculated on this topic. JPMorgan predicts billions of dollars in outflows from Grayscale’s Bitcoin Trust. Bitwise Research estimates that the total assets under management of Bitcoin ETFs could reach $72 billion within five years. This company describes the Bitcoin ETF as the most successful launch of all time.

The Risks on Supply and Basis Trade

According to Mr. Duong, one of the risks of high demand is supply. Bitcoins must be purchased on regulated sites. But with a high demand, issuers could have difficulty purchasing the necessary BTC. Knowing the flows is important, as we want to ensure that the demand is there. But it would be advisable to think about “the other side of the queue,” explains Mr. Duong.

The second risk concerns the basis trade, which is the difference between the BTC spot price and its futures price on the CME, the futures exchange. If the launch of the spot Bitcoin ETFs is approved in 2024, this could decrease the basis, said Greg Sutton. The basis will likely decrease, since investors will have more options to gain exposure.