In October 2021, the SEC approved the first Bitcoin futures ETF and many experts thought a spot Bitcoin ETF was just a matter of time. However, the SEC has rejected more than 30 applications for a Bitcoin ETF since then.
Ric Edelman thinks this year might be different.
In June, BlackRock, the world’s largest money manager with more than $8 trillion in assets under management, submitted a spot bitcoin ETF application to the SEC. Eight other fund companies quickly filed similar applications, with the hope that they had sufficiently addressed the SEC’s concerns.
Edelman, founder of the Digital Assets Council of Financial Professionals (DACFP) and founder of one the nation’s largest RIAs, sat down with RIA Intel to discuss a Bitcoin Spot ETF and what advisors should know.
Answers have been edited for clarity and length.
Investors and advisors already have access to Bitcoin and a couple of years ago, a futures Bitcoin ETF was approved. What makes a spot Bitcoin ETF so important and why should advisors be paying attention to it?
The spot Bitcoin ETF is important because ETFs are the most popular investment vehicle in the world. Most advisors use ETFs and many use them exclusively. They are very popular with clients for all the reasons everybody knows. They’re the cheapest investment vehicle available. They are highly liquid, highly transparent, and they allow you to build a diversified portfolio and manage it easily with rebalancing and dollar cost averaging, and tax loss harvesting. More easily than you can with virtually any other vehicle, and this is why 77 percent of advisors say that they’re waiting for an ETF to become available before they’re going to allocate to Bitcoin for their clients. There is already a futures ETF available but very few advisors recommend futures to their clients. They are expensive. They are cumbersome. They are complicated, and they’re far riskier than the spot asset. A futures ETF is not a substitute for a spot bitcoin ETF and since so many advisors are anxiously waiting for this, when it becomes available, there could easily be hundreds of millions of dollars, even tens of billions flowing into Bitcoin, which would have a dramatic impact on the price.
So, it makes sense to advisors but why would it make sense for investors? They can already directly own these assets.
Two-thirds of investors obtain their investments through their advisors. And if their advisor isn’t recommending a Bitcoin ETF, the investor isn’t going to access it in any other way. So, while a client certainly could go buy Bitcoin on their own, they aren’t likely to do so because they are depending on their advisor to handle this for them.
What are the risks with investing in a spot Bitcoin ETF?
The primary risk is the risk of owning Bitcoin itself. Bitcoin is a relatively new asset. It is highly controversial. It has experienced substantial, even massive levels of volatility in the past, along the way to becoming the most profitable investment in history. Since inception, it’s grown 40,000,000 percent. That’s never going to happen again. But many believe that Bitcoin could still grow three times, five times over the next three years or so. So, there are volatility risks. There are risks to market demand. There are regulatory risks because the SEC has not yet issued regulations governing Bitcoin. So, the very high profit potential is matched by high levels of risk. This is why it is highly likely that most advisors will allocate very small amounts to client portfolios, 1 percent, 2 percent, or 3 percent allocations. This way you control the risk while allowing yourself to enjoy the potential returns.
The SEC has come down against crypto multiple times and this year has taken a lot of action that signaled that it wasn’t necessarily in favor of crypto. And it has rejected spot Bitcoin ETF applications before. What makes this year’s applications different?
The SEC in the past has raised concerns about custody and price manipulation. The industry has resolved the SEC’s concerns about custody, and the remaining issue today is price legitimacy. The industry has responded, with BlackRock offering a surveillance approach that many believe will satisfy the SEC: that the price of Bitcoin that the ETF relies on is the true price of Bitcoin and not subject to manipulation or undue volatility. There is widespread optimism that all of these applications which contain a surveillance methodology will satisfy the SEC and lead to ultimate approval.
Is that optimism warranted considering the SEC’s statements about crypto?
Many believe that it is for three reasons.
One, we’re talking only about Bitcoin. We aren’t talking about any other coins or tokens. The SEC has stated that the vast majority of coins and tokens are securities and are not being properly registered under existing securities laws. That does not apply to Bitcoin. The SEC has said that Bitcoin is not a security. It’s the only digital asset that the SEC has made that statement about.
Second, for the very first time BlackRock filed an application for a spot Bitcoin ETF. BlackRock has never done that before. Many believe that BlackRock would not have done this if it did not have the confidence that it would gain SEC approval. Of Blackrock’s 575 ETFs, only once has it had an application rejected by the SEC.
And third, the SEC lost the lawsuit that was filed against it by Grayscale. The SEC had rejected Grayscale’s application and Grayscale sued and won. The court ruled that the SEC was acting capricious and arbitrary in its denial of Grayscale’s application because the SEC had said yes to futures Bitcoin ETFs, but it said no to the spot ETF. That makes no sense. That’s saying you can eat Ketchup, but you can’t eat tomatoes. If the derivative is acceptable, then the underlying security must be acceptable. The court ordered the SEC to vacate its refusal. Based on this, we believe Gray Gensler no longer has a legitimate reason for opposing and rejecting these applications.
Where do we stand today? What are the next steps?
The SEC has 45 days from the filing of the application to approve it. The SEC has the right to delay approval for an additional 240 days. And that is what it has done in every case. The earliest applications will hit their 240-day deadline in January. So many people expect that the SEC will issue a ruling before that date occurs. It could come as early as tomorrow. This isn’t a complicated issue at this point. The surveillance question is the only issue on the table and it is not likely to take the SEC the full 240 days to resolve it. The SEC is also dealing with the aftermath of the Grayscale lawsuit. The SEC is also under severe criticism from Congress for its handling of these ETF applications today. So, there’s a lot of pressure that the SEC is experiencing to move on with this issue.
Considering everything that you’ve outlined about what the industry has done to address the SEC’s concerns, do you think the SEC will approve it?
I am hopeful that the SEC will approve at least one of the applications but there is no certainty. Gary Gensler’s opposition is clear and he could very easily create delays. For example, the SEC the SEC could go back to the Grayscale and tell them that in light of the court ruling, they need to refile its application which would restart the 240-day clock. The SEC could also appeal the court’s ruling, which could delay further action for a year or more. The SEC could even take the futures Bitcoin ETFs off the market, which would seemingly satisfy the court which objected to the fact that the spot ETFs and the futures ETFs were being treated differently. The SEC can’t say yes to one and no to the other and everybody is hoping they will say yes to both, but they could frankly say no to both.
If the SEC rejects these applications, will that mean the end for the spot Bitcoin ETF?
The spot Bitcoin ETF is inevitable. The only issue is when. Canada, the United Kingdom, Europe, and Australia all have spot Bitcoin ETFs. The United States is looking increasingly foolish in its failure to provide these investments to American investors. It is not for the government to decide what people should or should not invest in, that’s for the industry to decide. It is the government’s job to make sure that the investments are operating appropriately under the law. We may have to wait for Gary Gensler’s term of office to expire in 2026.
One of the reasons that Gary Gensler has voiced opposition to the ETF is that he says he’s trying to protect the American investor. What he fails to realize is that the average investor who has an advisor is not getting assistance from their advisor with Bitcoin because there is no ETF that the advisor can provide. This is forcing investors to search for a way to buy Bitcoin. Most investors don’t know how to do this. The FBI says that 46,000 Americans have lost more than a billion dollars to crypto scams over the past two years. That wouldn’t have happened if those consumers had relied on their financial advisors. So, we don’t know whether Gensler will say yes tomorrow or if his successor will say yes in three years, but these ETFs will inevitably come onto the market. The longer it takes, the higher Bitcoin’s price will go, and the more harm investors will suffer by these delays.
Having founded what is today one of the large RIAs and having spent your career as a financial advisor, why did you pivot towards Bitcoin and crypto?
My goal throughout my career has been to provide our clients with the advice they need to help them create wealth. I am convinced that blockchain and digital assets represent the greatest wealth-building opportunity of this decade and advisors need to understand this. They need to understand how the technology works and how to fit these investments into a diversified portfolio so that they can benefit their clients and help them achieve their goals.