Spot Bitcoin ETFs will bring fresh capital to the market, but that won’t change the fundamental reality: Bitcoin liquidity is declining. Even with the introduction of a Bitcoin spot ETF, the Chicago Mercantile Exchange (CME) has long been the home of crypto for traditional finance investors. Over the last year, CME activity has increased dramatically. The CME currently sees more Bitcoin futures activity than Binance, the world’s largest cryptocurrency exchange. The CME’s open BTC interest currently accounts for 24.7% of the whole market, making it the world’s leading Bitcoin futures trading venue. While some of this activity is almost probably related to the anticipation of approval for a spot ETF, the introduction of one or more will not result in a decrease in futures market activity.
There is little question that a spot ETF will attract substantial amounts of institutional capital. However, it will have little effect on the fundamentals of Bitcoin liquidity. As we all know, the quantity of Bitcoin is limited to 21 million units. As a result, the futures market is the only area where meaningful trade action may take place. For years, Goldman Sachs, Morgan Stanley, JP Morgan, and others have used the CME to trade bitcoin assets, and they have done so via futures contracts. Because liquidity is the key concern in the spot market, futures remain the preferred product. These massive institutional investors might buy bitcoin at any time, but liquidity – not the lack of a spot ETF – remains the main disadvantage.
The CME is also used by sophisticated institutional investors. As a result, any fund manager who invests in BlackRock’s spot ETF, for example, will want to hedge that position with CME futures. As a result, we may expect CME activity to rise practically in lockstep with the rise in spot ETFs. Futures are, as we all know, a speculative tool, and there is possibly no more speculative market than cryptocurrency. With the introduction of a spot ETF, the asset class will gain greater validity and trust, and we will see more investors engaged in all aspects of digital asset trading.
Day traders who have traditionally focused on the foreign exchange market will most likely begin to diversify into Bitcoin and other crypto assets. This interest will be channelled through the CME. Indeed, I believe that perpetual swaps and other types of derivative instruments will see more interest in the sector next year. Another important factor is that cryptocurrency futures benefit from clearer and more consistent regulation. While the Commodity Futures Trading Commission (CFTC) regulates futures, no one has yet properly resolved who regulates the crypto spot market, which remains a concern. The Securities and Exchange Commission is now reviewing applications for these Bitcoin spot ETFs, but as has been clearly evident, Chairman Gary Gensler is a great fan of ambiguity. Clear regulation is driving evident success in bitcoin futures, but regulatory opacity is stifling the spot market. As a result, while the approval of an ETF is only a matter of time at this point, we don’t know how much time. While we wait, the futures market remains a very appealing trading venue for institutional investors.