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While there is an increasing expectation about Bitcoin Spot ETF, the immediate concern is about how the funds will choose the official “closing price” for Bitcoin.
Reportedly, for any ETF, the creation and redemption transactions happen at the fund’s official Net Asset Value (NAV).
Net asset value is the value of an entity’s assets minus the value of its liabilities, often in relation to open-end or mutual funds, since shares of such funds registered with the U.S. Securities and Exchange Commission are redeemed at their net asset value.
The spot price is the current price in the marketplace at which a given asset such as a security, commodity, or currency can be bought or sold for immediate delivery.
To calculate Net asset value, it is important to have a spot value. Many factors drive price fluctuations in the Bitcoin spot rate on cryptocurrency exchanges.
Bret Harrison expressed: “There would likely need to be some time-weighted average price (TWAP) or volume-weighted average price (VWAP) settlement calculation across the exchange order books, which regulators may fear would be subject to manipulation.”
For instance, at the CME, the price of bitcoin futures is calculated depending on the average trading activity across major US crypto exchanges. Therefore, it will be inconsistent to apply for spot basket calculation and not for futures baskets which will depend upon spot exchange prices.
There is a federal regulator (CFTC) in the futures market; however, there is no regulator for spot markets. This is indeed determinative if the spot bitcoin ETFs under review will be rejected.
The FTX US firmly believes that it is crucial to establish federal oversight for spot crypto exchanges. This will make approval of spot-backed ETFs easier, and it will pave the way for all institutions to be able to directly access spot crypto markets.
The listings are still good for retail. Retail traders will gain easy access to spot crypto, and they will benefit from the indirect demand for liquidity in spot, which will be created by the increased trading of crypto futures by institutions which are in connection with BITO.
The good news is that Bitcoin’s journey into mainstream finance is reaching another major milestone and another record price. Thus, investors will be able to trade an asset related to Bitcoin and they will be able to speculate its price without actually owning it. There is so much hyper and media attention to it. Regulators approving Bitcoin ETF is a significant change in direction indeed.
