Bitcoin is the digital world's non-sovereign reserve currency and serves as a unique way to diversify portfolios, consequently enhancing total risk-adjusted returns. However, despite numerous possibilities for capitalizing on this preeminent virtual asset, there remained one notable deficiency: the creation of a spot bitcoin ETF.
The pursuit of a spot bitcoin ETF has been a considerable endeavor. The SEC (Securities and Exchange Commission) has denied all 33 previous applications spanning across multiple filers ever since the Winklevoss twins first initiated their bid over a decade ago.
However, due to recent developments like BlackRock Inc (BLK) – managing an incredible $8.5 trillion in assets under management (AUM) – joining the fray in June, Grayscale's court triumph against the SEC rescinding its past application disapproval, followed by the fresh approvals of a leveraged Bitcoin futures ETF and Ethereum futures ETFs, we have come closer than ever.
Further adding to this progress, according to recently disclosed data, BLK has submitted an application for a spot Bitcoin ETF despite unwavering prior rejections from the SEC.
The SEC has previously spurned applications on the basis that Bitcoin's decentralization and volatility could hinder fund managers from safeguarding investors against market manipulation. Currently, all U.S.-traded bitcoin ETFs are tied to futures contracts traded on the Chicago Mercantile Exchange.
In its application, BLK announced JPMorgan Securities as one of the "Authorized Participants" for its proposed Bitcoin ETF.
U.S. banks like JPMorgan Chase & Co. (JPM), governed by strict regulations, currently cannot hold Bitcoin directly. However, the proposed structural change to spot bitcoin ETFs could alter this scenario. The modification would enable APs to create new shares within the fund using cash instead of strictly relying on cryptocurrency. This paves the way for these regulated banking entities that are unable to hold crypto assets directly.
Authorized participants generally oversee the creation and redemption of ETF shares in the primary market, ensuring the ETF’s price aligns with the value of the underlying securities, in this case, Bitcoin.
Securing authorized-participant agreements is typically straightforward for ETF issuers, yet concerns were raised that bitcoin funds could face challenges due to cryptocurrencies being a relatively new asset class.
If approved, JPM could potentially serve this role for the first such ETF in the U.S., a move anticipated to attract billions in institutional capital and stimulate the cryptocurrency market.
Critics have been quick to note the contradiction in JPM's involvement, given CEO Jamie Dimon's repeated criticism of Bitcoin, advocating for a government ban on cryptocurrencies due to concerns over their legitimacy.
However, Bloomberg Intelligence analysts suggest the SEC could approve spot Bitcoin ETF proposals committing to cash-only creations and redemptions, provided there are agreements with authorized participants. They estimate a 90% probability of SEC approval, with several firms expected to launch a spot Bitcoin ETF as early as January.
A spot bitcoin ETF is an investment tool that enables investors to gain exposure to the price fluctuations of bitcoin in their typical brokerage accounts. Unlike derivative contracts, this ETF directly invests in bitcoin as the underlying asset.
APs are economically motivated to leverage arbitrage opportunities in the market, a process involving the trading of ETF shares or underlying securities when minor price discrepancies arise between the two.
In scenarios where ETF shares trade at a premium or discount relative to bitcoin's actual price, APs step up to either create or redeem ETF shares in larger volumes. This action essentially arbitrages any difference, aligning the ETF share price with Bitcoin's cost.
Spot bitcoin ETFs present a spectrum of possibilities for both retail and institutional investors looking to speculate on bitcoin. They circumvent the technical complications of managing a cryptocurrency wallet and alleviate security concerns related to the safeguarding of private keys.
The appointment of JPM as an AP could positively influence the bank's share value, as it demonstrates the bank's readiness to engage in the burgeoning cryptocurrency sector and opens possibilities for a new stream of revenue via arbitrage and liquidity provision.
Nevertheless, the financial performance of JPM is not solely determined by this engagement. It is also contingent on external factors like the SEC’s verdict on approving the spot bitcoin ETF, the market's demand and mood toward bitcoin and other cryptocurrencies, and the overall regulatory and competitive landscape of the banking industry. These elements could concurrently sway the stock performance of JPM.
Bottom Line
The potential for a U.S. spot bitcoin ETF cannot be understated, given the vast expanse of the American capital market. According to figures from the SIFMA, American-held assets represent an impressive 40% of total global fixed-income assets and equity market cap. Moreover, ETFs in the U.S. are more prevalent as part of the total asset picture than they are in other regions. They make up 12.7% of the equity assets in America, compared to 8.5% in Europe and 4.4% in the Asia-Pacific.
This equates to a U.S. ETF market valued at around $7 trillion, significantly larger than Europe’s $1.5 trillion or Asia-Pacific’s $1 trillion markets. Judging from another angle, considering that the assets handled by broker-dealers, banks, and registered investment advisors (RIAs) in the U.S. reach into the trillions, a minute fraction of these managed and brokerage assets transitioning into a spot bitcoin ETF could significantly affect the financial landscape.
It's also worth highlighting that the U.S., according to Chainalysis's Global Crypto Adoption Index, ranks fourth in crypto adoption. This high level of acceptance might translate well into investment. Banking institution JPM's openness to engaging with this burgeoning market might lead to advantageous outcomes.
However, prospective investors should consider various additional factors. For instance, JPM's recent earnings were boosted by Republic's purchase, an influence expected to wane in upcoming quarters.
Notably, card delinquencies rose in November, potentially impacting both the card business and JPM's overall financial standing adversely. Commercial R/E, Sovereign Debt, and recession reports add complexity when attempting to reconcile them with JPM's high stock value.
The bank has recorded two instances of flat dividend growth over the 12 quarters, while inflation rates were significantly high. JPM has not been a reliable dividend growth investment over the past five years, with growth approximating only about 10%.
Investors in search of steady returns may want to tread carefully. JPM's forward dividend yield currently stands at 2.44%, lower than its four-year average yield of 2.91% and below the 3.32% sector median.
Moreover, the relatively low Price/Earnings ratio of 10.34x suggests market apprehension.
Given this scenario, investors should wait for a better entry point in the stock.
