Spot bitcoin ETP approvals veering off the golden road

Bitcoin is often referred to as digital gold. But, on the winding path toward approval for a physically backed exchange-traded product in the United States, the similarities between bitcoin and gold fall off quickly.

It has been 20 years since an exchange-traded product holding gold first listed in Australia. Within 19 months, similar offerings followed in the U.K. and the U.S. There are now nearly 100 exchange-listed products backed by physical gold throughout the world, including the $56.8 billion SPDR Gold Shares, known by its ticker GLD.

Perhaps to the bewilderment of bitcoin proponents, many of whom have been toiling away for approval of a spot U.S. offering for nearly a decade, GLD went from its first filing with the U.S. Securities and Exchange to listing on the New York Stock Exchange in just 18 months. Structured as a grantor trust, GLD hit $1 billion in assets in roughly a week and unlocked demand for gold across the investment spectrum.

The World Gold Council, a consortium of 33 gold-mining companies operating across 45 countries, helped bring many global gold products to life with its focus on standards and provenance, and the industry group is still closely intertwined with GLD, the world's largest gold fund. Joseph Cavatoni, North American market strategist for WGC, also serves as principal executive officer for World Gold Trust Services LLC, the sponsor of GLD and GLDM, the 5-year-old SPDR Gold MiniShares Trust.

What drives the viability of physical gold products, and continues to hinder SEC acceptance of spot bitcoin offerings, is the total market context in which gold operates. Spot gold is supported by a robust futures market. Central banks continue to hold gold reserves. Medical, industrial and jewelry markets create natural demand beyond investment. And, of course, gold bugs are ever-present.

Regulators, however, are not necessarily swayed by the details of the contextual market. They are concerned with what happens on the securities exchanges whose rules they oversee and listings they approve. For exchange-traded products, that means transparent pricing, clear custody, and trading and settlement reliability.

For investors and ETP issuers, their focus is on the liquidity of the underlying asset, the premium or discount of the ETP share price to net asset value, and the trading spreads and volumes that compel market makers and enhance liquidity.

ETPs include exchange-traded notes (debt securities that track the returns of a particular index or asset), exchange-traded funds (which hold equity and debt securities as well as loans, futures, options and cash), and exchange-traded commodities, which hold physical commodities.

"Tight spreads are easily achieved when a product is built the right way," Mr. Cavatoni said. "They give market makers confidence to transact."

Confidence in gold is also backed by millennia of luster, utilization and speculation. Bitcoin, on the other hand, just had its bar mitzvah last year.

It's not that bitcoin and other cryptocurrencies aren't available to anyone who wants to buy. Crypto can be held directly in a digital wallet or bought on an exchange such as Coinbase and Binance. (Last fall's bankruptcy of FTX cast a lot of doubt on such exchanges amid the "crypto winter" of declining asset values and failed companies.)

Though still 50% off highs hit in late 2021, bitcoin has doubled since the fall to about $30,000. The combination of rising rates, inflation and bank failures gave product issuers hope that the SEC would eventually bless a bitcoin offering. A mid-June filing by BlackRock Inc. for a spot Bitcoin ETP silenced even more critics as chairman and CEO Larry Fink, once a cryptobear, was out talking up crypto.

Still, exchange-traded products tracking or holding bitcoin have been available globally since 2015, starting with exchange-traded notes in Sweden. In 2021, a product holding "physical" bitcoin listed in Canada and a futures-based product arrived in the U.S. The Grayscale Bitcoin Trust, GBTC, launched in the U.S. as a private placement in 2013, has traded over-the-counter for eight years and holds $18.9 billion in bitcoin.

Grayscale is currently suing the SEC after the regulator denied its application to convert GBTC to an ETP. Such a conversion would effectively close its significant trading discount to NAV, which stood at 27.5% as of July 7. A final decision from the DC Circuit Court of Appeals is expected this fall.

Not including GBTC, research firm ETFGI tracks 166 digital asset ETPs around the world. These products collectively held $9 billion through April. Gold ETPs, on the other hand, held $211 billion in gold through June 30, according to the World Gold Council. Just under half of those assets are held by U.S.-listed products. This statistic reinforces why a U.S. ETP is seen as critically important to the bitcoin market.

"Without question, the greatest challenge (to launching GLD) was satisfying the rigorous examination from the Securities and Exchange Commission," said George Milling-Stanley, chief gold strategist for State Street Global Advisors.

"Prior to the GLD launch, the SEC had limited knowledge about the gold market and its operations and system of regulation, and that entailed a lengthy educational process, involving experts from the fields of trading in spot gold and futures, the legal structure of the gold market, attorneys, analysts and more," Mr. Milling-Stanley said.

From his experience with the launch of GLD, Mr. Milling-Stanley has some caution for those looking to bring new concepts and asset classes to ETPs.

"Make sure the market really has a burning desire for whatever product is being contemplated. For GLD, the World Gold Council conducted extensive market research, involving thousands of interviews with people who did not invest in gold, in order to identify the perceived barriers," he said. "This paid dividends."

Even though gold, like bitcoin, does not.