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Is BlackRock applying to the SEC for a Bitcoin ETF or a trust?

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What are the arguments held by analysts, investors, and professionals in the cryptocurrency industry?

One of the world's largest asset management giants, BlackRock, has submitted a filing for a spot Bitcoin ETF to the US SEC through its subsidiary iShares. The filing shows that the fund being applied for is named "iShares Bitcoin Trust" and its assets are "primarily composed of Bitcoin held by the trustee of the trust".

There has been a huge controversy and disagreement in the cryptocurrency industry regarding whether BlackRock's application is for a spot ETF or a trust. Some believe that BlackRock's application is for a trust, but it is different from trust funds like GBTC issued by Grayscale. It is more flexible and can be redeemed. Another view is that BlackRock's application is for an alternative structure of ETF, representing publicly traded Bitcoin trust fund stocks. It is completely different from financial instruments like GBTC and more similar to well-known ETF funds managed by GLD and BlackRock's subsidiary iShares.

Is BlackRock applying for a spot ETF or a trust? What are the arguments of analysts, investors, and professionals in the cryptocurrency industry? And from the perspective of traditional finance, what are the definitions, main differences, investment risks, and advantages and disadvantages of ETFs and trusts? This article will help you clarify these mysteries.

Is BlackRock applying for a trust?

Pomp Investments investor Anthony Pompliano believes that what BlackRock applied for is a trust, not a Bitcoin ETF. Although the two are technically different, especially when it comes to regulatory approval, the result is the same for investors. Anthony Pompliano tweeted that GBTC is a trust, so you cannot redeem it from the fund. BlackRock is also a trust, but you can redeem it. If the application is approved, it will be a huge victory for investors. However, the biggest positive news is still the approval of a real Bitcoin spot ETF by the SEC.

Web3 technology marketing studio SCRIB3 customer manager Joey Campbell also believes that what BlackRock submitted is a trust. He tweeted, "Currently, some people are shocked by the naming of 'trust' and 'ETF'. Some people say there is no difference. The reason why 'trust' keeps everyone highly vigilant is because of Grayscale's Bitcoin Trust, which currently trades at a significantly lower price than its net asset value. This is because investors cannot redeem their shares for BTC. Not redeeming means that they cannot buy at a discount or arbitrage in the market. This is different from BlackRock's trust fund."

"As described in the prospectus, you will see that Authorized Participants (APs), one of the main participants in the exchange-traded fund (ETF) creation and redemption mechanism, are essentially providers of ETF liquidity, and they can change the supply of ETF shares in the market. APs provide large fund shares for continuous redemption/creation, which means that the APs of the trust can redeem/create funds at any time of the day."

For example, if based on the current price of BTC, 40,000 BTC (1 "block") is worth $40 million, the fund's share is calculated at approximately $39 million. Therefore, AP authorized participants can purchase the share, redeem the 40,000 BTC held by the trust, and then sell it for a profit of $1 million.

Another person who holds the same view is Joe Consorti, a market analyst at The Bitcoin Layer. He tweeted that "This is not an ETF, it's a trust. Because it doesn't have the daily redemption mechanism that an ETF has, it will add and redeem in baskets of 40,000 bitcoins from the trust. It will generate similar premium and discount issues in net asset value as the Grayscale Bitcoin Trust Fund."

Another perspective: BlackRock applied for an ETF

CEHV partner Adam Cochran believes that what BlackRock has applied for is an ETF, but many ETFs have alternative structures. Unlike GBTC, BlackRock's application is for an ETF in the form of a redeemable trust, representing publicly traded shares of a Bitcoin trust fund, rather than directly processing Bitcoin asset units through clearing.

Bloomberg Senior ETF Analyst Eric Balchunas believes this is an ETF. In response, he tweeted, "For those who think that what BlackRock applied for is a trust rather than an ETF, I want to ask, do you think $GLD is an ETF? In fact, they are the same. There are many different structures under the "ETF" asset category. It's completely different from $GBTC."

SEC registered broker-dealer Watchdog Capital CEO Bruce Fenton believes that what BlackRock has submitted is an ETF, some people think it is a trust, but it is different from financial instruments like GBTC, and more like multiple well-known ETF funds managed by GLD and BlackRock's subsidiary iShares.

Considering that BlackRock's application is not for a traditional trust and does not fully meet the definition of an ETF, we will list the respective definitions and main differences between ETFs and trusts below.

What are the differences between ETFs and trusts?

ETF is an investment fund that trades on a stock exchange like a single stock. It is a type of security that holds underlying investments such as commodities, stocks, or bonds. It is typically similar to a mutual fund as it is co-managed by the issuer. ETFs are designed to track the performance of specific market indices, sectors, or assets. When investors buy ETFs, they are purchasing shares of the underlying investments such as stocks, bonds, or commodities in the portfolio. One of the benefits of investing in ETFs is that they provide easy access to a diversified portfolio of securities. ETFs also typically have lower costs compared to other types of investment tools.

Investment trusts are closed-end investment funds listed on stock exchanges. These trusts are managed by a professional fund manager who is responsible for investing the funds held in the trust. The fund manager will use this money to purchase a portfolio of assets such as stocks, bonds, or properties. The stock price of the investment trust is determined by the value of the assets held in the trust.

Generally speaking, one of the main differences between ETFs and investment trusts is their structure. ETFs are open-ended, which means the number of available shares can increase or decrease according to demand. Investment trusts, on the other hand, are closed-ended, which means there is a fixed number of shares available.

In addition, ETFs can be bought and sold on the stock exchange throughout the trading day, just like individual stocks. However, investment trusts only trade once at the end of each trading day. Additionally, the cost structure of ETFs and investment trusts is different. The cost of ETFs is usually lower than that of investment trusts because they are designed to track indices and require less active management. On the other hand, investment trusts are actively managed and may therefore have higher fees.

In the field of encryption, the grayscale GBTC trust fund is the absolute leader in the cryptocurrency market, managing over $35 billion in assets. The investment structure of the trust fund is corporate-style, at least in regulatory form, and belongs to a "closed-end fund". Therefore, the number of available shares is limited, and their supply and demand largely determine their price.

GBTC stocks are not easy to create and there is no active redemption plan. This often results in significant price differences from its net asset value. In contrast, ETFs allow market makers to create and redeem shares at will. Therefore, if there is sufficient liquidity, there is usually no premium or discount. ETFs are more easily accepted by mutual funds and pension funds because they carry much less risk than closed-end trust funds like GBTC.