A flood of investment money looks poised to pour into the cryptocurrency market if the U.S. Securities and Exchange Commission does as expected and approves bitcoin ETFs from a dozen or so firms in the next few days, as virtually everyone – crypto-savvy or not – gets easier access to the world of bitcoin [BTC].
That would force ETF issuers to scramble to buy potentially tens of billions of dollars worth of the original cryptocurrency to satisfy a surge in demand from mom-and-pop investors (grandma, grandpa and baby, too). The current biggest bitcoin investment vehicle, a relatively hard-to-buy product called the Grayscale Bitcoin Trust, has $26 billion of assets, giving some sense of the appetite for BTC even before the floodgates open.
Is the industry up to the task? Yes, according to key market players, who believe bitcoin trading is liquid enough to easily accommodate such giant purchases from issuers including BlackRock, Grayscale, Fidelity and Galaxy/Invesco.
To make sure that any large amount of capital trades efficiently, two key players have to step in: Trading firms called authorized participants (APs) and market makers.
APs create and redeem ETF shares, directing investor money into and out of the fund; while that may sound mundane, it’s a vital part of ensuring the price of an ETF remains closely linked to the value of the fund’s underlying holdings. With Grayscale’s trust, shares cannot be redeemed. That can lead to there being an oversupply of trust shares, putting downward pressure on their price. And, indeed, the trust has wandered far below its so-called net asset value in recent years – part of why Grayscale wants to turn it into an ETF.
While the work of APs is considered the “primary” market, another key player, market makers, is needed in the “secondary” market, for example on exchanges, where most of the trading is done. Market makers build on the role APs fill by buying ETF shares when others want to sell them, and vice versa. If prices get out of whack, they can earn a profit by trading to nudge them back in line. In some cases, market makers also play the role of the AP.
Several large Wall Street firms have agreed to serve as APs for bitcoin ETFs: JPMorgan Chase, Jane Street and Cantor Fitzgerald. Others are likely.
Read more: Goldman Sachs Eyeing Bitcoin ETF…
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