Institutional Heavyweights Back BlackRock's Bitcoin ETF Trading

Amid the recent regulatory crackdown on the cryptocurrency space, the potential approval of a Bitcoin ETF (Exchange-Traded Fund) could provide U.S.-based firms with a new opportunity to engage in the crypto market, leveraging their traditional strengths

It has been reported that some of the world's largest market-making firms are exploring the possibility of providing liquidity for BlackRock's highly anticipated Bitcoin ETF should it receive approval from regulators. Notably, market giants such as Jane Street, Virtu Financial, Jump Trading, and Hudson River Trading (also known as HRT) have engaged in discussions with BlackRock regarding a potential market-making role. These details were revealed through a BlackRock slide deck reviewed by an individual familiar with the matter. However, all involved parties, including BlackRock, Jane Street, Virtu, Jump Trading, and Hudson River Trading, declined to comment on the matter.

The U.S. has witnessed a series of regulatory actions targeting the cryptocurrency space throughout this year. These actions appear to be a response to various events, including the implosion of FTX and other scandals in 2022. As a result, some U.S. firms have opted to scale back their involvement in the crypto industry. In May, Bloomberg reported that both Jane Street and Jump Trading had reduced their crypto trading activities due to the regulatory crackdown.

If the U.S. Securities and Exchange Commission (SEC) approves one or more of the approximately dozen applications for Bitcoin ETFs, this could pave the way for U.S.-based firms to participate in the crypto market in a manner that aligns with their traditional strengths. Being a market-maker for ETFs, which are traded on exchanges much like stocks, necessitates a level of sophistication and automation that only a select number of companies can achieve.

Market makers play a crucial role in the functioning of ETFs. They are responsible for creating and redeeming new shares of an ETF, ensuring that its price remains closely tied to the value of the ETF's underlying holdings.

A compelling example of why this creation and redemption structure is essential comes from the cryptocurrency space. Grayscale Investments offers the Grayscale Bitcoin Trust (GBTC), a product whose price has, in the past, deviated significantly from the value of the Bitcoin (BTC) it holds. Unlike an ETF, GBTC shares cannot be redeemed for BTC. Grayscale has applied to convert GBTC into an ETF. While the initial application for conversion was rejected by the SEC, a court ruling in August criticized the SEC's reasoning. In October, the SEC decided not to appeal this ruling, which has raised expectations for the approval of Bitcoin ETFs in the United States.

James Butterfill, Head of Research at CoinShares, a provider of crypto exchange-traded products, highlighted the changing stance of the SEC, saying, 

"Several market makers were pulling back and being quite cautious because there was some heavy cracking down on exchanges. But since the Grayscale ruling, we've seen a very real change in stance from the SEC."

The potential involvement of these market-making firms in supporting a Bitcoin ETF by BlackRock is seen as a significant development that could bring further institutional interest and liquidity to the cryptocurrency market.

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