As they say, Bitcoin ( , BTC ) is slowly becoming mainstream. BlackRock and Fidelity, two of the largest asset managers in the U.S., have announced their intention to launch a bitcoin spot ETF.

Why is it so important to have a bitcoin spot ETF, when there are already bitcoin futures ETFs available?

BTC ETFs are not without their drawbacks. They have high roll costs, which can be as much as 30 percentage points higher than a spot product. If the bitcoin futures curve is in a steep contago, it can affect the performance of an ETF by up to 30 percentage points (!).

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Simply put, if bitcoin futures are significantly higher than the current spot price of bitcoin, investors in bitcoin futures will lose a significant portion of their returns. The full benefits of bitcoin holdings are not realized when investing in a futures product.

The expansion of investment opportunities in bitcoin and other crypto-assets can create a new world of portfolio allocations previously not possible.

Portfolio managers use the term “efficient frontier” to describe how bitcoin investments can significantly increase multi-asset portfolios.

The efficient frontier is a representation of all possible portfolios in a return risk diagram, based on different weights for the various asset classes. One dot, for example, represents a portfolio which invests X% in equities and Y% in bonds, with the remainder invested into bitcoin.

Portfolio managers are always looking to be on the frontier of this frontier, since they get the best return with the least risk.


Only for illustration purposes. Source: ETC Group

The black dot cloud represents the universe for potential portfolios that are based only on traditional asset classes. The green cloud represents a whole new universe when bitcoin is added. You can see that adding crypto assets such as bitcoin expands the universe of possible portfolios.

It is therefore not surprising that adding bitcoin to a traditional 60/40 stock/bond multi-assets portfolio in the past has led to an increase in risk adjusted returns (“Sharpe ratio”) with only a small increase in portfolio drawsdowns.


Only for illustration purposes. Source: ETC Group

It is not yet clear when these spot bitcoin ETFs will be approved. However, the consensus is that a batch of applications should be approved in January.

The potential bitcoin ETFs have significant assets under management. We estimate that they have around $16 trillion. They could have a major impact on the crypto market. Even if only a small portion of this amount is invested in bitcoin, it would have a significant impact because currently, Bitcoin exchange-traded product assets only total $38.8 Billion, according to our calculations. This includes Grayscale’s trust.

This capital will not be invested immediately. Investors will likely take several months to replace traditional assets with bitcoin.

As they say, it will happen gradually, and then suddenly.

Nick Baker is the editor.