BLACKROCK BITCOIN ETF, WHAT KIND OF ROCK IS THIS
As always, the State and its collaborators return once again to try to divert attention from the true problems of the system. However, today we are called to discuss how the BlackRock ETF will work. Despite the difficulties in finding the document through search engines like Google or Bing, it was not an impediment to address this important topic. This corporatocracy operates solely based on the surpluses they can extract from the public and retailers. Therefore, it is convenient to analyze the true meaning and form that this ETF will have.
Prologue.
Rocks are solid objects that contain a great deal of historical information accumulated over millions of years. At first glance, they may appear simple and rigid, but they are actually much more complex and versatile than they seem. Some rocks are soft and malleable, while others are strong and persistent. Additionally, there are rocks that contain valuable gemstones, while others only have worthless waste and residue.
In this occasion, we will focus on analyzing both rocks that contain gemstones and those that are highly radioactive, known as slag. The presence of slag in a rock can be harmful and contaminating, as it can poison and degrade its surroundings. However, it is important to highlight that it can also be a source of new discoveries and learnings, such as the need to stay away from these rocks and dispose of them properly.
In order to differentiate between a rock with gemstones (like Bitcoin) and a slag rock (like Blackrock), it is essential to acquire specific knowledge and skills. Only in this way can we make informed decisions and avoid falling into unfavorable situations.
Introduction
Definition of ETF and Its Relationship with Underlying Assets.
An ETF, or exchange-traded fund, is a type of investment fund that holds a portfolio of underlying assets and issues shares that can be bought and sold throughout the trading day, similar to ordinary stocks. ETFs provide investors with a simple way to gain exposure to complex underlying assets, such as stock indexes, commodities, or, in this particular case, bitcoins.
Exchange-traded funds are designed to provide an accessible and convenient investment alternative for investors. By acquiring shares of the ETF, investors can gain exposure to a diversified basket of assets, without the need to individually buy each one of them. This diversification helps reduce the risk and volatility inherent in investing in a single asset (Schwartz, 2018).
One notable aspect of ETFs is that they are traded on exchanges, which means that investors can buy or sell shares of the ETF at any time during trading hours. This provides flexibility and liquidity to investors, as they can adjust their positions according to their needs.
Therefore, ETFs exist to provide an accessible and convenient way for investors to gain exposure to complex underlying assets, such as stock indexes, commodities, or bitcoins. By acquiring shares of the ETF, investors can diversify their portfolio and reduce the inherent risk of investing in a single asset. Additionally, the exchange-traded nature of ETFs provides flexibility and liquidity to investors.
ETF de bitcoins iShares
The iShares Bitcoin ETF aims to provide investors with a successful way to invest in the price of bitcoin without the “complexity” of owning and storing bitcoins directly. The ETF holds bitcoins deposited by investors in exchange for shares that trade on NASDAQ under the symbol assigned by NASDAQ. According to iShares, the main objective of the ETF is to mirror the performance of the bitcoin price before taking into account its costs and expenses.
In this article, we will explore how this ETF works, its main risks and costs, and relevant information for those interested in investing. Topics that will be covered include:
— How the ETF operates and how its assets are valued.
— The main risks associated with an investment in this ETF.
— The cost structure and its impact on the bitcoin ownership per share.
— How are the bitcoins owned by the iShares ETF valued, according to the ‘Business Description’ in the prospectus?.
— How is the average volume-weighted spot price of bitcoins determined?.
At the end of the article, we will analyze whether this ETF achieves its objective of offering a simple way to invest in the price of bitcoin and whether it is worth considering an investment despite the numerous risks involved in investing with an opaque and opportunistic institution.
How the iShares Bitcoin Trust ETF will work
According to the document (Sec, 2023), the ETF can be explained as follows: The ETF holds bitcoins deposited by investors in exchange for shares. Authorized participants can exchange shares of the ETF for bitcoins and vice versa. This creates a mechanism for the price of the shares to reflect the price of the underlying bitcoin.
The ETF values its bitcoins using the CME CF Bitcoin Reference Rate index. It calculates the Net Asset Value (NAV) by dividing the total bitcoin value (according to the index) by the number of shares in circulation.
To cover expenses, the ETF periodically sells bitcoins. This results in a lower bitcoin backing for each share over time. Expenses include:
- Sponsor fee: [to be determined] % of assets paid annually to the ETF sponsor.
- Other expenses: legal, auditing, taxes, listing, custody, administration, etc.
In the event of a bitcoin “fork,” the sponsor will determine which forked asset is considered bitcoin for the ETF.
Possible intrinsic risks
Key risks include volatility in bitcoin prices and the lack of an operational history for the ETF. The ETF relies on service providers such as the custodian and index provider. There is also regulatory and tax uncertainty surrounding bitcoin.
Costs and associated returns
Regarding costs and returns, the following aspects should be considered: costs include the sponsor fee and other expenses. Over time, these costs reduce the amount of bitcoin backing each share.
The performance of the ETF closely correlates with bitcoin prices, but it will necessarily show lower returns due to the associated costs. It is important to note that the ETF will be established in 2023 or 2024, so long-term performance data is nonexistent.
Cost structure of the iShares Bitcoin Trust ETF and its impact on bitcoin ownership per share
The main costs of the ETF include the sponsor fee and other expenses. The sponsor fee is calculated daily as a percentage of the managed assets and is paid quarterly. This fee is intended to cover the administration costs of the ETF.
The other expenses include legal fees, audit fees, taxes, listing fees, custody fees, administrative fees, and other operational costs. The sponsor is responsible for some of these routine expenses, but not all. Any extraordinary or non-routine expenses will be covered by the ETF.
To pay the sponsor fee and other expenses, the ETF sells a portion of its bitcoins monthly. The amount of bitcoins sold each month depends on the percentage of the fee, the price of bitcoin, and the total expenses.
These monthly bitcoin sales result in a lower bitcoin backing per share over time. This is because the total number of shares in circulation remains constant, while the amount of bitcoins held by the ETF decreases with each sale.
For example, if the ETF has 100 bitcoins and 1 million shares in circulation, each share represents 0.0001 bitcoins. If the ETF sells 1 bitcoin to cover expenses, it will be left with 99 bitcoins and still have 1 million shares in circulation. Now each share represents only 0.000099 bitcoins, which results in a decrease in bitcoin ownership per share.
Throughout the existence of the ETF, this effect is exacerbated due to the monthly sales of bitcoins to cover fees and ongoing expenses. This means that even if the price of bitcoin remains unchanged, the value of each share tends to decrease due to the decrease in bitcoin backing behind each share.
The sale of bitcoins also generates taxable events for ETF shareholders. This means that shareholders may have to pay taxes even if they never sell any of their shares.
In summary, the costs of the ETF reduce the amount of bitcoin backing each share over time due to continuous bitcoin sales. This can negatively affect the value of shares regardless of bitcoin price movements.
How are the bitcoins owned by the iShares ETF valued, according to the ‘Business Description’ in the prospectus?
The value of the ETF’s assets, including bitcoins, is determined by the Sponsor. However, the responsibility for calculating the net asset value (NAV) of the ETF has been delegated to the Trustee.
The Trustee, in turn, has delegated the task to the Fiduciary Administrator. The Fiduciary Administrator values the ETF’s bitcoins based on the CF Benchmarks Index, unless otherwise determined by the Sponsor.
The CF Benchmarks Index is calculated daily and reflects the average weighted spot price of bitcoins on various selected cryptocurrency exchanges. The exchanges that make up the index may change.
If the CF Benchmarks Index is not available or the Sponsor determines otherwise, the ETF’s assets may be valued according to a policy approved by the Sponsor.
The method used to calculate the CF Benchmarks Index is likely not consistent with Generally Accepted Accounting Principles (GAAP). Therefore, for the purposes of the ETF’s financial statements, a pricing source consistent with GAAP will be used. The Sponsor will determine the valuation sources and policies for the ETF’s financial statements.
How is the average volume-weighted spot price of bitcoins determined?
The average volume-weighted spot price of bitcoins used as a reference for valuing assets in the iShares ETF is determined according to the following procedure, based on the CF Benchmarks Index and the Constituent Exchanges, which currently include Bitstamp, Coinbase, itBit, Kraken, Gemini, and LMAX Digital (subject to change in the future).
The price determination takes into account all spot bitcoin transactions in dollars carried out on these constituent exchanges during a one-hour observation window, specifically between 3 pm and 4 pm Eastern Time (ET).
This hour is divided into twelve 5-minute intervals. For each 5-minute interval, the volume-weighted median price of all transactions during that interval is calculated. This volume-weighted median gives more weight to transactions with higher volume.
The final reference price of the index is obtained by calculating the simple average of the twelve volume-weighted medians obtained throughout the one-hour window. This reference price of the index, established at 4 pm ET, is used to value the assets of the iShares ETF.
In conclusion, the average volume-weighted spot price is determined by summing all spot transactions in dollars recorded on the different constituent exchanges during one hour, dividing this period into intervals, calculating the volume-weighted median for each interval, and averaging the resulting medians.
How are the constituent exchanges selected for the calculation of the weighted spot price?
According to the prospectus, the constituent exchanges are chosen based on the exchanges in which the ETF primarily transacts. Currently, the constituent exchanges are as follows:
• Bitstamp: It is a UK-based exchange. It is registered with FinCEN as a money services business and holds money transmitter licenses in several US states.
• Coinbase: It is a US-based exchange. It is registered with FinCEN as a money services business and holds a Bitlicense from New York. It also holds state licenses as a money transmitter.
• ItBit: It is a US-based exchange. It holds a Bitlicense from New York. It is also registered with FinCEN and holds state licenses as a money transmitter.
• Kraken: It is a US-based exchange. It is registered with FinCEN and holds regulatory authorizations in various jurisdictions.
• Gemini: It is another US-based exchange that holds a Bitlicense and is registered with FinCEN.
• LMAX Digital: It is a Gibraltar-based exchange. It is regulated by the Gibraltar financial regulator but does not hold a Bitlicense.
The list of constituent exchanges may change over time and the Index Administrator may add or remove exchanges at its discretion. However, according to the prospectus, they are selected based on the exchanges in which the ETF itself primarily transacts.
Epilogue
The way the American corporatocracy operates is highly suspicious. It’s clear that it’s not a coincidence for the SEC to attack the cryptocurrency sector from multiple fronts. We should not accept this without questioning it. Additionally, it’s important to take into account the significant increase, both in percentage and absolute terms, of the US debt in the past three years. This is due to the pandemic and the government’s investments aimed at fostering new infrastructure and promoting reindustrialization.
Lastly, we cannot completely surrender to these institutions and their media and decision-making power. If we are not willing to live in yet another manifestation of the Procrustean syndrome, we must resist being shaped and turned into mere mechanisms for wealth extraction.
Conclusions
This ETF offers a convenient way for investors to gain exposure to bitcoin. However, it is important to consider some warnings:
1. The associated costs must be taken into account. The sponsor fee and other expenses can reduce the ETF’s returns. This means that the fund will sell bitcoins every month, which negatively affects the long-term value of the shares, regardless of bitcoin price movements. Therefore, costs can have a significant impact on long-term investors.
2. There is uncertainty in terms of regulations and taxes. The regulatory framework for bitcoin is still developing and not fully established. Additionally, it is not certain how bitcoin will be taxed in the long term. All these variables add risk for ETF investors.
3. It is important to recognize that BlackRock’s interests may not necessarily align with those of the investors. While BlackRock aims to offer bitcoin exposure to investors, it may also seek to profit through fees and trading against the ETF. Investors should consider these potential conflicts of interest.
4. Other institutions are also entering the bitcoin ETF market. Fidelity, VanEck, Valkyrie, and others have already launched or are planning to launch their own bitcoin ETFs. This growing competition could eventually lower fees, which would be beneficial for investors. However, it could also complicate the choice between multiple options.
5. Regulators may take actions regarding cryptocurrencies. Cryptocurrencies, including bitcoin, exist in an uncertain regulatory zone. If the SEC deems certain cryptocurrencies as securities, this could open the door for the launch of bitcoin ETFs. However, it could also lead to new regulations that affect the market.
6. It should be noted that the short and medium-term cost is considerable if the bitcoin is left in the hands of BlackRock, and there is a risk of confiscation. Specific issues such as forks are also mentioned. In this sense, it may be more convenient to learn how to handle virtual wallets and have the ability to buy and sell bitcoin directly.
While this ETF offers an interesting investment opportunity to gain exposure to bitcoin, investors should carefully analyze the costs, risks, and potential motives of the sponsoring institution. Additionally, it is necessary to stay alert to regulatory changes and evolving competition. Taking all this into account, the ETF may be suitable for some investors, but definitely not for everyone.
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References
Schwartz, G. (2018). What are ETFs and how do they work: a beginner’s guide.
Sec, iSHARES BITCOIN TRUST. (2023). Bitwise Bitcoin ETF S-1 [Online document]. Retrieved from https://www.sec.gov/Archives/edgar/data/1980994/000143774923017574/bit20230608_s1.htm
CF Benchmarks. (n.d.). BRR. Retrieved from https://www.cfbenchmarks.com/data/indices/BRR
- Fannon, M. (2020). Bitcoin ETF Considerations for Investors. Crypto.com. https://crypto.com/academy/what-is-a-bitcoin-etf-guide
- Cayman Islands Monetary Authority. (2019). Guidance on Regulations for Virtual Asset Service Providers. https://www.cima.ky/regulated-sectors-securities-investment-business/guidance-on-regulations-for-virtual-asset-service-providers
