The premium of cash-settled Bitcoin spot ETFs could reach up to 8%.

GTS ETF's Co-Head of Trading and Sales, Reggie Browne, stated on Bloomberg TV that if a Bitcoin spot ETF were to start trading, it could potentially see premiums as high as 8% due to the way U.S. institutions are currently handling cryptocurrencies.

Here’s the ETF IQ clip of ⁦@regbrowne⁩ explaining from a mkt maker’s POV why/how he thinks bid-ask spreads on spot ETFs will be tight but (thx to cash only creations) premiums could be as high as 8%. That’s really high and I’m a bit shocked tbh. https://t.co/VHBaOvvlIC

— Eric Balchunas (@EricBalchunas) January 8, 2024

Complexity of Cash Mode Will Lead to ETF Premiums

Browne believes that due to the complexity of the cash mode, many broker-dealers will need to use futures for hedging, resulting in a premium for Bitcoin spot ETFs in the early stages of trading. He estimates that the premium could be as high as 8%.

Illustration of ETF | What are the differences between the SEC-preferred ETF cash mode and the BlackRock Bitcoin Physical ETF?

However, he also believes that there is enough liquidity in the market to maintain the ETF's bid-ask spread as "very competitive and minimal" because market makers are prepared to handle sufficient liquidity.

Physical Mode Will Be the Next Stage

Browne expects that physical creation and redemption will become a reality at some point, although currently, they are proving to be a sticking point during negotiations with the U.S. Securities and Exchange Commission, so all companies currently waiting for ETF approvals have chosen a pure cash mode.

He stated:

This is to keep moving forward, and after climbing a few more mountains, the physical mode will be realized.

Bitcoin Spot ETF Update: First get cash mode approved, then strive for physical mode?

Canada's BTCC Also Adopts Cash Mode

However, Bloomberg ETF analyst Eric Balchunas pointed out that Canada's Bitcoin spot ETF BTCC also adopts a cash mode, but its premium is not significant, although there is occasionally a 2% discount premium. He exclaimed that 8% is indeed a surprising number!

BTCC is a Bitcoin spot ETF launched by Canadian asset management company Purpose Investments Inc. on the Toronto Stock Exchange in February 2021, with an annual management fee of 1%. Currently, the fund has assets under management of $2.22 billion, holding a total of 35,521 bitcoins.