Bitcoin ETFs Have Arrived. Here’s Who Stands to Get Rich

US regulators have approved a new breed of financial product that will give people a way to invest in bitcoin through their brokerage for the first time, as if it were a regular stock.

A selection of financial institutions, including household names like BlackRock and Fidelity, have been given permission by the US Securities and Exchange Commission (SEC) to launch spot bitcoin exchange-traded funds (ETFs), whose value tracks the price of bitcoin. The approval comes after a peculiar incident on January 9, in which a hijacker used the agency's X account to announce the ETFs prematurely, leading to market chaos and forcing the SEC to publish a retraction.

The arrival of the spot bitcoin ETFs has been celebrated among investors as a source of new demand for the asset—now available in a more accessible format—that could push up the price. Yet a significant portion of the financial upside will be captured behind the scenes, not in the open market.

The ETF issuers will take a management fee, as a percentage of the sum people invest. One layer deeper, though, another subset of companies—intermediaries that provide the plumbing necessary for a spot bitcoin ETF to function—stand to earn big. These firms are responsible for storing bitcoin on behalf of the issuers, as appointed custodians, or creating new ETF shares and cashing in existing ones, in the case of authorized participants, or APs. The job of another set of third parties, market makers, is to help price ETFs accurately and ensure that trades run smoothly in the public market.

The pool of firms that perform these trading-related functions is limited, says James Seyffart, ETF research analyst at Bloomberg Intelligence, partly because of the amount of cash required to deal with large quantities of assets flowing in and out the door. With respect to custody, the Venn diagram of willing and qualified candidates is restricted further by the challenges of handling bitcoin, which sits on entirely different technical rails than regular shares. “It’s a whole different area,” says Seyffart.

As such, the spot bitcoin ETF issuers will share a small group of service providers, at least at launch. Between them, crypto exchanges Coinbase and Gemini will provide custody services for practically all the new ETFs. Only JPMorgan, Cantor Fitzgerald, Virtu Financial, and Jane Street, all multinational financial services firms, have signed on as APs to date.

The revenue won by these players will scale with the popularity of the ETFs; the more money invested and the more frenetic the trading activity, the more there is to be made below deck. The opportunity is “enormous,” claims Brett Tejpaul, head of institutional services at Coinbase, who predicts trillions of dollars will eventually flow into US spot bitcoin ETFs. It may be a “slow and building process,” but could represent a “giant expansion of the pie,” he says.

In the form of bitcoin futures ETFs, whose value is correlated with the price of the crypto token, US residents have had access to a loose proxy for bitcoin investment since 2021. But spot bitcoin ETFs are the closest thing to investing directly, without taking on the risk associated with storing crypto manually.

The SEC had for years been reluctant to approve spot bitcoin ETFs, over concerns that the volatility of prices and lack of regulated trading venues would put investors at risk. In August 2023, when a US judge ruled the agency had wrongfully denied an application by asset manager Grayscale to convert its bitcoin trust into a spot ETF, however, the SEC was forced to reconsider its position.

The SEC has now rubber-stamped all eleven pending applications for spot bitcoin ETFs, whose operators will now jostle, says Seoyoung Kim, professor of finance at Santa Clara University's Leavey School of Business, to attract the most investment. The “usual suspects,” she says, with the broadest reach and strongest reputation—the likes of BlackRock—are in prime position. Relationships with these companies could be highly valuable for the intermediaries.

The additional revenue stream could be particularly important for the US-based crypto firms tasked with storing bitcoin for the ETF issuers, who have found themselves in conflict with regulators over their consumer-facing services in the last year. In June, the SEC sued Coinbase, which it accused of operating an unregistered securities exchange in the US. In October, the New York attorney general charged Gemini with participating in a $1.1 billion fraud in relation to a service whereby customers earned interest on crypto deposits. Both companies have denied the charges and will fight them in court. An expansion of their respective custody businesses though could help to offset the prevailing uncertainty over the future of consumer crypto trading in the US, amid the regulatory crackdown.

It would even be possible, says Kim, for the crypto firms now acting only as custodians to move into other areas of the ETF plumbing—as APs, for instance. Coinbase does not rule out the possibility, says Greg Tusar, head of institutional product, but will lean into crypto-specific services. Gemini will evaluate the services it provides as spot bitcoin ETFs mature, according to chief strategy officer Marshall Beard.

As traditional financial institutions grow comfortable with bitcoin’s technical complexities, there is potential they might “cannibalize portions of the market,” including crypto custody, says Austin Reid, head of business at crypto prime brokerage FalconX. In the interim, there are “opportunities for growth,” he says, for companies ready with the necessary crypto expertise to serve ETF issuers.

That opportunity would be multiplied if the new spot bitcoin ETFs begin to spawn variants, says Tejpaul. The ETFs could act as a “giant building block,” he says, on top of which various derivative products could be built, expanding the revenue available for custodians and other intermediaries to grasp.

Beneath these projections, however, is the assumption the spot bitcoin ETFs will succeed. The issuers, says Seyffart, anticipate strong demand for their new ETFs, or else they wouldn’t have queued up to launch them. For the intermediaries, much depends on whether the thesis holds true in practice—whether the ETFs will unlock a wave of pent up demand for bitcoin as the issuers hope.

“This is just the first step,” says Reid. “Then it’s a question of how [the ETFs] scale.”