The revenue generated by these players will grow in tandem with the popularity of the ETFs; as more funds are invested and trading activity intensifies, the potential earnings will increase significantly. Brett Tejpaul, who leads institutional services at Coinbase, describes the opportunity as “enormous,” predicting that trillions of dollars will eventually flow into US spot bitcoin ETFs. Although it may be a gradual process, he sees it as a potential “giant expansion of the pie.”
Since 2021, residents in the US have had access to bitcoin futures ETFs, which provide a loose proxy for bitcoin investment, as their value is linked to the price of the cryptocurrency. However, spot bitcoin ETFs offer a more direct investment route, alleviating the risks tied to manual cryptocurrency storage.
For years, the SEC was hesitant to approve spot bitcoin ETFs due to concerns regarding significant price volatility and the absence of regulated trading platforms, which could pose risks to investors. A turning point occurred in August 2023 when a US judge ruled that the SEC had wrongly denied an application from asset manager Grayscale to transform its bitcoin trust into a spot ETF, prompting the agency to reevaluate its stance.
Subsequently, the SEC approved all eleven pending applications for spot bitcoin ETFs, leading to competition among operators to attract investment, notes Seoyoung Kim, a finance professor at Santa Clara University’s Leavey School of Business. The firms with the broadest reach and strongest reputations—like BlackRock—are poised to benefit significantly. Collaborations with these entities could be immensely advantageous for intermediaries.
This additional revenue could be crucial for US-based crypto firms responsible for bitcoin custody for ETF issuers, especially amid regulatory clashes over their consumer-facing services in the previous year. In June, the SEC took legal action against Coinbase, accusing it of operating an unregistered securities exchange in the US. In October, the New York attorney general charged Gemini with involvement in a $1.1 billion fraud concerning a service that allowed customers to earn interest on crypto deposits. Both companies vehemently deny these allegations and are preparing to defend themselves in court. Expanding their custody operations could help mitigate the uncertainty surrounding consumer crypto trading in the US amidst ongoing regulatory scrutiny.
As Kim suggests, it might be feasible for crypto firms acting solely as custodians to expand into other areas related to ETF functionality, such as Authorized Participants (APs). Coinbase, as stated by Greg Tusar, head of institutional product, is considering this possibility but will primarily focus on crypto-specific services. Meanwhile, Gemini intends to assess its offerings as spot bitcoin ETFs evolve, according to chief strategy officer Marshall Beard.
As traditional financial institutions become more comfortable with the technical complexities of bitcoin, there exists the potential for them to “cannibalize portions of the market,” including crypto custody, cautions Austin Reid, head of business at crypto prime brokerage FalconX. In the meantime, he notes, there are substantial growth opportunities for companies equipped with the essential crypto expertise to support ETF issuers.
This opportunity could be amplified if new spot bitcoin ETFs lead to the creation of derivatives, according to Tejpaul. He explains that these ETFs could function as a “giant building block,” paving the way for various derivative products and expanding potential revenue for custodians and other intermediaries.
Underlying these projections, however, is the assumption that the spot bitcoin ETFs will perform successfully. Seyffart indicates that the issuers expect robust demand for their new ETFs; otherwise, they would not have rushed to launch them. For intermediaries, much hinges on whether this expectation proves true in practice—specifically, whether the ETFs will stimulate a surge in demand for bitcoin as envisioned by the issuers.
“This is just the first step,” Reid states. “Next, it’s a matter of how [the ETFs] scale.”