February 26, 2024

Due Diligence Slows Adoption of Spot Bitcoin ETFs, Large Platforms Cautiously Assessing Risks

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The adoption of spot Bitcoin exchange-traded funds (ETFs) is experiencing a deliberate pace as major trading platforms engage in thorough due diligence processes. According to a report by Bloomberg on February 3, industry players like LPL Financial Holdings, one of the largest independent broker-dealers in the United States, are meticulously evaluating recently approved Bitcoin ETFs to determine their availability for approximately 19,000 independent financial advisers overseeing assets totaling $1.4 trillion.

Rob Pettman, Vice President of Wealth Management Solutions for LPL Financial, emphasized the importance of understanding how these ETFs function in the markets. The due diligence process is essential for comprehensive analysis, assessing risks and opportunities, and ensuring transparency before committing substantial assets or resources.

LPL Financial aims to complete its due diligence on Bitcoin ETFs within three months. A key consideration is the potential for ETFs to be shut down if they underperform, failing to accumulate significant assets. Pettman highlighted the negative impact such closures can have on investors, financial advisers, and operational costs for firms facilitating the process.

Bloomberg’s ETF analyst, James Seyffart, expressed a belief that the widespread adoption of Bitcoin ETFs might progress more slowly than initially anticipated. He previously predicted that ETFs could attract $10 billion in inflows during their first year in a private webinar with CryptoQuant held in January.

Seyffart explained the constraints faced by major institutions and platforms, emphasizing the need for approval lists. As of January 31, collectively, all Bitcoin ETFs approved in the previous month held 656,421 BTC, reflecting a 3% increase from the initial total holdings of 637,610 BTC. The ETFs’ performances have been notably influenced by outflows from the Grayscale Bitcoin Trust, which disposed of 132,195 Bitcoin after its transition from an over-the-counter product to a listed ETF.

LPL Financial’s Pettman emphasized the significance of time in evaluating the investment thesis for Bitcoin ETFs. The cautious approach from large institutions underscores the need for robust due diligence processes to ensure the durability and viability of these financial products over time. As the industry continues to navigate the complexities of crypto-based investment vehicles, the role of due diligence remains pivotal in safeguarding the interests of investors and financial advisers alike.

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