A spot bitcoin ETF , similar to a stock, can be shorted, enabling investors to capitalize on anticipated price declines by selling borrowed ETF shares. The process of shorting an ETF would involve borrowing shares from a broker, selling them at the current market price, and later repurchasing them at a lower price to return to the lender.
"This increased capacity to safely short bitcoin by traditional market participants is in part because the perceived risk of the share-borrow, and the collateral posted to support it, is now lower in the minds of these market participants, as compared to dealing with unregulated CeFi crypto lenders," crypto derivatives trader Gordon Grant told The Block.
Grant stressed that traditional stock market traders could recognize a major use-case in borrowing shares of new spot bitcoin ETF funds in order to short sell them, "either outright or as a hedge mechanism for options."
Lower counterparty risk could drive activity
Grant added that there is now the potential for the emergence of functional "repo" markets for spot bitcoin ETFs with top-tier equity trading counterparts. This development could foster a perception among market participants that there is now reduced counterparty risk when engaging in borrowing and lending mechanisms used for short positions.
"In essence, whereas in the past, you had to feel comfortable with the credit risk of the CeFi desk of your choice, which obviously did not end well in many circumstances, the arrival of spot bitcoin ETFs should see counterparty risk palpably abate since it will be possible to gain short exposure to bitcoin in a way other than through borrowing and selling the actual token, trading on unregulated offshore exchanges, or having access to a commodities futures trading account via an FCM," Grant said.
