2 RISKS AROUND BITCOIN ETF LAUNCH THAT NO ONES TALKING ABOUT

Last updated: June 20, 2025, 00:25 | Written by: Cathie Wood

The arrival of spot Bitcoin ETFs has been hailed as a game-changer, potentially opening the floodgates to mainstream adoption and injecting billions into the crypto market. Collective flows to the nine funds outpaced post-launch flows into the ProShares Bitcoin Strategy ETF, which drew a record $1.2 billion in the first three days of trading after its 2025 launch.We've witnessed record inflows, institutions dipping their toes in the water, and even rumblings from political figures like Donald Trump embracing the digital asset revolution.However, amidst all the excitement, some crucial considerations are being overlooked.While most discussions focus on price predictions and accessibility, Coinbase researchers recently highlighted two significant risks associated with spot Bitcoin ETFs that are rarely discussed. Spot Bitcoin ETFs have sparked strong interest among investors over the past few months. With just three weeks remaining before the SEC decides on the matter, the community is abuzz. However, Coinbase researchers warn about the risks of this type of digital asset. They identify two main risks.These risks could impact the market in unexpected ways, affecting the performance of your investments and the broader crypto ecosystem.From potential Bitcoin supply crunches to the disruption of popular trading strategies, it’s essential to delve deeper than the headlines and understand the less obvious consequences of these financial instruments. In a recent podcast on December 19, Coinbase researchers brought attention to two potential issues that might arise with the anticipated launch of spot Bitcoin exchange-traded funds (ETFs), shedding light on risks not commonly discussed in the mainstream.This article explores these hidden risks, providing you with a more comprehensive perspective on the evolving landscape of Bitcoin ETFs. Circle's IPO Sets Records with 168% Surge Amid Crypto-Community Backlash. Circle's IPO on J, marked a record-setting debut on the NYSE, closing with a 168% gain after opening at $69 and peaking at $123.5, resulting in a market cap surge to $16.7-18.4 billion, surpassing its IPO valuation of $6.8 billion.Understanding these potential pitfalls is crucial for making informed investment decisions in this rapidly changing environment.

The Looming Bitcoin Supply Squeeze: A Sourcing Conundrum

One of the primary concerns raised by Coinbase researchers, and echoed by others in the industry, is the potential for a Bitcoin supply squeeze.With the increased demand driven by spot Bitcoin ETFs, issuers might face challenges in acquiring the underlying Bitcoin to back their funds.This isn't just a theoretical concern; it could have real-world implications for Bitcoin's price and market dynamics.

Increased Demand, Limited Supply

David Duong, head of institutional research at Coinbase, emphasized that as demand for Bitcoin increases due to ETF inflows, issuers will be scrambling to source Bitcoin.The finite nature of Bitcoin, with its hard cap of 21 million coins, makes it inherently susceptible to supply shocks.With a significant portion of Bitcoin already held by long-term holders or locked away, the available supply for new ETF purchases may become increasingly scarce.

Here's a breakdown of the potential consequences:

Price Volatility: A supply crunch could lead to increased price volatility, as even small imbalances between supply and demand can cause significant price swings.
Premium Discrepancies: The price of Bitcoin within an ETF could trade at a premium compared to the spot price on exchanges, reflecting the difficulty in acquiring Bitcoin to meet ETF demand.
ETF Issuance Constraints: Issuers might face limitations on how many ETF shares they can create, potentially hindering the growth of the funds and limiting investor access.

Where Will the Bitcoin Come From?

The question then becomes, where will ETF issuers source the necessary Bitcoin? TALLINN, Estonia, J (GLOBE NEWSWIRE) - The crypto community is buzzing as Bitcoin Solaris (BTC-S) crosses a major milestone, raising $3.8 million in its ongoing presale. With overThey have several options, each with its own set of implications:

Existing Exchanges: Issuers can purchase Bitcoin from existing cryptocurrency exchanges. However, there are two Bitcoin ETF risks that you won't hear a lot of people talking about. And either could affect how well your investment performs over time. The primary purpose of theHowever, this could further strain the available supply on these platforms, driving up prices.
Over-the-Counter (OTC) Desks: OTC desks facilitate large-volume trades and may offer access to Bitcoin that is not readily available on exchanges. We expected a successful spot Bitcoin ETF launch, but one year later, the impact is much greater than we expected, VettaFi s head of sector and industry research, Roxanna Islam, saidHowever, these transactions can be less transparent and may come at a premium.
Miners: Miners are a primary source of new Bitcoin entering the market. To pick just one notorious example, North Korea s Lazarus Group hacking cohort is believed to have stolen $3 billion worth of crypto over the past six years, and it shows no signs of stoppingIssuers could potentially partner with miners to secure a steady supply of Bitcoin.

The dependence on a limited number of custodians, primarily Coinbase, for holding the Bitcoin backing these ETFs also presents a concentration of risk.While Coinbase is considered a reputable and secure custodian, the concentration of assets in a single entity introduces potential vulnerabilities to cyberattacks or operational failures.

Actionable Advice: How to Prepare for a Potential Supply Squeeze

So, what can investors do to prepare for a potential Bitcoin supply squeeze? Max Income Focus: BAGY seeks % annualized option premium 1 and Bitcoin price exposure of approximately 5% price appreciation each week. 4x More Options: BAGY uses weekly call options seeking to collect premiums 4x more often than monthly options, enabling the potential for compounded income and enhanced Bitcoin price returns.Here are some actionable steps:

Diversify Your Holdings: Don't put all your eggs in one basket. Blackrock, the world s largest asset manager, has reportedly lined up $2 billion for its spot bitcoin ETF within days of launch. Blackrock, the world s largest asset manager, has reportedlyDiversify your crypto portfolio across different assets to mitigate risk.
Consider Cold Storage: For long-term holdings, consider storing your Bitcoin in a cold storage wallet, which is not connected to the internet and therefore less vulnerable to hacking.
Stay Informed: Keep a close eye on ETF flows and Bitcoin supply metrics to stay informed about potential supply pressures.
Be Prepared for Volatility: Understand that a supply squeeze could lead to increased price volatility, and be prepared to weather the storm.

The Disruption of Popular Trading Strategies: The Basis Trade Under Threat

The second major risk identified by Coinbase researchers is the potential disruption of the basis trade, a popular strategy among sophisticated crypto traders. 2 Risks Surrounding Bitcoin ETF Launch No One Is Talking About. In a podcast released on December 19, Coinbase researchers warned that there are at least two potential problems that could arise with the launch of spot Bitcoin ETFs.This strategy involves exploiting price discrepancies between Bitcoin futures contracts and the spot price of Bitcoin.

Understanding the Basis Trade

The basis trade works by simultaneously buying Bitcoin in the spot market and selling Bitcoin futures contracts. That this is only around 3% of IBIT's AUM indicates that unlike other risk on investments like leveraged ETFs, there are plenty of longer-term holders, at least at this point in the market cycle.The trader profits from the difference between the spot price and the futures price, which typically converges as the futures contract approaches its expiration date.

This strategy relies on the existence of a price difference between the spot market and the futures market.However, the introduction of spot Bitcoin ETFs could narrow this spread, making the basis trade less profitable or even unviable.

Here's why:

Increased Spot Market Liquidity: Spot Bitcoin ETFs increase liquidity in the spot market, making it easier for traders to buy and sell Bitcoin.This increased liquidity can reduce the price discrepancies between the spot market and the futures market.
Arbitrage Opportunities: Spot Bitcoin ETFs provide arbitrage opportunities for traders to profit from any price differences between the ETF and the underlying Bitcoin.This arbitrage activity can further narrow the spread between the spot market and the futures market.

The Impact on Traders

The disruption of the basis trade could have several consequences for traders:

Reduced Profitability: Traders who rely on the basis trade may see their profits decline as the spread between the spot market and the futures market narrows.
Increased Competition: The increased liquidity and arbitrage activity in the spot market could lead to increased competition among traders, making it more difficult to execute profitable basis trades.
Strategy Adjustments: Traders may need to adjust their strategies or explore alternative trading opportunities to compensate for the disruption of the basis trade.

The Broader Market Implications

While the disruption of the basis trade primarily affects sophisticated traders, it could also have broader implications for the market:

Reduced Market Efficiency: The basis trade helps to ensure that the spot market and the futures market are efficiently priced. A majority of bitcoin ETF issuers have chosen Coinbase as a custodian, which is a concentration of risk. Even if that is the safest option, new cybersecurity standards are needed for making cryptoThe disruption of this trade could lead to reduced market efficiency and increased price volatility.
Lower Trading Volumes: The disruption of the basis trade could lead to lower trading volumes in the Bitcoin futures market, as traders move to other strategies.

Actionable Advice: Adapting to a Changing Landscape

If you're a trader who relies on the basis trade, here's how you can adapt to the changing landscape:

Refine Your Strategies: Look for ways to refine your strategies to maintain profitability even with narrower spreads.
Explore Alternative Strategies: Diversify your trading strategies and explore alternative opportunities in the crypto market.
Monitor Market Dynamics: Keep a close eye on ETF flows, market liquidity, and price spreads to identify new opportunities and potential risks.
Embrace Innovation: Be open to new technologies and trading platforms that can help you adapt to the evolving market landscape.

Beyond the Obvious: Other Overlooked Risks

While the potential Bitcoin supply squeeze and the disruption of the basis trade are two of the most prominent overlooked risks, there are other factors to consider as well:

Custodial Risks: As mentioned earlier, the concentration of Bitcoin custody with a few providers presents a potential vulnerability.Stricter cybersecurity standards are needed to safeguard these assets.
Regulatory Uncertainty: The regulatory landscape surrounding Bitcoin ETFs is still evolving. Spot Bitcoin ETFs have been heralded as a digital asset revolution, but risks and side effects have received less airtime. Demand for Bitcoin could lead to sourcing issues, while spot ETFs might kill one of crypto s most popular trades, Coinbase researchers said.Changes in regulations could impact the operation and performance of these funds.
Market Manipulation: The increased liquidity and trading volumes associated with Bitcoin ETFs could make the market more susceptible to manipulation.
Geopolitical Risks: Geopolitical events, such as government crackdowns on cryptocurrency or economic instability, could impact the price of Bitcoin and the performance of Bitcoin ETFs.North Korea's Lazarus Group, for example, has been known to steal cryptocurrency, highlighting the persistent threat of illicit activity.

It’s important to remember that the cryptocurrency market is still relatively new and subject to rapid change. The launch of spot Bitcoin exchange-traded funds (ETFs) in the United States could cause a shortage of regulated Bitcoin and hurt one popular trading strategy, according to CoinbaseInvestors need to be aware of these risks and take steps to protect their investments.

The Rise of Protected Bitcoin ETFs: A Potential Solution?

In response to the inherent volatility of Bitcoin, several firms have launched protected Bitcoin ETFs.These ETFs aim to provide investors with exposure to Bitcoin's upside potential while limiting their downside risk.

Calamos, for example, offers a suite of Protected Bitcoin ETFs that provide different levels of downside protection.These ETFs typically use options strategies to hedge against potential losses.The Calamos Protected Bitcoin ETF Suite includes ETFs offering 90% and 80% protection levels over a one-year outcome period.They also offer the world's first 100% Protected Bitcoin ETF (CBOJ).

Another example is the Quadratic Bitcoin Futures ETF (QBF), which aims to provide uncapped gains with a 20% maximum loss over a three-month outcome period.

These protected ETFs offer a potentially attractive option for investors who are risk-averse but still want to participate in the Bitcoin market.

The ETF Landscape: Who's Winning the Race?

Since their launch in January 2025, spot Bitcoin ETFs have attracted significant inflows.However, not all ETFs have performed equally well.BlackRock's IBIT has been a clear winner, consistently attracting the lion's share of new money. During a recent 10-day streak, IBIT pulled in 96 percent of all new money flowing into spot Bitcoin ETFs. Altogether, the U.S. Bitcoin ETF market brought in more than $9 billion over the past five weeks. At the same time, gold funds saw over $2.8 billion in outflows. It s clear that some investors are trading in their gold for digital gold.During one 10-day streak, IBIT pulled in 96% of all new money flowing into spot Bitcoin ETFs. On Jan. 11, 2025, the day that 11 spot bitcoin ETFs began trading in the U.S, the price of bitcoin was around $46,000, almost three times its price of one year prior and 500 times the price ofThe U.S. 2 risks around Bitcoin ETF launch that no one s talking about In a Dec. 19 podcast, Coinbase researchers warned there are at least two potential problems that could arise with the launch of spotBitcoin ETF market brought in over $9 billion in the first five weeks.

However, even the most successful ETFs can experience outflows. Calamos announces the expansion of the Calamos Protected Bitcoin ETF Suite through two new ETFs offering upside growth potential of bitcoin with 90% (CBXJ) and 80% (CBTJ) protection levels over a one year outcome period. This enhancement builds upon the announcement of CBOJ, the world's first 100% Protected Bitcoin ETF.BlackRock's Bitcoin ETF experienced outflows of over $430 million in a single week, marking the first time the fund had lost money since its launch.

The ETF landscape is constantly evolving, and investors need to monitor the performance and flows of different ETFs to make informed investment decisions.

The Future of Bitcoin ETFs: A Glimpse into 2026 and Beyond

One year after the launch of spot Bitcoin ETFs, the impact has been much greater than many expected, according to Roxanna Islam, head of sector and industry research at VettaFi.

Looking ahead, the future of Bitcoin ETFs is likely to be shaped by several factors:

Increased Institutional Adoption: As institutions become more comfortable with Bitcoin ETFs, we can expect to see further inflows into these funds.
New Product Development: We can expect to see the launch of new and innovative Bitcoin ETFs, such as protected ETFs and ETFs that track different Bitcoin-related assets.
Regulatory Clarity: As the regulatory landscape becomes clearer, Bitcoin ETFs are likely to become more mainstream and accessible to a wider range of investors.
The Continued Evolution of the Crypto Ecosystem: The broader crypto ecosystem will continue to evolve, with new technologies and applications emerging. David Duong, head of institutional research at Coinbase, highlights a crucial risk related to the sourcing of Bitcoin once spot ETFs are launched. As demand for Bitcoin increases, issuersBitcoin ETFs will play a role in this evolution.

Conclusion: Navigating the Risks and Rewards of Bitcoin ETFs

The launch of spot Bitcoin ETFs represents a significant milestone in the evolution of the cryptocurrency market.These financial instruments offer investors a convenient and accessible way to gain exposure to Bitcoin.However, it's crucial to recognize that these ETFs are not without risks.The potential for a Bitcoin supply squeeze and the disruption of the basis trade are two significant concerns that are often overlooked. Bitcoin, like other risk assets, often reacts to such news. ETF Movements: One of the largest Bitcoin investment products, BlackRock s Bitcoin ETF, experienced outflows of over $430 million in a single week. This was the first time the fund had lost money since it launched earlier in the year.By understanding these risks and taking steps to mitigate them, investors can navigate the evolving landscape of Bitcoin ETFs and make informed investment decisions.Remember to diversify your holdings, stay informed, and be prepared for volatility.As the market matures and new products emerge, the future of Bitcoin ETFs promises to be both exciting and challenging.The key takeaway is to approach this emerging asset class with a balanced perspective, acknowledging both the potential rewards and the inherent risks.

Are you ready to take a more informed approach to investing in Bitcoin ETFs?Start by researching different ETFs, understanding their risk profiles, and consulting with a financial advisor to determine if they align with your investment goals.