BlackRock ETF might open door to institutional shorting of bitcoin

BlackRock has filed for regulatory approval of a bitcoin ETF. The SEC has never approved one, but investment giant has a nearly flawless track record when applying for ETFs: over 500 approvals per one denial. Unlike the over-the-counter traded Grayscale Bitcoin Trust (GBTC), which Barry Silbert’s Grayscale would like to convert into an ETF, BlackRock could open the door for institutional short-selling of bitcoin via a NASDAQ-listed bitcoin ETF.

BlackRock’s proposed bitcoin ETF will almost certainly be DTC eligible, whereas most over-the-counter securities are not. The Depository Trust Company, or DTC, serves as a securities repository with over $32 trillion worth of securities deposited within its system. It’s by far the largest source of US broker ‘borrows,’ also known as ‘locates.’

Put simply, BlackRock’s bitcoin ETF will allow short-sellers to easily locate shares to borrow from the world’s most voluminous trust company. DTC processes quadrillions of dollars worth of securities every year.

Because DTC only accepts deposits from its members, usually clearinghouses, and keeps a tidy ledger of ownership of each security at all times, members may lend shares easily to other members. In this way, brokers who holds ETFs on deposit with DTC on behalf of their customers can easily lend those shares out for short-selling borrows.

DTC eligibility: The key to institutional bitcoin ETF shorting

DTC eligibility helps ensure the liquidity of securities because brokers and clearing houses typically require it to deposit shares with them for trading on the secondary market. Experts often recommend avoiding trading in securities that are not eligible for DTC because moving them between brokerage accounts is difficult.

DTC eligibility also makes it possible to short-sell securities. The typical method for short-selling involves borrowing the stock, selling it on the open market, and then repurchasing it later to return to the owner.

Institutional investors often use this tactic if they expect the price of a company’s stock to drop. Of course, they can guess wrong, and the occasional ‘short squeeze’ — the price of a stock suddenly moving in a way they do not expect — can cause significant issues.

GameStop was shorted by more than 100% of the available shares to borrow when the WallStreetBets community targeted it for a pump. This short squeeze exhausted DTC borrows and caused institutional investors to lose billions of dollars.

Read more: Coinbase pitches “inflation-proof” flatcoins against struggling USDC

However, the chaos caused by WallStreetBets has not discouraged institutional investors from using short selling as a trading tactic. Shorting is as popular as ever. When DTC lists shares of BlackRock’s proposed bitcoin ETF as eligible to borrow in its system, shares will become as eligible for short-selling as any other security on NASDAQ.

Short-selling shares will likely become common in a DTC-eligible bitcoin ETF like BlackRock’s, considering bitcoin’s volatility. Some institutional investors might wish they could have shorted GBTC given its substantial discount to net asset value (NAV). However, they couldn’t short GBTC because it was not eligible in DTC’s platform, making it difficult to locate GBTC borrows to short-sell.

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