On January 10th, 2024 the U.S Securities and Exchange Commission (SEC) approved the first exchange traded funds (ETF) to track Bitcoin. Within the crypto community this has been the talk of the town and is indeed a watershed moment for the industry. Although other countries like Canada and some in Europe have been able to purchase futures that track the price of Bitcoin, a regulated spot ETF in the U.S has always been thought of as something that could really cement cryptocurrencies within traditional economic systems. But what does it mean? How will it affect Bitcoin and other cryptocurrencies in the long term?
First, what is an ETF? An ETF or exchange traded fund, is a financial product that tracks the price of an asset, or collection of assets, that can be bought and sold on a stock exchange. Traditional ETFs track things like commodities and sectors. ETFs can be bought and sold on a stock exchange just like a regular stock an investor might buy in a large company. Due to the fact these can be bought and sold so easily, they generally serve as a way for investors to diversify their portfolios.
As stated previously, there are two types of BTC ETFs, futures, which were approved by the SEC in 2021, and spot ETFs which were approved recently. A futures ETF involves an individual buying into a fund that holds the futures contracts, which bet on BTC’s future price. This leads to increased exposure for the investor to price fluctuations without actually holding the coin. A spot ETF on the other hand is merely an asset that tracks the price of Bitcoin and allows traditional investors to benefit from changes in price. Due to the fact BTC ETF shares will reflect the price of BTC in real time, it makes it more akin to owning BTC yourself compared to existing futures ETFs.
There have been other investment vehicles that are similar to BTC ETFs, such as Trusts. The Trust holds BTC, and the shares an investor owns represents a portion of the pool held by the Trust. The main difference here is these are affected by premiums and other fees, which results in the actual share price differing from the price of Bitcoin. The new spot ETF avoids this issue.
The decision by the SEC has given approval to eleven ETFs for Bitcoin, which opens the door for institutional and traditional investors to dive into cryptocurrencies. This is a monumental event for cryptocurrencies and could lead to a major transformation of the market, in the same way the gold ETF did in 2003.
The Bitcoin spot ETF will do this in a few ways, it will legitimise Bitcoin. It gives it institutional credibility, integrates Bitcoin into traditional financial markets and will most likely be included in mainstream investment portfolios. The approval by the SEC also signals the growing maturity of the cryptocurrency market, the regulatory approval process itself is robust and in depth so the fact the Bitcoin ETF was approved signals the market as a whole is heading in the right direction when it comes to regulation.
It allows for institutional participation in the market, which in turn, may enhance market liquidity, raise the demand and thus the price of Bitcoin, and increase adoption, which will have all kinds of long term benefits. The evolving investor base for cryptocurrencies over the years has been obvious for those watching. First it was retail investors and individuals passionate about the technology. Shortly after, Businesses, Self Managed Super Funds and other investment vehicles were bought on board. The ETF allows Bitcoin to expand its reach to investment groups who are yet to get involved in the cryptocurrency market. This level of accessibility may lead to further legitimisation of the cryptocurrency as a whole.
Another point that makes the Bitcoin ETF attractive to institutional investors is the fact that many of the most respected financial players are offering it. Some of the eleven BTC ETFs approved by the SEC include Grayscale Bitcoin Trust, Fidelity Wise Origin Bitcoin Trust, and iShares Bitcoin Trust which was created by Blackrock, one of the world's largest multinational investment companies. One of the main goals outlined on the iShares website is to enable investors to access Bitcoin within traditional brokerage accounts. The vast majority of advisors see the approval of the spot Bitcoin ETF as a catalyst for future adoption, with many interested in purchasing it now it is approved. Regulatory uncertainty was always a concern for institutional investors, by approving the BTC ETF, the SEC has bought Bitcoin under their regulatory umbrella, putting one more concern to rest.
As a result, we may see a new wave of adoption heading into the future. With the support of trusted and reputable institutions like Grayscale and Blackrock, investors who may have been unsure about cryptocurrencies might start thinking twice. Not only this, but increased demand for Bitcoin as a result may result in higher prices, which benefits those who were savvy enough to get in on the ground floor.
The story of a Bitcoin ETF did not start here. The first attempt was made by the Winklesvoss twins in 2013 with their Winklevoss Bitcoin Trust. This particular Trust was shot down twice by the Securities and Exchange Commission. In the years following this, the SEC denied another twelve Bitcoin ETF proposals for similar reasons. The most troubling time for Bitcoin ETF supporters was in 2018, when the SEC shot down nine different Bitcoin ETF proposals in one day. At the time it was looking rather dyer for a BTC ETF.
So what changed in the past few years? Why did the SEC approve the futures ETF in 2021, and now the spot ETF in 2024? Well according to the current SEC Chairman, Gary Gensler, the U.S federal court forced their hand, the court stated that the regulator did not provide a sufficient explanation as to why they would reject the Bitcoin ETF application. Regardless of the reason, the mission of getting a spot ETF has finally been accomplished. This represents a major win for Bitcoin and the cryptocurrency market as a whole. It shows that the original reason for SEC rejection does not hold as much weight now according to the U.S federal court. This implies that the level of risk, and lack of regulations, which were the reasons originally provided by the SEC for their rejections, are not the same as they once were.
The Securities and Exchange Commission's historic decision to approve the first spot Bitcoin ETF will have a number of ripple effects in the market that may not be realised for some time. The approval of the Bitcoin ETF may pave the way for increased mainstream acceptance and singling out Bitcoin and other cryptocurrencies as legitimate and recognised asset classes. It also sets a regulatory precedent that may influence other cryptocurrencies to follow suit. A result of this may be clearer regulatory guidelines for the cryptocurrency industry. The Bitcoin ETF may also serve as an educational opportunity for traditional investors with no prior experience with cryptocurrencies. Fostering a better understanding of the industry and further legitimise it as an asset class.
When the Gold ETF was introduced, it had a notable effect on the market. It resulted in increased accessibility, it increased liquidity which resulted in a more efficient and dynamic market for gold, and it helped to democratise ownership. This may be a good template for the future of the Bitcoin ETF, which for a long time has been referred to as digital gold.
It is difficult to understate just how significant this decision by the SEC is. A U.S regulated Bitcoin spot ETF has the potential to change a number of things about traditional finance as well as the cryptocurrency market as we know it. It fosters wider adoption, gives cryptocurrency more credibility, provides regulatory clarity for the rest of the industry and much more. This is the start of an exciting new era for cryptocurrencies with the hope that this will lead to further mainstream adoption.