The recent approval by the U.S. Securities and Exchange Commission (SEC) for exchange-traded funds (ETFs) tracking bitcoin’s price marks a pivotal moment for the cryptocurrency industry. After a decade-long effort, the green light from the SEC signifies a significant shift in the landscape. Let’s delve into the details of this game-changing development.
Embracing Change: SEC’s Approval Journey
For years, multiple asset managers pursued the dream of launching bitcoin ETFs, facing rejections from the SEC due to concerns about market manipulation vulnerability. However, a turning point came in August when a court ruled against the SEC’s rejection of Grayscale Investments’ bitcoin ETF application, prompting a reevaluation of the regulatory stance.
On the recent Wednesday, the SEC granted approvals to prominent names like ARK Investments, BlackRock (BLK.N), and Fidelity. Understanding how these ETFs function and the reasons behind the approval is crucial.
Deconstructing the ETF Mechanism
Listing and Assets
The approved ETFs will find their place on major stock exchanges, including Nasdaq, NYSE, and CBOE. Their asset composition will consist of physical bitcoins acquired from crypto exchanges and safeguarded through custodians like Coinbase Global (COIN.O).
Benchmark Tracking
These products track a bitcoin benchmark, with some relying on an index provided by CF Benchmarks, a Kraken subsidiary. The index aggregates trading data from various Bitcoin-USD markets, enhancing transparency.
Addressing Manipulation Concerns
To mitigate the SEC’s manipulation concerns, Nasdaq and CBOE collaborated to establish a market surveillance mechanism with Coinbase, a leading U.S. cryptocurrency exchange.
Cost Considerations
Issuers plan to impose fees ranging from 0.20% to 0.8%, well below the broader ETF market average, making these investments cost-effective.
Spot Bitcoin ETF vs. Direct Ownership
Simplifying Investment
A spot bitcoin ETF provides investors with exposure to bitcoin’s price without the complexities and risks associated with direct ownership. This includes avoiding the need to set up crypto wallets and accounts on potentially insecure crypto exchanges.
Regulatory Oversight
ETFs, listed on tightly-regulated stock exchanges, offer accessibility through retail investors’ existing brokerage accounts, ensuring close supervision. This regulatory oversight is a stark contrast to the industry’s history of bankruptcies, scandals, and security breaches.
Institutional Accessibility
The ETF structure also enhances bitcoin accessibility for institutional investors, some of whom face restrictions when investing directly in alternative assets.
Distinguishing from Bitcoin Futures ETFs
While the SEC approved bitcoin futures ETFs in 2021, the newly approved spot bitcoin ETFs differ significantly. Bitcoin futures ETFs track agreements to buy or sell bitcoin at a pre-agreed price, with potential drawbacks such as imprecise price movement tracking and costs associated with rolling over futures contracts.
A Global Perspective: Why US Matters
Although spot bitcoin ETFs exist in Canada and Europe, the U.S. market’s sheer size and influence make a significant impact. As the world’s largest capital market, it houses major asset managers and institutional investors.
Forecasting Success: The Financial Outlook
The potential financial impact of a bitcoin ETF remains uncertain. The ProShares Bitcoin Strategy ETF (BITO.P), the first bitcoin futures ETF approved in 2021, witnessed around $1 billion worth of shares traded on its first day. Some experts anticipate a spot bitcoin ETF could attract three times that amount on its debut, possibly reaching $55 billion over five years.
While bitcoin’s value has surged by 70% since the Grayscale ruling, predicting future trends remains challenging. Analysts point to the role of interest rates as a determining factor in bitcoin’s trajectory.
Beyond Financial Gains: Implications for the Crypto Industry
For the cryptocurrency industry, the approval of a spot bitcoin ETF represents a significant triumph, elevating the sector’s legitimacy and bringing bitcoin further into the mainstream. This development unfolds amidst an ongoing struggle between the crypto industry and the SEC, with the former claiming victory in this particular battle. As the industry continues to evolve, the impact of a U.S. bitcoin ETF reverberates beyond financial considerations, shaping the narrative of crypto’s broader acceptance.