Bitcoin ETF’s: Revolutionizing the Cryptocurrency Space
A game-changer for the cryptocurrency industry, which has been striving to introduce such a product for more than ten years, the U.S. Securities and Exchange Commission (SEC) approved exchange-traded funds (ETFs) on Wednesday, 10th January, 2014 to track the price of bitcoin.
Since 2013, the SEC has rejected applications for bitcoin exchange-traded funds (ETFs) from several asset managers, citing concerns about potential market manipulation. Nevertheless, in August 2023, a court ruling determined that the SEC erred in rejecting Grayscale Investments’ application for a Bitcoin ETF, compelling the agency to reconsider its position.
Applications from ARK Investments, BlackRock (NYSE: BLK), and Fidelity, among others, were accepted by the SEC on Wednesday, 10th January, 2024.
The following describes the products’ functions and the significance of the approval:
How the ETFs will operate
A Bitcoin benchmark is followed by some of the products, which track an index provided by CF Benchmarks, a subsidiary of Kraken, which aggregates trading data from multiple Bitcoin-USD markets operated by major cryptocurrency exchanges. They will be listed on the Nasdaq, NYSE, and the CBOE. Their assets include physical bitcoin purchased from crypto exchanges and held via custodians like Coinbase (NASDAQ:COIN) Global.
Coinbase, the biggest cryptocurrency exchange in the United States, and Nasdaq and CBOE established a market surveillance system to resolve the SEC's worries about potential manipulation. Issuers intend to impose fees significantly lower than the average of the broader ETF market, ranging from 0.20% to 0.8%.
How is this any different from buying Bitcoin?
Without the hassles and hazards of direct bitcoin ownership—such as creating cryptocurrency wallets and accounts with exchanges that may have weak cyber security records or be vulnerable to hacking—investors can get exposure to the price of bitcoin through a spot bitcoin ETF.
Several bankruptcies and scandals have also beset the industry, such as the collapse of the cryptocurrency exchange FTX, whose founder Sam Bankman-Fried was found guilty of fraud; charges of violating U.S. securities laws have been leveled against other exchanges; and the largest cryptocurrency exchange in the world, Binance, recently entered a guilty plea to violating U.S. anti-money laundering laws. These developments have left many investors extremely cautious.
The ETF structure also increases the accessibility of Bitcoin for institutional investors, some of whom are prohibited from investing directly in alternative assets. In contrast, ETFs are listed on strictly regulated stock exchanges and are therefore accessible through retail investors’ existing brokerage accounts, which are also closely supervised.
Why it is not the same with existing Bitcoin Future ETFs
In 2021, the SEC approved bitcoin futures ETFs, which track contracts to buy or sell bitcoin at a pre-arranged price. However, those products do not accurately track price movements, and the expense of rolling over futures contracts can reduce returns, which deters many investors from investing in them.
Do other parts of the world have Spot Bitcoin ETFs?
They do. Canada and Europe are particularly notable for this. However, the US is home to some of the biggest asset managers and institutional investors in the world. So it is important to understand why this is different from existing Bitcoin Futures ETFs.
What capital injection would a Bitcoin ETF create?
It isn’t clear. Roughly $1 billion worth of shares exchanged hands on the first day of trading for the ProShares Bitcoin Strategy ETF, the first bitcoin futures ETF allowed by the SEC in 2021. According to some analysts, a spot bitcoin ETF may make three times that amount on its first day of trade. That cost might mushroom to $55 billion over five years, some analysts say.
Although there has been a 70% increase in bitcoin since the Grayscale verdict, observers were unsure of how much more might be earned; some predicted that interest rates would become more significant.
It’s more than just the capital influx
A spot Bitcoin ETF is a huge victory for the cryptocurrency sector, as it increases the sector’s respectability and advances Bitcoin’s acceptance by the general public.
It also occurs during a larger struggle between the SEC, which has been clamping down on the cryptocurrency industry, and the industry itself. The industry has won this specific struggle.
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