The topic of Bitcoin ETFs has been dominating discussions in the cryptocurrency, finance, and investing world in recent months. With a flurry of attention-grabbing articles on the latest wave of spot Bitcoin ETF applications, stakeholders have been speculating on the potential implications. After much anticipation, the Securities and Exchange Commission of the United States (US SEC) finally gave the green light to these new securities in early 2024.
The entrance of financial heavyweights such as BlackRock, Fidelity, Valkyrie, ArkInvest, VanEck, Wisdom Tree, Bitwise, Invesco Galaxy, and others into the Bitcoin ETF market marks the beginning of a new era in Bitcoin investments. However, the road to Bitcoin ETFs and their recent approvals has not been without its challenges. Advocates for long-term Bitcoin ETFs have faced numerous obstacles over the past decade. As we enter Bitcoin’s 15th year, it is worth examining its remarkable journey from a niche experimental currency to a formal security backed by some of the world’s most prominent asset managers.
How did the world’s first decentralized asset, created to minimize the role of central authorities, become the most-awaited investment news of early 2024? What events have shaped the current unprecedented wave of institutional interest? And what factors influenced the US SEC’s decision to approve the latest wave of spot ETF filings?
Bitcoin ETFs promise to bridge the experimental and largely decentralized world of cryptocurrencies with traditional finance structures. They are an unprecedented hybrid technological and regulatory innovation poised to transform how people view and invest in digital assets. These ETFs are not just new investment vehicles; they are also evolutionary catalysts for US financial markets and beyond.
Spot Bitcoin ETFs: A Better Way To Invest In Cryptocurrency?
Exchange-traded funds, or ETFs, are a $7.7 trillion industry, making them one of the world’s most favored and familiar investment methods. ETFs have been around for thirty years and represent a deeply ingrained investment instrument on Wall Street.
ETFs were initially designed to buy and sell more complex instruments, similar to how one would buy and sell company stock. In the last decade, Bitcoin entrepreneurs and proponents have attempted to sell the idea of a Bitcoin-related ETF for the same purpose – to simplify and formalize investment in the digital currency. However, before the recent approvals, no one had succeeded, except for Bitcoin futures ETFs - derivatives-based ETFs related to, but not directly tied to, Bitcoin.
After many years of trying, efforts to launch spot Bitcoin ETFs had finally lost steam. However, over the past year or so, market discussions around possible new Bitcoin ETFs have come alive again. Finance publications have announced more spot Bitcoin ETF applications, this time headlining with the names of trillion-dollar asset managers such as BlackRock and Fidelity. These filings imply the possibility of greater institutional interest.
According to pre-approval predictions, the potential of new institutional interest in Bitcoin ETFs could bring about $14 billion to the crypto market within a year of a BlackRock ETF launch. With BlackRock holding $10 trillion in assets, this amount is considered pocket change and a highly feasible goal. With the Blackrock IShares ETF in place alongside strong competitors, the $14 billion influx prophecy is one to watch in 2025.
If this hypothetical $14 billion influx into the market were to occur, Bitcoin’s price could be driven up to $141,000, according to George Tung, founder of CryptosRUs with over 600,000 followers on YouTube. Additionally, the head of research at CoinShares estimates that as much as $31.34 billion could flow into crypto markets this year. CoinShares has a higher price target, anticipating Bitcoin’s price to skyrocket to $265,437 – an over 600% boost compared to its current range.
Rate cut announcements from the Federal Reserve may further boost confidence. We have already seen such statements influence markets during the holidays.
The new wave of spot ETFs simplifies access to Bitcoin and the growth opportunities it presents, as predicted by some analysts. However, whether it is a better way to invest in the asset is disputed, with some advocating for holding actual Bitcoin. To them, it is a disadvantage that ETFs don’t put actual cryptocurrency in your account. This means that the Bitcoin in ETFs cannot be used for any other purpose, as investment does not equate to ownership of the actual currency. Moreover, ETFs will not provide the same pseudonymity or even anonymity that trading in the crypto or DeFi space does – an attribute that may discourage native crypto investors.
However, ETFs offer the advantage of easy tradability. An ETF or exchange-traded fund is a convenient way to invest in a single or group of assets like gold or junk bonds without purchasing those assets directly. Additionally, unlike traditional mutual funds, ETFs offer round-the-clock buying and selling, just like stocks. This makes ETFs appealing to those seeking to invest in Bitcoin without learning the nuances of direct purchase and ownership. Thus, spot Bitcoin ETFs open the door to new investors who are not native to crypto and don’t want to take the additional steps of opening accounts in crypto trading platforms and learning the nuances of hot and cold wallets.
Current Events Impacting Bitcoin ETFs
To understand Bitcoin ETFs better, we must examine their history and evolution. The path has been a bumpy one, full of regulatory roadblocks.
It has been nearly eleven years since the Winklevoss twins submitted the first filing for a Bitcoin ETF in 2013. It was called the Winklevoss Bitcoin Trust. In those days, Bitcoin traded at $90 – a far cry from today’s prices.
The Winklevoss twins were never able to capitalize on their first-mover advantage. The United States SEC rejected their proposal twice over concerns about the risks of the once-nascent crypto market.
The Winklevoss Bitcoin Trust ETF would have traded under the ticker “COIN” – a ticker that has since been claimed by the most significant US crypto exchange, Coinbase.
Since the Winklevoss attempt, several ETF applications have followed, but they have all been rejected. The succeeding applications were rejected because of inadequate investor protection in the bitcoin market.
The rejected ETF applications, however, varied in their nature and structure. Some were spot ETFs – bitcoin funds that directly owned the cryptocurrency. Others were futures-based investment products.
The futures ETFs held derivative contracts on the Chicago Mercantile Exchange (CME), ranging from long-only funds to leveraged and inverse products. None of these proposals passed the scrutiny of the US SEC at the time.
The Clayton Era Of Regulation
The “Clayton era” marked a time when Bitcoin ETFs were at their lowest point. In the summer of 2018, the SEC rejected a shocking nine proposed Bitcoin ETFs in a single sweep – all in one day, to be exact.
Former SEC Chair Jay Clayton headed the commission from 2017 to 2020. He explained that the “rules and surveillance to prevent manipulative techniques” did not exist on all exchange venues where digital currencies were traded.
Moreover, custody was another sticking point. The former SEC Chair believed that ETF risk should only be confined to the underlying asset’s value and must not include other risks like untraceable disappearance or theft of the digital asset.
Bitcoin futures markets, which were in their infancy, were also a damaging strike against the spot ETFs. The SEC mentioned that while the CBOE and CME were regulated markets for bitcoin derivatives at the time, there was no basis in the record for the commission to conclude that those regulated markets were of significant size.
In addition, in 2018, the United States SEC wrote that as bitcoin futures were trading on the CBOE and CME just recently – since December of 2017 – the commission lacked a basis for predicting how such markets would develop over time. The record was also considered insufficient for predicting their future success or size.
The Slow Winds Of Change: Events That Drove A Shift In Sentiment
Even with the SEC’s consistent rejection of spot ETF applications, Bitcoin ETFs were gaining unprecedented momentum if one cared to look under the hood.
Technological acceleration, geopolitical change, institutional interest, and economic drivers converged to create the perfect climate for an ETF approval. What drove regulators to shift gears and become receptive to the current set of Bitcoin ETF applications? Persistence, luck, grit, and the boldness of one player in particular.
Technological Drivers
Being open source, Bitcoin has undergone significant technological advancements over the years. These advancements have made it more secure, efficient, and accessible. Additionally, the rise of decentralized finance (DeFi) has brought about new use cases for Bitcoin and other cryptocurrencies, making them more attractive to institutional investors.
Geopolitical Change
The global economic landscape has also played a significant role in driving institutional interest in Bitcoin ETFs. With the ongoing trade war between the US and China, as well as the economic impact of the COVID-19 pandemic, investors are looking for alternative assets to diversify their portfolios and hedge against inflation.
Institutional Interest
The entrance of major asset managers like BlackRock and FBitcoin is a constantly evolving protocol, with new developments contributing to its value and relevance. However, the Bitcoin community is known for being cautious about changes to the protocol. This is due to the fact that Bitcoin is open to all and its core developers are meticulous in their approach to change, which has earned it a reputation as a stable asset.
One of the most significant upgrades to the Bitcoin protocol was the implementation of Taproot in 2021, which is the first major upgrade since SegWit in 2017. This upgrade has expanded Bitcoin’s potential applications and made it more capable of supporting complex smart contracts. As a result, Bitcoin has become more competitive with its closest rival, Ethereum, in terms of flexibility and capability. Additionally, Taproot has also improved Bitcoin’s privacy by obscuring the type of transactions being executed. These improvements have contributed to the value and continued relevance of Bitcoin to cryptocurrency enthusiasts.
One of the key factors that sets Bitcoin apart from other cryptocurrencies is its decentralized nature. Without a CEO or founder, Bitcoin has gained credibility as a decentralized coin, thanks to the pseudonymity of its creator, Satoshi Nakamoto, and their eventual disappearance from the development and decision-making processes. This lack of a central figure profiting from the markets has further solidified Bitcoin’s reputation as a decentralized currency.
The Bitcoin community is fiercely protective of its original design and principles, which include decentralization and a fixed supply. This decentralization has proven to be a key factor in preventing Bitcoin from being labeled as a security. Unlike other cryptocurrencies, Bitcoin does not fulfill the requirements of the Howey test and is therefore not considered a security. While the US Securities and Exchange Commission (SEC) has cracked down on ICOs and other token offerings, declaring them securities, Bitcoin has remained a non-security and decentralized currency.
Despite the drastic changes to its biggest rival, Ethereum, the protocol’s shift in incentives, including its move away from mining and towards staking, has not resulted in a significant spike in ETH’s price. This has caused some investors and participants to question the stability of Ethereum. In contrast, Bitcoin remains true to its design by halving its mining rewards at specific points in its lifetime. The next Bitcoin halving is just around the corner, which will further reduce miners’ rewards and the rate at which new BTC is created. This reduced rate of new supply, coupled with potential new Bitcoin ETF approvals, could lead to a bullish sentiment and heighten interest in Bitcoin ETFs.
The development of custody technology and investment-grade protocols for exchanges and institutions to ensure the security of digital asset stores has also contributed to an increased perception of trustworthiness in Bitcoin and the products borne out of these custodians.
Economic and geopolitical factors also play a significant role in the discussion around Bitcoin ETFs. The recent announcement by the Federal Reserve about upcoming rate cuts drove markets to a frenzy at the end of 2023, highlighting the influence of such announcements on market sentiment. While inflation fears have been a major concern in previous years, the Fed has declared that inflation has eased, though it remains elevated. This shift in policy could be a boon to risk assets like Bitcoin and, therefore, Bitcoin ETFs.
The post-pandemic slump in markets has affected venture capital and, in turn, startups. With tech companies downsizing, there is less enthusiasm for new crypto projects and startups, leaving Bitcoin as the “last man standing” in a leveled field of crypto experiments. This positions Bitcoin as a resilient asset, better able to withstand downturns than other crypto projects.
One key factor fueling the discussion around Bitcoin ETFs is the increased interest and involvement of institutional investors. Institutional participation has traditionally been a significant driver of mainstream financial products, and Bitcoin is no exception. The recent influx of high-profile companies and institutional investors into cryptocurrency signals a shift in the perception of Bitcoin as a legitimate digital asset class. The confidence of such companies in Bitcoin as both a store of value and a hedge against inflation has led to the creation of new tradable products.
Companies like MicroStrategy have made headlines by including Bitcoin in their treasury. In previous years, high-profile companies like Tesla, Square, and Grayscale have also publicly announced their Bitcoin purchases and stores. The confidence of such companies in Bitcoin has contributed to its legitimacy and influenced the consideration of Bitcoin ETFs.
The pessimistic news surrounding FTX, Three Arrows Capital, and the Terra-Luna debacle appears to be fading. Today, they are little more than a postscript, and their effect on markets has waned. The string of legal actions and prosecutions against these companies’ financial irregularities has strengthened faith in the system and, over time, has separated them from the legitimacy of Bitcoin as an asset. This change in sentiment has contributed to a renewed interest among investors in Bitcoin.
Governments around the world are also warming up to digital currencies and blockchain technology. BRICS countries have taken a stand against the dominance of the US dollar, leading to increased receptiveness to cryptocurrencies and blockchain technology in creating new currencies. Central Bank Digital Currencies (CBDCs) are the digital fiat equivalent of crypto and are government-controlled and centralized. However, they improve the perception of blockchain technology and crypto coins among the general public, indicating a new chapter of maturity as the technology is assimilated into fiat or government-issued currency.
War and government sanctions have further led to the exploration of Bitcoin and other cryptocurrencies as accepted forms of payment in severely restricted countries and regions. Political unrest and the restriction of human rights in different parts of the world have given rise to discussions about using cryptocurrency to achieve financial freedom.
Governments like El Salvador have led the way in declaring Bitcoin as legal tender and conducting mining operations in their country. This news has added to Bitcoin’s image as a credible store of value and as an alternative option for developing economies instead of gold.
Recent US crackdowns on exchanges like FTX and declarations of ICOs as securities have increased confidence in Bitcoin, which the US SEC views as the only truly decentralized currency. Ethereum and Ethereum-based tokens have taken a plunge, but Bitcoin has traded steadily for months, indicating its relative stability compared to potential securities. This has led to a renewed interest in Bitcoin among investors.
Such events have brought Bitcoin to the forefront of various political discussions, with most of the feedback favoring Bitcoin holders. This has boosted the currency and increased trust in its independence.
Regulatory milestones also play a crucial role in the consideration of Bitcoin ETFs. Under former SEC Chair Jay Clayton, the regulator rejected over 20 exchange rule filings for spot Bitcoin ETPs. Grayscale’s filing, which proposed the conversion of the Grayscale Bitcoin Trust to an ETP, was among those disapproved.
However, in August 2023, crypto asset manager Grayscale Investments LLC scored a landmark legal victory against the US SEC. In its effort to develop and launch a US-listed Bitcoin exchange-traded fund, it won a critical legal fight on the road to Bitcoin ETF acceptance.
The SEC had previously denied Grayscale’s application to convert its spot GBTC (Grayscale Bitcoin Trust) into an ETF. While the agency approved bitcoin futures ETFs, it stood firm on its rejection of Grayscale’s spot ETF conversion, saying that the spot ETF application did not meet its standards. Grayscale then sued the SEC, and the case went straight to appeals court due to the defendant being a regulator.
A federal appeals court, composed of a three-judge panel, ruled that the US Securities and Exchange Commission was mistaken in rejecting the application to convert Grayscale’s flagship vehicle, GBTC, to an ETF. The court found that the proposed spot Bitcoin ETF was materially similar to the existing approved futures ETFs, with the underlying assets, Bitcoin futures, and Bitcoin, being closely correlated.
This landmark legal win for Grayscale has further strengthened the case for Bitcoin ETFs and has increased confidence in Bitcoin as a legitimate asset class. With the growing interest and involvement of institutional investors, the increased acceptance of Bitcoin by governments, and regulatory milestones being achieved, the future looks bright for Bitcoin ETFs.Rewritten Article:
The CME and SEC have been found to have identical sharing arrangements, with similar probabilities of detecting fraud or manipulation in Bitcoin markets. However, the court ruled that the SEC’s rejection of a spot ETF filing was ”arbitrary and capricious.” The court found that the SEC failed to explain how Grayscale’s ownership of Bitcoin, rather than Bitcoin futures, would affect the CME’s ability to detect fraudulent activities. As a result, the three-judge panel on the District of Columbia Circuit Court of Appeals vacated the SEC’s decision to block the spot ETF.
This unprecedented victory has opened the door for other ETF applicants, including Blackrock, Fidelity, WisdomTree, VanEck, Bitwise, and Invesco. It has also boosted confidence in these instruments and ensured that the SEC cannot use the same argument to reject future Bitcoin ETF applications.
Under pressure from this court decision, SEC Chair Gary Gensler, who has been actively pursuing enforcement actions against crypto industry players, approved the listing and trading of a number of spot Bitcoin exchange-traded product (ETP) shares on January 10, 2024.
This decision marks a significant moment for the digital financial world. It signals the evolution of crypto assets into mainstream investable products, backed by major institutions and under the supervision of government-registered entities. Additionally, as global competitors like Binance retreat from the US, Coinbase remains the largest crypto exchange and is poised to play a crucial role as the custodian of physically-backed Bitcoin ETPs.
With the upcoming Bitcoin halving in Q1 2024, which will further reduce Bitcoin supply, and a change in perspective among traders as Bitcoin becomes more mainstream, we can expect a surge in demand for the coin. This, combined with the scarcity-inducing events of executing a spot ETF, will make Bitcoin highly appealing to institutions and the investing public.
On their first day of trading, the newly-approved US-listed Bitcoin ETFs recorded an astonishing $4.6 billion in shares changing hands. This launch has sparked a fierce competition for market share among the eleven ETFs, including BlackRock’s iShares Bitcoin Trust, ARK 21 Shares Bitcoin ETF, and Grayscale Bitcoin Trust. According to LSEG data, BlackRock, Grayscale, and Fidelity dominated trading volumes, with GBTC mostly experiencing outflows as traders disposed of their long-held GBTC holdings.
Despite the bullish predictions at the beginning of the year, Bitcoin showed a bearish trend, dropping from $46,000 on January 11 to sub-$45,000 the following day. However, this may have been a case of “buy the rumor, sell the fact,” as Bitcoin saw a post-shedding surge of 5% after GBTC outflows declined.
As financial giants compete for the top spot, a Bitcoin ETF fees war has emerged. The newly-minted spot Bitcoin ETFs from Grayscale, Blackrock, Fidelity, Ark/21 Shares, Bitwise, Invesco, VanEck, Valkyrie, Franklin Templeton, and WisdomTree have fees ranging from 0.19 percent to 0.39 percent, with Grayscale being an outlier at 1.5 percent.
The approval of Bitcoin ETFs marks a watershed moment in Bitcoin investing. It deepens the connections between Bitcoin and mainstream finance, as Wall Street can now officially sell Bitcoin to Main Street, legitimizing it in the eyes of traditional finance. However, experts warn of new and broader risks, as Bitcoin volatility and price dislocation now have the power to impact traditional markets directly.
The main advantage of Bitcoin ETFs is their ability to make investing in Bitcoin simpler and relatively safer for non-native investors. These instruments combine the familiarity of traditional trading, the ease of buying and selling, and the trust of a fully regulated product with the innovation potential of the world’s most vital digital asset.
In conclusion, the approval of Bitcoin ETFs has brought clarity to the markets and marks a significant step towards mainstream adoption of Bitcoin. However, it is essential to remember that these instruments have the potential to impact traditional markets and come with their own set of risks.
Unlocking the Future: The Journey Towards Bitcoin ETFs
The world of cryptocurrency has been rapidly expanding and gaining mainstream attention in recent years, and Bitcoin is at the forefront of this digital revolution. With an increase in demand and a rise in its value, investors and financial institutions are looking for more ways to get involved with Bitcoin. One way this is being explored is through the introduction of Bitcoin ETFs (exchange-traded funds). In this article, we will take a deep dive into what Bitcoin ETFs are, their potential benefits, and the current journey towards their approval.
What are Bitcoin ETFs?
ETFs are investment funds that are traded on a stock exchange, similar to shares of a company. They allow investors to diversify their portfolio and gain exposure to a specific asset or market without directly owning it. With the rise of cryptocurrency, there has been a growing demand for a Bitcoin ETF, which would provide a familiar and regulated platform for investors to enter the crypto market.
Benefits of Bitcoin ETFs
Bitcoin ETFs offer several potential benefits for both retail and institutional investors.
1. Accessibility: ETFs make it easier for a wider range of investors to get involved in Bitcoin. Currently, many people are intimidated or confused by the process of buying and storing cryptocurrency. With ETFs, investors can access the market through their traditional brokerage accounts, making the process more familiar and user-friendly.
2. Diversification: Investing in Bitcoin ETFs allows for diversification within the crypto market. Instead of putting all their eggs in one basket and only investing in Bitcoin, investors can spread their risk by investing in a diverse basket of cryptocurrencies through a well-managed ETF.
3. Greater Liquidity: ETFs are traded on a public stock exchange, making them more accessible and liquid than traditional cryptocurrency. This means that investors can easily buy and sell their shares at any time during market hours, providing a greater level of flexibility.
The Journey Towards Bitcoin ETFs
The journey towards introducing Bitcoin ETFs has been long and filled with obstacles. In the United States, the Securities and Exchange Commission (SEC) has the authority and responsibility to approve or reject ETF filings. So far, the SEC has rejected every proposal for a Bitcoin ETF, citing concerns such as lack of regulation, market manipulation, and volatility.
However, the hope for a Bitcoin ETF gained new momentum in 2020 when the Office of the Comptroller of the Currency (OCC) announced that financial institutions could now provide custody services for cryptocurrency. This effectively removed one of the major hurdles for a Bitcoin ETF – the lack of custodial services for digital assets.
Furthermore, with the growing mainstream acceptance and adoption of cryptocurrency, there is pressure on the SEC to re-evaluate its stance towards Bitcoin ETFs. The launch of successful Bitcoin futures contracts by the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE) in 2017 proved that there is an institutional demand for Bitcoin exposure.
Current State of Bitcoin ETFs
Currently, there are several Bitcoin ETF proposals under review by the SEC. The most promising one is the VanEck/SolidX proposal, which has been resubmitted a few times with added features to address the SEC’s concerns. Another notable proposal is the Bitwise Asset Management proposal, which seeks to list on the New York Stock Exchange.
While these proposals are yet to be approved, other countries have already launched their own Bitcoin ETFs. In 2019, Switzerland approved the world’s first Bitcoin ETF, enabling European investors to access the market through the SIX Swiss Exchange. Similarly, Canada approved the launch of the world’s first physically-backed Bitcoin ETF in February 2021.
Practical Tips for Investors
If and when Bitcoin ETFs are approved in the US, investors should keep a few things in mind.
1. Research the ETF: As with any investment, it is essential to research the ETF you plan to invest in. Look at factors such as management fees, holdings, and performance history.
2. Seek Diversification: If you plan to invest in Bitcoin ETFs, don’t put all your money in one fund. Seek diversification by investing in a mix of crypto-related ETFs.
3. Look at the Big Picture: While a Bitcoin ETF may offer an easier way to invest in Bitcoin, it is essential to look at the overall performance of the cryptocurrency market. Don’t invest solely based on the ETF’s performance or hype.
In Conclusion
The journey towards Bitcoin ETFs may seem long and uncertain, but it is not a question of “if,” but “when.” With the growing mainstream acceptance and technological advancements supporting cryptocurrency, the SEC will likely approve a Bitcoin ETF in the near future. This will provide investors with an easier and more familiar way to get involved in the crypto market, ultimately unlocking the future of digital assets.
