The U.S. Securities and Exchange Commission (SEC) on Wednesday approved exchange-traded funds (ETFs) that track the price of bitcoin in a game-changer for the cryptocurrency industry which has been trying for more than a decade to launch such a product.
Multiple asset managers have applied for bitcoin ETFs since 2013, but the SEC rejected them on the grounds they would be vulnerable to market manipulation. In August, however, a court found the SEC was wrong to reject Grayscale Investments’ bitcoin ETF application, forcing the agency to rethink its stance.
HOW WILL THE ETFS WORK?
They will be listed on Nasdaq, NYSE and the CBOE. Their assets will comprise physical bitcoin purchased from crypto exchanges and held via custodians like Coinbase Global (COIN.O).
The products track a bitcoin benchmark. Some track an index provided by CF Benchmarks, a subsidiary of crypto exchange Kraken, which aggregates trading data from multiple Bitcoin-USD markets operated by big cryptocurrency exchanges.
Issuers plan to charge fees ranging from 0.20% to 0.8%, well below the broader ETF market average.
IS IT DIFFERENT TO BUYING BITCOIN OUTRIGHT?
Yes. A spot bitcoin ETF allows investors to gain exposure to the price of bitcoin without the complications and risks of owning bitcoin directly. Those include setting up crypto wallets and accounts with crypto exchanges, some of which have poor cyber security records and are prone to hacks.
Other exchanges have been accused of flouting U.S. securities laws, while Binance, the world’s largest crypto exchange, recently pleaded guilty to breaking U.S. anti-money laundering laws. All this continues to make many investors wary.
In contrast, ETFs are listed on tightly-regulated stock exchanges and are therefore accessible through retail investors’ existing brokerage accounts, which are also closely supervised.
The ETF structure also boosts the accessibility of bitcoin for institutional investors, some of whom are barred from investing directly in alternative assets.
WHY IS IT DIFFERENT TO EXISTING BITCOIN FUTURES ETFS?
The SEC in 2021 approved bitcoin futures ETF, which track agreements to buy or sell bitcoin at a pre-agreed price. But those products don’t track price movements precisely, and the cost of rolling over futures contracts can eat into returns, making them less desirable for many investors.
AREN’T THERE SPOT BITCOIN ETFS IN CANADA AND EUROPE?
Yes. But the United States is the world’s largest capital market, home to some of the globe’s largest asset managers and institutional investors.
HOW MUCH WOULD A BITCOIN ETF REEL IN?
It’s unclear. The ProShares Bitcoin Strategy ETF (BITO.P), the first bitcoin futures ETF approved by the SEC in 2021, saw around $1 billion worth of shares trading hands on its first day, and some experts believe a spot bitcoin ETF could net three times that much on its first day. That figure could balloon to $55 billion over five years, some expert estimate.
While bitcoin has gained 70% since the Grayscale ruling, analysts said it was unclear how much further it would rise, with some saying interest rates would play a bigger role.
BUT IT’S NOT JUST ABOUT THE MONEY
For the crypto industry, a spot bitcoin ETF is a big win, boosting the legitimacy of the cryptocurrency industry and pushing bitcoin further into the mainstream.
It also comes amid a broader tug-of-war between the crypto industry and SEC, which has been cracking down on the sector. When it comes to this particular battle, the industry can claim victory.
Boosting the legitimacy of the cryptocurrency
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The approval of U.S. bitcoin ETFs by the SEC is a significant development for the cryptocurrency industry. These ETFs, offered by companies like ARK Investments, BlackRock, and Fidelity, will be listed on major exchanges and track the price of bitcoin through physical assets held via custodians like Coinbase. Unlike buying bitcoin directly, ETFs offer exposure to its price without the complexities and risks associated with owning cryptocurrency, making it more accessible to investors. While similar ETFs exist in Canada and Europe, the U.S. market’s size and regulatory environment make this approval particularly noteworthy. Experts anticipate significant trading volumes and potential long-term growth for these ETFs, further legitimizing bitcoin and the broader crypto industry in the eyes of institutional and retail investors alike.
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