What does Bitcoin ETF introduction mean for Investors
The United States SEC approved 11 spot Bitcoin ETF applications on 10 January 2024.
The approval of BTC ETFs is likely to attract many institutions to invest in bitcoin.
Spot bitcoin ETFs may help to stabilize the price of BTC.
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Introduction
The approval of spot bitcoin ETFs in the United States has marked an important development in the sector. For example, that has given much confidence to investors which may lead to the greater adoption of cryptocurrencies than ever before. That may also have acted as an acceptance of the role of cryptocurrencies by governments including the United States one.
Significantly, the recently approved spot bitcoin ETFs are not the first to come on the market as other countries approved them a few years back. Canada, Germany, Brazil, Switzerland, Australia and Liechtenstein are examples of countries that already have spot BTC ETFs.
Now, this article explores the significance of spot crypto ETFs in the United States and their effect on the entire digital asset market. We shall also discuss the impact of ETF approvals on the price of bitcoin.
SEC Approves Spot BTC ETFs
On 11 January the United States Securities and Exchange Commission (SEC) approved 11 bitcoin ETFs, ushering a new era for the crypto sector as investors can “trade bitcoin” without holding it in wallets or exchanges.
After the approval of bitcoin ETFs for Ark Investments, Fidelity, Invesco , VanEck, BlackRock and other asset management firms investors began trading these funds on 11 January. Several stock exchanges in the United States including NYSE, Nasdaq, and Cboe Global markets are offering the BTC ETFs.
After approving the crypto ETFs, the SEC through its website said, “Investors today can already buy and sell or otherwise gain exposure to bitcoin at a number of brokerage houses, through mutual funds, on national securities exchanges, through peer-to peer payment apps, on non-compliant crypto trading platforms, and, of course, through the Grayscale Bitcoin Trust.”
However, the regulator warned the would-be bitcoin ETF investors to invest wisely. It added, “While we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.”
Now, before we look at the impact of spot bitcoin ETFs on bitcoin price, let’s recap on what a spot bitcoin ETF is.
Read also: Coin Metrics: Market Structure for Spot Bitcoin ETFs
What is a Spot Bitcoin ETF?
In general, an exchange traded fund (ETF) is an investment instrument that tracks the price of an underlying asset which can be a cryptocurrency, stock or bond. With this, a spot bitcoin ETF is an exchange traded fund that tracks the bitcoin price.
As a result, an individual can choose to invest in a spot bitcoin ETF rather than involved in bitcoin trading. By doing this, he/she will not encounter the burden of managing digital wallets for holding bitcoin or conducting transactions. For instance, if you buy bitcoin and hold it you need a secure crypto wallet.
Unlike bitcoin that you trade on cryptocurrency exchanges, spot BTC ETFs are only available on traditional financial markets such as NYSE and Nasdaq. This is because spot bitcoin ETFs are regulated investment instruments.
That is the reason why the SEC has emphasized the role of regulations on crypto ETFs. It stated “Further, existing rules and standards of conduct will apply to the purchase and sale of the approved ETPs. This includes, for example, Regulation Best Interest when broker-dealers recommend ETPs to retail investors, as well as a fiduciary duty under the Investment Advisers Act for investment advisers.”
What Bitcoin ETFs Mean For Crypto Investors?
Spot bitcoin ETFs enable crypto investors who do not have experience in trading bitcoin or using other investment strategies like liquidity provision, staking and hodling to benefit from the fluctuation in BTC price.
After the SEC approved spot bitcoin ETFs many investors no longer consider bitcoin a shady investment asset. Now, therefore, the public has a better perception of bitcoin than before.
Plus, more investors can buy and sell bitcoin now than before, leading to its greater adoption. Thus, the number one digital asset will likely become an important part of mainstream investment portfolios.
The vice president of international markets for Indian crypto exchange CoinDCX, Vijay Ayyar, emphasized that view in an interview with CNBC when he said, “The ETF approval also provides a credible stamp of approval for large institutions and market participants that were waiting for an easier way to access the asset class rather than buying crypto directly, which always has inherent price and custody risks.”
Similarly, many institutional investors will also invest in bitcoin ETFs since they are regulated financial instruments. As an example, retirement planners are now able to make spot crypto ETFs part of their portfolios. Again, they will have no hassles attached to managing digital wallets or get worried about the safety of their bitcoin holdings.
Regarding this, the co-founder of blockchain firm Swarm Markets, Timo Lehes, said that spot bitcoin ETFs are an important development in the traditional investment sector. In an interview with CNBC, he said, “The approval of a Bitcoin ETF has huge implications for US investors because they can now hold crypto in their brokerage account, which they couldn’t do before.”
He continued, “This gives the green light for portfolio diversification into the asset, and we expect major inflows of capital into the market, as a result.”
How Spot Bitcoin ETF Approval Impacts on Price for Bitcoin?
We can use the example of the SPDR Gold Shares ETF — the first-ever spot gold ETF – launched in 2004 to understand the effect of the approval of spot bitcoin ETFs on the price for bitcoin.
At the time of the launch of the SPDR Gold Shares ETF the total market capitalization of gold was between $1 trillion and $2 trillion. However, within a few years gold’s total market capitalization grew to $16 trillion.
In the same way, the approval of spot bitcoin ETF is likely to lead to the rise in bitcoin price. The reason why its price may rise with time is an increase in bitcoin investors. While some investors will sell bitcoin others will buy and hold it as well as carry out other transactions which increases its demand.
Favour Chinaza Ibe said that Standard chartered Bank has predicted the price of bitcoin to reach $100,000 this year. On the other hand, bitcoin ETFs are likely to draw between $50bn and $100bn during the same period.
Source: LinkedIn
However, some analysts also believe that the spot BTC ETFs will help stabilize the price of bitcoin since they broaden the use of bitcoin.
Positing on WazirX Blog, Harshita Shrivastava, a crypto author and researcher said, “Beyond short-term fluctuations, the Bitcoin ETF approvals could influence the long-term price trajectory by attracting sustained investment, reducing supply constraints, and enhancing market efficiency. This market maturation process could stabilize prices, mitigate volatility, and foster sustainable growth within the Bitcoin eco.”
Conclusion
On 10 January this year, the United States SEC approved 11 spot bitcoin ETFs creating much hype among crypto fanatics and investors. Investment analysts think this will draw much capital to the sector. This may also help to increase and stabilize the bitcoin price. Presently, several asset management firms including NYSE, Nasdaq, and Cboe Global markets have listed spot bitcoin ETFs.
FAQs about Bitcoin ETFs
Are bitcoin ETFs a good investment?
Since bitcoin ETFs are regulated financial instruments that are part of mainstream investment they appeal to many traditional investors. Also, they are not prone to certain risks that bitcoin faces like hacking and loss of private keys. However, their prices remain as volatile as that of bitcoin.
What does ETF approval mean for bitcoin?
The approval of spot bitcoin ETFs may draw much funds to the sector. That may also lead to a steady rise in bitcoin price and greater adoption. In addition, spot bitcoin ETFs may stabilize the price of bitcoin in the long term.
Is owning a bitcoin ETF the same as owning bitcoin?
Owning a bitcoin ETF is different from owning bitcoin. When you own a bitcoin ETF you don’t own bitcoin directly. Also, buying and selling bitcoin ETFs involve third parties. However, in most cases purchasing and selling bitcoin does not involve third parties.
What is the disadvantage of bitcoin ETF?
The main disadvantage of spot bitcoin ETFs are high management costs that may reduce the rate of return. When you invest in a bitcoin ETF you do not directly own bitcoin.
