The U.S. Securities and Exchange Commission (SEC) has finally given the green light for the creation and trading of bitcoin exchange-traded funds (ETFs) in the country. This is a historic and groundbreaking decision that will open the doors for more investors to access the world’s oldest and most popular cryptocurrency.
Bitcoin ETFs are funds that track the price of bitcoin and trade on stock exchanges like any other ETF. They allow investors to buy and sell shares of the fund without having to deal with the technicalities and risks of owning and storing bitcoin directly. Bitcoin ETFs also provide more transparency, liquidity, and regulatory oversight than other crypto products.
Bitcoin ETFs are important because they will make bitcoin more accessible and attractive to mainstream investors, especially institutional ones. They will also increase the demand and legitimacy of bitcoin, which could boost its price and adoption. Bitcoin ETFs could also pave the way for other crypto ETFs in the future, creating a more diverse and vibrant crypto market.
How did the SEC approve bitcoin ETFs and what are the implications?
The SEC has been reluctant to approve bitcoin ETFs for years, citing concerns about market manipulation, fraud, custody, and volatility. However, the SEC has recently changed its stance and adopted a more favorable approach to crypto regulation. The SEC has approved bitcoin ETFs that are based on bitcoin futures contracts, rather than spot prices. Bitcoin futures are standardized contracts that allow traders to buy or sell bitcoin at a predetermined price and date in the future. They are traded on regulated platforms such as the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE).
The SEC’s approval of bitcoin ETFs based on futures contracts has several implications. First, it will create more demand and liquidity for bitcoin futures, which could reduce the gap between the futures and spot prices. Second, it will increase the competition and innovation among bitcoin ETF providers, who will try to offer the best products and services to investors. Third, it will encourage more crypto companies and platforms to comply with the SEC’s rules and standards, which could improve the security and trustworthiness of the crypto industry.
Who are the players and beneficiaries of bitcoin ETFs?
The first bitcoin ETFs to start trading in the U.S. are the ProShares Bitcoin Strategy ETF and the Valkyrie Bitcoin Strategy ETF. They will begin trading on Thursday, January 11, 2024, on the NYSE Arca and the Nasdaq, respectively. They will charge annual fees of 0.95% and 0.8%, respectively. Both ETFs will invest in bitcoin futures contracts and will not hold any bitcoin directly.
Other bitcoin ETFs that have been approved by the SEC and are expected to launch soon are the VanEck Bitcoin Strategy ETF, the Invesco Bitcoin Strategy ETF, the WisdomTree Bitcoin Strategy ETF, and the First Trust SkyBridge Bitcoin ETF. They will also invest in bitcoin futures contracts and will charge annual fees ranging from 0.65% to 0.95%.
One of the biggest beneficiaries of bitcoin ETFs is the Grayscale Bitcoin Trust (GBTC), which is the largest and oldest crypto fund in the world. GBTC holds about $29 billion of bitcoin and trades on the over-the-counter (OTC) market. GBTC has been trading at a significant discount to its net asset value (NAV) for months, due to the lack of liquidity and competition. However, GBTC will likely be converted into an ETF following the SEC’s decision, which will eliminate the discount and make it more attractive to investors.
Another major beneficiary of bitcoin ETFs is BlackRock, the world’s largest asset manager. BlackRock has been one of the most vocal and active supporters of crypto and blockchain. BlackRock is the largest shareholder of CME, which is the main provider of bitcoin futures contracts. BlackRock is also the largest shareholder of MicroStrategy, which is the largest corporate holder of bitcoin. BlackRock is also the sub-adviser of the ProShares Bitcoin Strategy ETF, which means it will provide the fund with trading and risk management services.
Other beneficiaries of bitcoin ETFs include Fidelity, which is one of the largest and most reputable financial institutions in the world. Fidelity has been a pioneer and leader in the crypto space, offering custody, trading, and research services to institutional and retail clients. Fidelity is also the sponsor of the Wise Origin Bitcoin Trust, which is one of the bitcoin ETFs that is still pending approval by the SEC.
What are the challenges and risks of bitcoin ETFs?
Bitcoin ETFs are not without challenges and risks. One of the main challenges is the regulatory uncertainty and complexity that surrounds crypto. The SEC’s approval of bitcoin ETFs based on futures contracts does not mean that it will approve bitcoin ETFs based on spot prices, which are preferred by many investors. The SEC’s approval also does not mean that other regulators, such as the Commodity Futures Trading Commission (CFTC), the Internal Revenue Service (IRS), and the Financial Crimes Enforcement Network (FinCEN), will not impose their own rules and requirements on crypto.
One of the main risks of bitcoin ETFs is the volatility and unpredictability of bitcoin. Bitcoin is known for its wild price swings and fluctuations, which can be influenced by various factors, such as supply and demand, news and events, sentiment and speculation, hacks and attacks, and technical and fundamental developments. Bitcoin ETFs will expose investors to these risks, which could result in significant losses or gains.
Another risk of bitcoin ETFs is the operational and technical risk that comes with dealing with crypto. Crypto is a complex and evolving technology that requires a high level of expertise and security. Crypto is also prone to cyberattacks, fraud, theft, and human error, which could compromise the integrity and functionality of the crypto platforms and services. Bitcoin ETFs will rely on these platforms and services, which could pose a threat to their performance and reliability.
Conclusion
Bitcoin ETFs are a game-changer for crypto adoption. They will make bitcoin more accessible and attractive to mainstream investors, especially institutional ones. They will also increase the demand and legitimacy of bitcoin, which could boost its price and adoption. Bitcoin ETFs could also pave the way for other crypto ETFs in the future, creating a more diverse and vibrant crypto market.
However, bitcoin ETFs are not without challenges and risks. They will face regulatory uncertainty and complexity, as well as volatility and unpredictability. They will also face operational and technical risk, as well as cyberattacks, fraud, theft, and human error. Bitcoin ETFs will require careful and informed decision-making by investors, who should weigh the potential rewards and risks of investing in this new and exciting asset class.
