The US Securities and Exchange Commission (SEC) announced on 10 January the approval of exchange-traded funds (ETFs) invested directly in Bitcoin for the first time.
While Canada approved a spot-based Bitcoin ETF in 2021 and in Europe the first one was listed on the Euronext Amsterdam exchange in 2023, access to the much larger US ETF market has been a long-running goal for the crypto community.
Heralded as a landmark event for the crypto and digital asset sector, Retail Banker International has covered some market reaction to the approval.
Here, GlobalData Thematic Analyst Alfie King explains the significance and implications of this news after a decade of the SEC refusing to approve such funds.
What is a spot ETF?
A spot ETF is an exchange-traded fund that holds a security for investors. In this case, the ETF directly holds cryptocurrency, and the performance of the digital assets contained is replicated by the fund’s portfolio.
How does this differ from future Bitcoin ETFs?
The key difference between spot and future Bitcoin ETFs is that spots will invest directly in the underlying asset, so the funds will actually own Bitcoin, whereas futures ETFs invest in derivatives tied to the price of Bitcoin. They track agreements to buy or sell Bitcoin at a pre-agreed price but don’t precisely track Bitcoin price movements.
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What impact will this authorisation have on investors?
This development simplifies the Bitcoin investment experience for the mainstream investor. As Bitcoin is a bearer instrument, the custody of the asset isn’t ideal if a material amount of your net worth is tied up in it – third parties may compromise a private key, enabling them to control the digital asset. A spot Bitcoin ETF means investors benefit from the performance of the underlying asset without having to worry about custody or security.
How is this development significant for crypto?
This approval validates the legitimacy not just of Bitcoin but also of other parts of the crypto ecosystem. It is also effectively an approval of the underlying crypto exchanges, meaning more institutions can trade on those exchanges, leading to more traction and interest, and a bigger segment of the institutional cohort able to play in crypto. Crypto has long been viewed as a highly risky investment due to considerable market volatility, but this development should boost liquidity, which will raise Bitcoin’s price and hopefully reduce this volatility.
Bitcoin ETFs have been rejected by the SEC since 2013 because they are vulnerable to market manipulation – what has changed?
The SEC has been rejecting ETF applications one after the other, but each rejection has become slightly more tenuous every time. In August 2023, a US federal court ruled that they were wrong to prevent crypto asset manager Grayscale from converting its Bitcoin Trust into an ETF, and, since this point, the SEC has changed its course.
It is thought that greater liquidity and institutional adoption of crypto as an asset class will make it more difficult, for example, for crypto whales (individuals or entities that hold large amounts of cryptocurrency) to impact liquidity and price stability.
How has anticipation of this news affected Bitcoin’s value?
Feverish anticipation of this development has caused a number of sudden price hikes in recent months as false reports of an approval filtered out, before being debunked, subsequently bringing the price back down. After the official approval, Bitcoin rose 6% over 24 hours before falling again slightly.
On yesterday’s (11 January) first day of trading following the approval, Bitcoin’s value fell from the two-year high of $49,021 around the announcement of the approval of spot Bitcoin ETFs.
How long until we see an Ethereum spot ETF?
Following this approval, it is widely expected that approval of the spot Ethereum ETF applications currently in the hands of the SEC will follow in 2024, potentially as early as May.