Here's Everything You Should Know About Bitcoin ETF Approval

Analysts Notebook joined discussion · Jan 11 01:27

The US Securities and Exchange Commission (SEC) has given the green light to the first spot bitcoin exchange-traded funds (ETFs) on Wednesday, a significant milestone anticipated to attract both retail and institutional investors to the cryptocurrency market.

We think that the SEC approval, should we and others get it, is a green light for institutions. We've been talking to quite a few of them, and they're much more interested now that the SEC effectively is paving the way," Ark Invest CEO Cathie Wood said. Ark Invest has partnered with 21Shares on a proposed bitcoin fund.

The SEC has approved funds from several entities to commence trading on Thursday, as part of their mission to safeguard investors.

What Is a Spot Bitcoin ETF

An ETF provides a convenient method of investing in assets or a group of assets, without the need to purchase the assets themselves. For instance, by investing in the $SPDR Gold ETF(GLD.US)$, one can easily invest in gold without worrying about the storage or security of the physical asset. Moreover, ETFs can be effortlessly traded on stock exchanges. However, since the advent of Bitcoin, acquiring ownership of the cryptocurrency entailed creating a digital wallet or registering an account with a crypto trading platform such as $Coinbase(COIN.US)$ or Binance.

Unlike existing products that invest in Bitcoin futures, the recently approved spot Bitcoin ETFs will hold actual Bitcoin. The decision also marks a U-turn by the SEC. After a decade of rejection, the SEC has finally authorized spot Bitcoin ETFs.

What Does It Mean for Investors

Although spot Bitcoin ETFs have been accessible in other markets, their approval in the US is anticipated to initiate a new era for the widely used and highly tradable cryptocurrency. With the introduction of regulated products, institutional and retail investors in the US can now acquire direct exposure to the coin, without the hazards of purchasing from unregulated exchanges or the elevated costs associated with Bitcoin futures ETFs.

The approval means that both retail and institutional investors now have the ability to diversify their portfolio with crypto exposure without worrying about the complicated issues of custody," said Campbell Harvey, finance professor at Duke University. "The ETF makes it easy to add to your portfolio."

Here's Everything You Should Know About Bitcoin ETF Approval

What Does This Mean for the Price of BTC

After the approvals, Bitcoin witnessed a surge of approximately 3.4% and reached $47,500. The price of the original cryptocurrency had plummeted by 64% in 2022, but in 2023, it more than doubled primarily due to the speculation that the SEC would approve ETFs. The approval would enable investors to gain exposure to Bitcoin through their conventional brokerage accounts, rather than relying on crypto-oriented startups that have been subjected to heightened regulatory scrutiny following a series of sector scandals and bankruptcies.

Source: CoinMarketCap

Standard Chartered analysts this week said the ETFs could draw $50bn to $100bn this year alone, potentially driving the price of bitcoin as high as $100,000. Others have said inflows will be closer to $55bn over five years.

Some issuers are already contemplating which other cryptocurrencies have the potential to be approved for a spot ETF. Among the potential candidates, Ether and XRP have generated the most buzz.

Concerns Over the Approval

• "The notorious price volatility of bitcoin … could expose mainstream investors to a less familiar spectrum of investment risks," said Yiannis Giokas, senior director of Moody's Analytics.

• "While we approved the listing and trading of certain spot Bitcoin ETP shares today, we did not approve or endorse Bitcoin," SEC Chair Gary Gensler said in a statement. "Investors should remain cautious about the myriad risks associated with Bitcoin and products whose value is tied to crypto."

• "I am concerned that these products will flood the markets and land squarely in the retirement accounts of US households who can least afford to lose their savings to the fraud and manipulation that appears prevalent in the spot bitcoin markets," Commissioner Caroline Crenshaw said in her dissent.