They have been a long time coming. But Bitcoin spot ETFs have finally received SEC approval in the US. Could this trigger a substantial inflow of funds into the crypto market in the medium to long-term, or might there be short-term downside risks?
It has been a long wait for US investors interested in spot Bitcoin or Ether ETFs.
The first application for such a fund dates back ten years to the Winkelvoss twins. That application, as well as their second effort in 2018, was never approved by the SEC. Nor has any of the many other applications filed since then, including those from major mainstream names like BlackRock.
The wait is now over as the SEC granted approval for 11 spot Bitcoin ETFs (Bitwise, Grayscale, Hashdex, BlackRock, Valkyrie, BZX, Invesco, VanEck, WisdomTree, Fidelity and Franklin, according to reports from The Block and Bloomberg) on 10 January, 2024. According to many reports, discussions between the SEC and a number of issuers of Bitcoin ETFs were in advanced stages. BlackRock recently made a key concession – allowing cash redemptions – suggesting that the two sides were coming closer together before the approvals were finalised.
These Bitcoin spot ETF approvals could have a tremendous effect on cryptocurrency markets, potentially bringing in billions of dollars and igniting a new wave of crypto adoption.
Understanding the impact of crypto spot ETFs
To understand why this is a big deal, it helps to understand the difference between Bitcoin futures ETFs, which were approved and have been available in the US since 2021, and a Bitcoin spot ETF.
Futures ETFs are derivative instruments. They don’t involve actually owning the coins but rather track the price of the underlying asset through futures contracts. That can make them overly complex for many retail investors. The tracking is also not always accurate, as the price of the futures contracts can be influenced by factors other than Bitcoin’s spot price.
A spot ETF like the one Blackrock is proposing does not have this problem. These funds actually own the coins. That gives investors direct exposure to the cryptocurrency, without, however, actually having to purchase or custody any coins. They are therefore much more straightforward and intuitive for investors.
Many people think that Bitcoin and Ether spot ETFs could attract massive amounts of money to crypto market.
Entrepreneur and Bitcoin investor Anthony Pompliano, a former Wall Street trader and founder of Morgan Creek Digital, for instance, recently calculated that there could be inflows into these funds of between USD 50 – 100 billion in the first 12 – 24 months. His estimate is based, at least partially, on precedent: When the first US Bitcoin futures ETF was approved and launched in 2021, it attracted over USD 1 billion in assets in the first few days; at the height of the bull market in 2021, Grayscale’s GBTC ETF had about a USD 40 billion market capitalisation. Spot ETFs, the argument goes, can be expected to do much better. For similar reasons, Standard Chartered’s Head of Financial Research, Geoffrey Kendrick, made a bold prediction, stating that ETF-related inflows could reach USD 50 – 100 billion in 2024, while Head of ETF Trading and Sales at market maker GTS, Reggie Browne, expects USD 10 – 20 billion.
Even BlackRock’s CEO, Larry Fink, voiced his desire for US regulators to consider these ETFs as a means to “democratise crypto,” pointing out their unique capabilities in making crypto more accessible to a broader range of investors and to reduce many of the costs associated with current Bitcoin transactions.
There are good reasons to believe such estimates are plausible. For example:
- Lower barriers to entry. Without the friction of having to understand how to use a wallet or how to account for crypto in a tax return, spot crypto ETFs would dramatically lower the barrier to entry into crypto. This could attract a new wave of investors, particularly those familiar with traditional stock market trading but new to the crypto space.
- Legitimacy through mainstream institutions. The issuance of spot Bitcoin and Ether ETFs by reputable financial institutions like BlackRock, Fidelity or ARKInvest, could lend significant legitimacy to cryptocurrencies for retail and institutional investors alike. They would provide a secure and regulated entry point without the reputational issues that often get in the way, particularly for institutions.
- Snowball effect. Pompliano argues that the potential profits from launching a successful Bitcoin ETF are so high, we can expect issuers to go on aggressive – and expensive – marketing campaigns. Superbowl ads and talking heads from mainstream institutions on TV will greatly increase the visibility of crypto, attracting even more investors. This could serve as a powerful bridge to mainstream adoption, bringing cryptocurrencies to an even broader investor pool.
While these ETF approvals are good reasons to be optimistic, we are not there quite yet. It is not a given that we will see the kinds of inflows that GTS, Standard Chartered and Pompliano expect. These projections are indeed speculative, and we should consider the potential consequences of the ETF launch on institutions tasked with acquiring sufficient Bitcoin for their ETF products. Moreover, spot Bitcoin ETFs are already available in a number of jurisdictions outside the US, for instance Germany and Canada, where interest has been respectable but not massive.
These are however much smaller markets than the US, with issuers who don’t have the kind of marketing savvy we can expect from their American peers.
With the SEC’s approval now secured, the potential for a significant market impact is clearly on the table.
Fabian Dori, Deputy Group CEO and Chief Asset Management Officer at Sygnum: “Bitcoin spot ETFs will be important for increasing institutional adoption of crypto. They offer a structured, regulated entry point into Bitcoin without the reputational issues that often deter traditional investors to the asset class.“
Martin Burgherr, Chief Clients Officer at Sygnum: “Bitcoin spot ETFs, as a long-term commitment from mainstream institutions like BlackRock, could further improve investor confidence and trust towards digital asset investing, as we move towards a market increasingly defined by regulatory scrutiny.“
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