Bitcoin’s Spot ETF Arrival: A New Investment Milestone

Introduction

As 2024 dawns, Bitcoin’s value has embarked on a remarkable ascent, soaring to its highest level since April 2022. This surge, coupled with the recent approval of the first spot Bitcoin ETF by the Securities and Exchange Commission (SEC), has fueled anticipation for further growth in the cryptocurrency market. This milestone, anticipated for over a decade, marks a turning point for the industry, opening doors for institutional investment and potentially propelling Bitcoin to new heights. Furthermore, the upcoming halving, scheduled for April 2024, is expected to further amplify these price spikes, adding to the excitement surrounding Bitcoin’s future.

ETF scenario: what is changing?

The US Securities and Exchange Commission has finally approved the launch of 11 spot Bitcoin ETFs on January 10th. This decision has been waited for over ten years, and now a huge wake of investments is expected to grow in the field. 

The SEC has approved ETfs from the following issuers: Blackrock, Ark Invest, Grayscale, VanEck, Bitwise, Fidelity, Hashdex, WisdomTree, Invesco Galaxy, Franklin and Valkyrie.

Thanks to the approval, institutional investors, such as insurance funds or conservative pension, will be able to open an exposure to Bitcoin without having to buy BTC themselves.

Spot bitcoin ETFs allow investors to invest in bitcoin without paying the higher fees associated with directly buying the token on dedicated crypto exchanges like Coinbase.

The US becomes in this way the ninth country to approve a spot Bitcoin ETF after Canada, Germany, Brazil, Australia, Jersey, Switzerland, Liechtenstein and Guernsey.

The approval process for spot Bitcoin ETFs in the US market has spanned a decade, with regulators citing concerns about Bitcoin price manipulation due to its high volatility. In 2021, Bitcoin experienced significant growth, gaining 60%. However, in 2022, Bitcoin experienced a decline of 64%, followed by a rebound in 2023, where its value more than doubled. With the approval of spot Bitcoin ETFs, the cryptocurrency’s upward trajectory is expected to continue

The price of Bitcoin has increased by around 70% since October, as investors anticipate that the launch of Bitcoin ETFs will boost demand for the cryptocurrency. The price of Bitcoin dropped to as low as $16,000 in November 2022, after the bankruptcy of the cryptocurrency exchange FTX. However, the price surged to $46,500 in the hours following the SEC’s approval of Bitcoin ETFs.

There is a range of views on the future value of Bitcoin. Standard Chartered analysts believe that Bitcoin ETFs could push the price of Bitcoin to $100,000, potentially increasing the size of the ETF market. Other analysts have taken a more cautious approach, suggesting that ETFs could actually help stabilize cryptocurrency prices by broadening their appeal. However, many investors remain concerned that the widespread use of Bitcoin ETFs could introduce too much risk and volatility into the American financial system.

The SEC has expressed doubts about the ability of funds to properly value and track cryptocurrency holdings, citing the lack of the regulatory oversight and surveillance in the crypto market. In response, BlackRock and other ETF issuers have proposed surveillance-sharing agreements to address these concerts and mitigate the risk of manipulation and fraud.

With the approval of Bitcoin ETFs, the cryptocurrency market’s trajectory is expected to continue evolving. As the regulatory landscape adapts, the cryptocurrency market’s attention is now turning to the possibility of an Ethereum ETF, the second-most valuable cryptocurrency after Bitcoin.

ETFs on Bitcoin spot: how do they work?

An ETF (Exchange Traded Fund), also known as a passive fund, is a type of fund that aims to track the performance of a specific market index. Investors who participate in an ETF can buy and sell shares of the fund on regulated exchanges, or they can hold their shares and benefit from the fund’s performance.

ETFs on Bitcoin are funds that invest in the cryptocurrency by purchasing it. In generale, the issuer of the fund is a financial institution that interacts with two main groups of participants:

  • Authorize Participants: These are specialized investors who trade Bitcoin directly with the issuer, exchanging crypto for ETF shares and vice versa. This mechanism allows them to profit from the spread between the ETF and the underlying asset (Bitcoin).
  • Investors: Investors can buy or sell ETF shares, just like any other fund, and they cannot ever interchange their investments with Bitcoin. Their returns are purely based on the performance of the ETF.

In this way, the issuer holds a reserve of Bitcoin to provide safe liquidity. This means that the ETF’s value is backed by a tangible asset, making it a more secure investment.

Bitcoin spot ETFs offer a variety of benefits over Bitcoin futures ETFs: these include a simplified structure of the financial instrument, easier to approach even for smaller investors, a value closer to the actual performance of the cryptocurrency as the spot is backed by bitcoin itself.

In addition, this type of structure minimizes the risk of counterparty defaults, which can occur in futures ETFs when either party fails to fulfill their obligations, potentially affecting the holder of the contract.

Bitcoin spot ETFs have been gaining traction in Europe, particularly in Switzerland, France, and the UK. In 2023, the Jacobi FT Wilshire Bitcoin ETF became the first Bitcoin spot ETF to be approved, trading on the Euronext Stock Exchange in Amsterdam. However, it’s crucial to acknowledge that each country has its own regulatory framework, and the general perception of Bitcoin remains cautious due to its lack of regulation and high volatility.

Conclusion

The recent approval of spot Bitcoin ETFs by the SEC represents a watershed moment for the cryptocurrency market. This development is expected to attract significant institutional investment, further legitimize Bitcoin as a mainstream asset class, and potentially fuel its price growth. While Bitcoin’s volatility remains a concern, the introduction of ETFs provides investors with a more accessible and diversified way to participate in the cryptocurrency market. As the regulatory landscape continues to evolve, Bitcoin ETFs are poised to play a pivotal role in shaping the future of cryptocurrency investing.

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