On Wednesday 10th December, the United States Securities and Exchange Commission (SEC) in a much-anticipated move revealed that it had for the first time approved certain investment firms to introduce exchange-traded funds (ETFs) based on “spot Bitcoin.”
The document released by the watchdog stated that “after careful review, the Commission finds that the Proposals are consistent with the Exchange Act and rules and regulations thereunder applicable to a national securities exchange”.
Exchange-traded funds (ETFs) are collective investments, similar to mutual funds, but they are traded on stock exchanges like stocks or bonds. Unlike traditional mutual funds, ETFs can be bought and sold throughout the trading day.
A spot Bitcoin ETF provides investors with a direct avenue to gain exposure to Bitcoin without the need to physically possess it. In contrast to conventional Bitcoin ETFs, where Bitcoin futures contracts serve as the underlying asset, a spot Bitcoin ETF’s underlying asset is actual Bitcoins. Each spot Bitcoin ETF is managed by a company that issues shares based on its holdings of Bitcoins acquired either from other holders or through an authorized cryptocurrency exchange. These shares are then listed on a traditional stock exchange.
The 11 spot Bitcoin ETFs that got the regulatory nod include; iShares Bitcoin Trust by BlackRock, Grayscale Bitcoin Trust, ARK 21Shares Bitcoin ETF, Bitwise Bitcoin ETP Trust, WisdomTree Bitcoin Fund, Wise Origin Bitcoin Trust by Fidelity, VanEck Bitcoin Trust, Galaxy Bitcoin ETF by Invesco, Valkyrie Bitcoin Fund, Bitcoin ETF by Hashdex, and Bitcoin ETF by Franklin.
The majority of these products are set to commence trading on Thursday, according to issuers, initiating a competitive battle for market dominance.
The approval from the SEC comes after years of delays and rejections of various attempts to introduce spot Bitcoin ETFs. This decision follows a significant setback for the agency a few months ago when the D.C. Circuit Court of Appeals ruled in August that the SEC’s rejection of Grayscale’s bid to convert its approximately $26 billion Grayscale Bitcoin Trust (GBTC) into a spot ETF was “arbitrary and capricious.”
Several crypto enthusiasts believe that the approval was long overdue. For instance, SEC Commissioner Hester Pierce, a longtime crypto advocate nicknamed “Crypto Mom” by fans aired her sentiment in a statement. She noted that “today mark[ed] the end of an unnecessary, but consequential, saga.”
Peirce observed that the initial filing for a spot Bitcoin ETF in the United States occurred over a decade ago. She remarked that the necessity for a spot Bitcoin exchange-traded product (ETP) has been a recurring question throughout her six years with the agency.
“We squandered a decade of opportunities to do our job […] If we had applied the standard we use for other commodity-based ETPs, we could have approved these products years ago, but we refused to do so until a court called our bluff,” she wrote.
In conjunction with the comprehensive approval order, the SEC released a speech by Chair Gary Gensler. While confirming the approvals, he also issued a cautionary statement.
“While we approved the listing and trading of certain spot Bitcoin ETP shares today, we did not approve or endorse Bitcoin. Investors should remain cautious about the myriad risks associated with Bitcoin and products whose value is tied to crypto,” he said.
The endorsements occurred a day after an unauthorized individual disseminated a false post on the SEC’s account on social media platform X, falsely claiming the agency’s approval for trading the products. The agency promptly disowned and removed the post.
On Wednesday, the SEC stated that it is collaborating with law enforcement and its internal watchdog to investigate the incident. Despite this incident and a perplexing announcement on Wednesday afternoon, during which the SEC seemed to release and subsequently remove the formal regulatory approval from its website, the celebrations within the crypto industry remained unaffected.
Game Changer or Market Mayhem?
After a decade in development, these ETFs represent a transformative development for Bitcoin, providing investors with access to the world’s largest cryptocurrency without the need for direct ownership. This marks a significant uplift for a crypto industry that has faced numerous scandals.
Analysts in the industry forecast that the endorsement of these ETFs will trigger a notable increase in institutional capital flowing into Bitcoin. This influx has the potential to propel BTC’s value to unprecedented highs, consolidating its standing as a bona fide asset class.
Andrew Bond, Managing Director and Senior Fintech Analyst at Rosenblatt Securities, expressed his opinion on the issue saying “It’s a huge positive for the institutionalization of Bitcoin as an asset class,”
Investors are also placing bets on the expectation that the introduction of spot Bitcoin ETFs will inject billions of dollars into the digital currency, simplifying and making the investment process less daunting.
Upon commencement of trading, significant capital inflows are anticipated for these products. Steven McClurg, Co-founder and CIO of Valkyrie Investments, anticipates an influx of $200 million to $400 million into Valkyrie’s ETF, with the entire cohort potentially experiencing inflows ranging from $4 to $5 billion in the initial weeks.
Established financial service entities such as BlackRock and Fidelity, known as household names, venturing into this sector contributes to pushing Bitcoin more prominently into the mainstream as a legitimate investment class. This move also bestows credibility on the often-shadowy and highly volatile cryptocurrency industry.
With the increasing demand for Bitcoin, experts predict a corresponding rise in its price, potentially prompting heightened investment and greater interest in the cryptocurrency. The surge in Bitcoin investment, along with the introduction of new products by established financial entities, may expedite the implementation of prudent regulations. These regulations aim to eradicate fraud and establish cryptocurrency as a legitimate means for investment, payments, and broader business transactions.
For individuals contemplating entering the realm of Bitcoin, it’s crucial to recognize that the volatility of Bitcoin’s price remains consistent, whether you opt to invest directly or through an ETF.
Earlier this week, Gensler shared a series of posts on X, cautioning investors about the general risks associated with crypto investing. According to his post:
Investments in crypto assets also can be exceptionally risky & are often volatile. A number of major platforms & crypto assets have become insolvent and/or lost value. Investments in crypto assets continue to be subject to significant risk.
Enhancing the regulatory framework for cryptocurrencies is crucial, as emphasized by Rajeev Bamra, Senior Vice President of Digital Finance at Moody’s Investors Service.
“Whether this trend will hold depends on the trajectory of global monetary policymaking as well as the availability of cryptocurrencies to institutional investors through products that meet regulatory standards, ensuring their safety and security,” he said.