United States Approves First Bitcoin ETFs, Marking a Milestone in the Digital Asset Market

In a historic move for the cryptocurrency market, U.S. regulators have granted approval for exchange-traded funds (ETFs) that directly invest in Bitcoin. This decision follows a recent incident involving a false tweet that prematurely raised expectations, causing a brief spike in the cryptocurrency's price.

Approval and Market Participants

The United States Securities and Exchange Commission (SEC) has given the green light to a select group of participants to operate Bitcoin ETFs starting this Thursday. Among the authorized entities are ARK 21Shares, Invesco Galaxy, VanEck, WisdomTree, Fidelity, Valkyrie, BlackRock, Grayscale, Bitwise, Hashdex, and Franklin Templeton.

SEC Chairman Gary Gensler highlighted in a statement that this approval is based on changing circumstances, particularly after a appellate court ruling that questioned previous denials, and following BlackRock's request to launch an ETF, thereby increasing investor pressure. It's worth noting that the SEC received the first petition related to Bitcoin ETF approval a decade ago.

Approval does not imply endorsement

Despite this historic step, the SEC, known for its cautious stance toward cryptocurrencies, has made it clear that approving Bitcoin ETFs does not imply endorsement. Gary Gensler emphasized in his statement: "While today we approved the listing and trading of certain spot market ETFs, we do not approve or endorse Bitcoin."

This nuance highlights the SEC's conservative stance on cryptocurrencies, despite allowing significant market players into the Bitcoin ETF space. Investors should take this distinction into account when assessing the long-term impact of this regulatory decision on the digital asset market.

What do the experts say?

Franco Macchiavelli, Head of Analysis at Admirals Spain

Rarely has a move been so telegraphed before its execution. Now begins the battle to attract clients and, consequently, the fees of the ETFs offered by different entities. However, it is worth noting that the activation of the various ETFs by each participant is not expected to happen suddenly and all at once, but rather progressively and in 'lots.'

Financial giants are updating their S1 proposals with the SEC at the last minute, potentially generating more FOMO (fear of missing out) among individual investors.

BlackRock stands out, with fees of 0.20% for the first $5 billion managed, then applying 0.30%. Wisdomtree sets it at 0.50%, Bitwise at 0.24%, while Grayscale charges 1.5% as a trust.

This battle to win clients with attractive fees can generate initial FOMO and buying interest from the start.

Estimates from many banks point to significant increases, possibly in triple digits by 2025, due to the increased inflows expected after the final regulator approval. Meanwhile, capital inflows into digital assets are on the rise, with a particular focus on Bitcoin, which has seen $112 million of the $151 million in inflows recorded in recent days.

Risks:

Nine out of the twelve companies applying for the spot ETF have chosen the same custodian, raising concerns about the risk associated with concentration of custody in one company.

If this custodian operates both as an exchange and a broker, it may also influence the market as a maker, raising concerns about potential price manipulation. This raises questions about the custodian's corporate performance and its current legal conflict with the SEC.

Hector McNeil, Co-Founder and Co-CEO of HANetf:

The much-anticipated approval of a spot price Bitcoin ETF by the US Securities and Exchange Commission is without a doubt one of the major landmark moments since the birth of Bitcoin. As we saw in the run up to the approval, investor excitement about the approval helped push Bitcoin out of its 2022-induced slump, with the price of a coin once more reaching $47,000. 

At the same time, digital asset ETPs available in Europe saw dramatic inflows in 2023. In total, the entire range of cryptocurrency ETCs from ETC Group saw $426million in inflows over the course of the year. Among those, ETC Group Physical Bitcoin (BTCE) saw an AUM increase of 351.12% and ETC Group Physical Ethereum (ZETH) 86.6% in 2023. 

The then-still-anticipated approval by the SEC helped boost the price of Bitcoin for several reasons. The first was the expectation that ETFs will unlock a new wave of investor demand. Many US investors have been reluctant to use typical cryptocurrency trading venues, given some of high-profile scandals in the space. A spot price Bitcoin ETF gives a potentially huge number of US investors with a way to access Bitcoin now directly. The creation of Bitcoin ETCs in Europe, such as BTCE, directed several billions of dollars among European investors. A US Bitcoin ETF has the ability to gather even more investor money looking for spot price exposure to Bitcoin, consider the bigger pool of money among both professional and retail investors in the US compared to Europe. 

We can consider the SEC approval in a similar vein to the creation of gold ETCs in the early 2000s, which both myself and HANetf co-founder Nik Bienkowski had close involvement with. If you read investment literature from before the creation of the first gold ETC, you will see gold often touted as an asset class to consider, adding diversification to a portfolio. But how to gain exposure was always an issue. Investors could opt for exposure to gold miners, but that brought potential equity risk. Or, investors could opt for physical bullion, bringing with it custody risk. Storing gold bars in your garage is not ideal. But, with the creation of the first gold ETC, investors finally had an easy way to invest directly in gold. It is similar for US investors with Bitcoin. Investors have had the option of a futures-based ETF, approved in 2021 – but that added performance drag through roll yield. Or they could use some of the online cryptocurrency trading venues to directly buy bitcoin, with the introduction of a digital-based custody risk. But with the SEC approval, a spot price ETF has become an option. 

But beyond simply unlocking new money for Bitcoin, SEC approval adds a new layer of acceptability to the currency.  It is interesting to consider that it was the filing from BlackRock for a Bitcoin ETF that saw optimism around the prospect really pick up. That was because BlackRock is seen as the most mainstream of mainstream asset managers. By filing for a Bitcoin ETF, it showed showed that cryptocurrencies themselves are increasingly being considered a mainstream asset class. 

Of course, the issue remains for UK investors. For several years, investors in Europe have been able to invest in Bitcoin thought ETCs such as BTCE, listed on several European stock exchanges. Now US investors can invest in Bitcoin through an ETF, following the SEC ruling. But the UK’s regulator still blocks UK investor access. 

There are, however, proxy ways to gain exposure to Bitcoin. For example, the ETC Group Digital Assets and Blockchain Equity UCITS ETF (KOIN) offers exposure to companies within the crypto and blockchain ecosystem, whose fortunes are intricately tied to the performance of Bitcoin itself. A key indicator of KOIN's alignment with Bitcoin is its correlation. In December 2023, KOIN exhibited a correlation of around 0.7 with Bitcoin, highlighting its potential as a proxy for the digital gold. This means that as Bitcoin prices move, so do the fortunes of KOIN, providing investors with a strategic avenue to participate in the crypto market.Another option is the Grayscale Future of Finance UCITS ETF (GFOF), which aims to provide exposure to the companies that are, and could be, building the future of finance and digital payment systems. This encompasses everything from payment platforms, to exchanges, to miners, to asset management, and blockchain technology.

GFOF could be well placed to capture growth in the digital assets space, driven by the potential approval of a US Bitcoin ETF. As digital assets move increasingly into the mainstream, the infrastructure for transactions and asset management will need to expand. 

Javier García de la Torre, Director of Binance Spain and Portugal

The approval illustrates a new level of acceptance, maturity, and widespread adoption of the crypto market, providing the sector with greater credibility and the potential to continue innovating.

Bitcoin spot ETFs will facilitate access to the crypto market, attracting more investors and liquidity. Although it's challenging to anticipate the scale of new players and market dynamics (which are subject to change), it's worth considering that the introduction of gold ETFs in 2004 led to seven years of positive price evolution. Coupled with this year's Bitcoin halving event, these developments could create a dynamic market for Bitcoin.

ETFs offer a familiar and cost-effective mechanism for conventional users to easily access cryptocurrency investments.

The Bitcoin spot ETF will bring greater credibility to the digital asset sector, fostering trust in the market among a broader audience.

Direct investment in Bitcoin and various regulated instruments will coexist, allowing for diverse investment strategies catering to different risk profiles and preferences. This signals a new and exciting era of acceptance and legitimacy, not just for Bitcoin but also for the broader crypto space.

We look forward to other milestones anticipated in the coming weeks and months, including the next Bitcoin halving, expectations for an ETH ETF, or traditional finance exploring the custody of digital assets, among others