Bitcoin ETF What is it

In January 2024, the U.S. Securities and Exchange Commission (SEC) announced the official approval of the launch of 11 Bitcoin exchange-traded funds (ETFs) that directly invest in Bitcoin.

What Is a Bitcoin ETF?

The concept of an ETF stands for Exchange Traded Funds. From this, we can infer the principle of how such an instrument works: companies offer investors shares of purchased assets in order for them to generate income. The size of these shares can be determined independently by each institution, ranging from 70% to 100%.

Thus, a Bitcoin ETF is a spot fund with shares for investors that exclusively deals with the primary cryptocurrency. Consequently, investors who invest in Bitcoin ETF shares can earn additional profits when the asset's price increases.

It is important to note that the buying process itself is carried out not on traditional cryptocurrency exchanges but on more conventional trading platforms. It should also be considered that, despite the similarity to buying stocks, ETF funds typically include a diverse range of assets.

However, what is the difference between directly purchasing digital assets and shares of a fund? It's quite simple: when an investor puts money into tokens, they become the owner of those tokens. Therefore, the process of storing the coins and all related risks become their responsibility. However, if they acquire shares in an existing fund (such as Bitcoin), they do not directly own the tokens.

Thus, for many, investing in a Bitcoin ETF is safer and more convenient than buying the coin on a cryptocurrency exchange. There is no need to set up a wallet, register on an exchange, worry about hacker attacks, scams by exchange owners, or the loss of a private key.
The issuers of cryptocurrency ETFs bear full responsibility for the security of the underlying asset. Moreover, such ETFs are regulated according to securities laws. The custody and transparency of the fund are monitored by a depository and auditors, and the fund reports to regulators, such as the U.S. Securities and Exchange Commission (SEC).

The decision was made following a ruling by the U.S. Court of Appeals for the District of Columbia Circuit. According to the ruling, the SEC failed to explain the reasons why it did not approve investment firm Grayscale's application for listing and trading a Bitcoin ETF. As a result, the previous decision of the commission was overturned, and the case was sent for reconsideration. From 2018 to March 2023, the commission rejected 20 similar applications.
The regulator granted permission for trading shares of the following funds: Grayscale Bitcoin Trust, Bitwise Bitcoin ETF, Hashdex Bitcoin ETF, iShares Bitcoin Trust, Valkyrie Bitcoin Fund, ARK 21Shares Bitcoin ETF, Invesco Galaxy Bitcoin ETF, VanEck Bitcoin Trust, WisdomTree Bitcoin Fund, Fidelity Wise Origin Bitcoin Fund, and Franklin Bitcoin ETF.

The approval of spot Bitcoin ETFs can provide support to the cryptocurrency's prices. Currently, the launch of spot ETFs for Bitcoin is one of the most discussed topics in the cryptocurrency industry. What is the reason for such interest? The reason is that the introduction of such funds can bring a lot of new opportunities to the digital asset sphere and also provide additional earnings for investors in countries where cryptocurrency trading is prohibited.

What Is the Purpose of Creating Spot Bitcoin ETFs?

Spot funds are established by the companies themselves, who also oversee the entire management process. These organizations, such as BlackRock, iShares, and Charles Schwab, possess the ability not only to engage in trading activities but also to modify the composition of their funds at any given moment. Presently, ETF funds represent one of the most versatile financial instruments, which is why the cryptocurrency community eagerly anticipated the introduction of ETFs for Bitcoin. Market participants believe that this step will aid in driving up the price of BTC and simplifying its usage beyond the realm of cryptocurrency.

Another distinctive feature of ETFs is the potential to popularize the cryptocurrency segment and integrate it into the broader financial market. The rationale behind this lies in the fact that by purchasing shares in Bitcoin ETF funds, users need not immerse themselves in the intricacies of the industry. They simply need to establish a brokerage account and execute transactions through a specialist or company. Analysts assert that this approach will attract a larger number of investors from the traditional fund market and heighten the level of acceptance for Bitcoin.

Therefore, January 11, 2024, marked the initial day when spot Bitcoin ETFs became accessible for trading. Additionally, this milestone witnessed the simultaneous approval of 11 funds that track this new asset class, representing a first in history. Bitcoin ETFs commenced trading on three exchanges.

The trading volume of the new instruments was impressive, exceeding $4.6 billion. However, the price of BTC soon declined to $41.5 thousand as of January 14th, shortly after the launch of spot ETFs. Why did the price of Bitcoin decrease despite the record trading volumes and significant capital inflows?

The reason is that the impact of ETFs is not felt because the funds purchase Bitcoin on the OTC market. This over-the-counter market operates based on pre-agreed prices and does not influence the asset's price. Most funds acquire Bitcoin on the OTC market through Coinbase, and on January 11th, the trading volume of Bitcoin on the Coinbase OTC market reached its second-highest level ever at $7.7 billion. It is likely that we need to wait until the supply on the OTC market diminishes, forcing the funds to buy BTC on the spot market, thereby driving the price upwards.

The beauty of competition lies in the fact that issuers are reducing their fees to make their products more attractive. Overall, this is credited to the SEC, which decided not to give preference to a single fund and approved 11 new assets at once.

The cost of holding spot Bitcoin ETFs can be much lower than in some traditional digital wallets, according to Bloomberg Intelligence analysts. The temporary management fee of 0% may incentivize owners of other virtual assets to exchange them for ETFs to benefit from placing their assets on a regulated exchange.

Out of the 11 approved ETFs, six offer zero management fees under certain conditions. Bitwise, ARK, and WisdomTree waive fees for the first six months and/or upon reaching $1 billion in assets. Invesco also eliminates fees for the first six months and/or upon reaching $5 billion in assets. iShares reduces fees for the first 12 months and/or when assets under management reach $5 billion. Valkyrie waives fees for the first three months.

The Key Advantages of Bitcoin ETFs

The key advantages of Bitcoin ETFs include the convenience and accessibility for traders. Market participants have the opportunity to profit from the market value dynamics of Bitcoin, similar to stocks or other securities, without the need to acquire BTC, use cold wallets, etc.

Another advantage is portfolio diversification when investing in the stock market. Bitcoin is traditionally perceived by conservative investors as a high-risk asset. With spot Bitcoin ETFs, they can diversify their portfolios with the expectation of higher returns compared to other alternatives.

Regulatory protection is also a significant factor. Many investors are deterred by unregulated cryptocurrency markets. Now they can trade desired assets within a clearly defined legal framework. In the United States, the rules of the game will be established by the SEC, and similar approaches are likely to be adopted by other countries.

ETFs provide investors with the opportunity to invest in a basket of assets at once. For example, one can purchase shares in the S&P 500 ETF, which would invest money in the 500 largest American companies. This is more reliable and convenient than buying shares of different companies individually. If some companies in the S&P 500 decrease in price, others are likely to increase, and the investor in the ETF will still make a profit.

What Lies Ahead?

As the spot Bitcoin ETF market is still in its early stages, there are unanswered questions that have yet to be addressed. For instance, the accessibility of ETFs to investors and the ease of accessing them remain uncertain. If these issues are not resolved, the long-term success of ETFs may be hindered.

Partially due to these concerns, Vanguard Group Inc., a brokerage division, has announced that it will not offer Bitcoin ETF trading, while Merrill Edge, a subsidiary of Bank of America Corp., is currently evaluating the possibilities of providing such a service.

However, other platforms are working diligently to swiftly grant access to these new assets. Robinhood Markets Inc., a brokerage company, granted access to all 11 ETFs for its clients in the United States. Charles Schwab has also made ETFs available on its platform.

The next phase in Wall Street's adoption will likely involve the approval of options linked to these ETFs. Investment professionals often favor derivative instruments as a means to speculate on future profits or safeguard against losses. Currently, Cboe Global Markets Inc. anticipates that the SEC will approve options trading later in 2024.

Simultaneously, a few hours after the commencement of ETF trading, the ETF industry submitted a new application for the Grayscale Bitcoin Trust Covered Call ETF, which is designed to track GBTC.

Although it remains uncertain when major distribution platforms will choose to offer Bitcoin spot products, the mere existence of these funds stands as a triumph for cryptocurrencies.

Henry Smith

Author

calendar icon 20.02.2024

Independent financial analyst. He is a financial adviser for a number of investment funds.

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