Key takeaways

  • Bitcoin exchange-traded funds (ETFs) allow investors to securely access cryptocurrencies without having to directly manage their digital assets. The possible approval of Bitcoin Spot ETFs by US regulators has sparked growing optimism in recent months.

  • A US-regulated Bitcoin Spot ETF could potentially improve the accessibility, liquidity, demand and price of BTC, but such innovation would also generate additional costs.

  • Ideally, direct investment in BTC would coexist with various regulated instruments, allowing diverse strategies to be adopted and meeting different investor needs.

A Bitcoin exchange-traded fund (ETF) is a financial instrument that provides safe and regulated exposure to cryptocurrencies while freeing users from having to manage their BTC directly. Similar products already exist in Canada and Europe, and American investors can buy ETFs that track the price of Bitcoin Futures contracts since 2021. One idea has, however, taken root: a regulated ETF in the United States comprising “physical” Bitcoins. » (more commonly known as Bitcoin Spot ETF) could be a real game-changer in the sector.

On paper, the encouraging developments in American regulations have helped fuel investor optimism in recent months. Many observers believe that a turning point is on the horizon: crypto investors should therefore make sure they master the key concepts and are familiar with the potential scenarios that the arrival of a regulated Bitcoin Spot ETF could trigger.

Key definitions

An ETF is a type of financial product that tracks the price of a specific asset, index or basket of assets, and is bought and sold on a stock exchange. Generally, ETFs provide a way to invest in multiple assets while still having the flexibility to trade on a crypto exchange; they are therefore often used by traders to diversify their exposure to the market.

Two main types of BTC ETFs have emerged following the advent of cryptos: Futures ETFs and Spot ETFs. A BTC Futures ETF invests in contracts betting on the future price of BTC and provides exposure to its fluctuations without holding the token itself. A BTC Spot ETF must own the underlying asset and reflect its price more accurately, bringing ownership of its shares closer to owning BTC. We invite you to read this article on Binance Academy for a more detailed comparison of the two ETFs.

Bitcoin trusts are other financial instruments that are somewhat similar, but differ in their structure and operation. A trust acts more like a traditional investment fund and holds actual BTC, with investors owning shares that represent part of the pool of digital assets held by the trust. Unlike ETFs, trusts are subject to premiums or discounts, meaning the price of a stock can deviate significantly from the value of the underlying BTC it represents.

Launched in 2015, Grayscale Bitcoin Trust (GBTC) aspires to become the first publicly traded Bitcoin fund in the United States. Grayscale's application to make GBTC a Spot ETF is still under review by the Securities and Exchange Commission (SEC) as of this writing (early December 2023). The first Bitcoin Futures ETF was launched on the New York Stock Exchange Arca in October 2021, and several such products are now available to US investors. Of all the instruments described in this section, only Bitcoin Spot ETFs remain unavailable, although many believe this could change soon.

Obtain SEC approval

The first of many BTC Spot ETF applications was submitted to the SEC in 2013. The body initially put forward several conditions for approval, including the proper regulation of Bitcoin-related markets and the signing of surveillance sharing agreements to prevent fraud and market manipulation. In the years since, several companies have revised their applications; unfortunately, none of these attempts were successful, and the requests were all either denied due to ongoing concerns, or withdrawn, since a denial was inevitable.

However, the situation began to change in 2023. The SEC's decisions have led many companies to question their merits: why are Bitcoin Futures ETFs allowed, but not Bitcoin Spot ETFs? In August, the US courts appeared to move in this direction when the judge presiding over the Grayscale-SEC case ruled in favor of Grayscale, demanding that the SEC reconsider its decision to deny the conversion of GBTC to the Spot ETF and deeming the differences in treatment “arbitrary and capricious”.

Another important milestone was reached in June when BlackRock, the world's largest asset manager, filed for a Bitcoin Spot ETF. His proposal included agreements to share oversight to prevent fraud and market manipulation to potentially allay the SEC's main concerns. Combined with BlackRock’s excellent track record of approving ETF applications, this dynamic has encouraged other firms to do the same.

All of these developments have fueled optimism in the fall 2023 market, and a wave of companies have refiled previously rejected applications. Expected deflationary pressures following the next halving of 2024 have reinforced this positive sentiment, and market participants are closely monitoring the first signs of a breakthrough as events run their course.

Potential effects

Many investors are wondering about the repercussions of a possible American Bitcoin Spot ETF on the traditional and crypto financial markets, and in the world of blockchain in general. Although these may be difficult to determine, such an innovation could have a significant influence on the price of Bitcoin, demand for digital assets, liquidity and adoption. Above all, the most optimistic expect that the approval of Bitcoin Spot ETFs will further stimulate adoption and innovation in the sector: the legitimization and accessibility of an ETF would attract potentially more crypto investors and with more varied profiles. Although these effects are likely, their magnitude remains difficult to anticipate.

The historical case of gold ETFs is worth reviewing in this context, although it would be unreasonable to expect BTC Spot ETFs to have similar effects. Much like Bitcoin, gold is difficult for the general public to access: specific efforts and resources are required to directly purchase and store these two assets. SPDR Gold Shares (GLD), the first gold ETF in terms of assets under management, was launched in 2004 and quickly accumulated assets with a total value of over $1 billion, a figure which exceeded $50 billion in 2010.

By relinquishing direct ownership of the underlying asset, ETFs are more accessible and allow a wider range of investors to gain exposure to it, in turn increasing demand and liquidity for the asset. active. The rise of gold ETFs has marked a significant turning point in the trading dynamics of this resource, with increased accessibility leading to increased volumes and market liquidity.

The arrival of a Bitcoin Spot ETF in the United States could generate similar benefits and perhaps even usher in a new era of adoption and innovation. Although Bitcoin is often considered the digital counterpart of gold, it is impossible to rely on the history of one asset to predict the future of another. We can, however, draw parallels to get an idea of ​​the potential effects: Let’s take a closer look at the pros and cons of a Bitcoin Spot ETF in the US.

As with gold ETFs, increased accessibility could usher in a new wave of adoption, potentially increasing the price, demand and liquidity of Bitcoin. Additionally, this increase in liquidity and investor diversification could help stabilize Bitcoin price volatility, which would improve market fluidity, predictability, and investor confidence in the asset.

Beyond the dynamics of the BTC market, the approval of a Bitcoin Spot ETF in the United States could be a sign of the legitimization of the crypto sector and signify greater acceptance, credibility and maturity which could amplify them. also innovation and adoption.

A Spot ETF would come with increased regulatory oversight and transparency through standardized reporting that would enhance security and reduce the risk of fraud or theft. The crypto sector would thus gain credibility in the financial world in general and give confidence to a wider audience.

Disadvantages and risks

Despite the ambient optimism regarding the potential approvals of BTC Spot ETFs in the United States, they present risks and disadvantages which should not be overlooked. First, removing direct ownership of Bitcoins would prevent investors from participating in the BTC ecosystem and enjoying the benefits offered by owning a decentralized digital asset.

ETFs could also be sources of additional costs for crypto investors, who would then have to pay management fees that are probably higher than the costs of directly holding Bitcoins. However, many investors should be willing to accept these disadvantages in exchange for the peace of mind that ETFs offer.

Generally speaking, the crypto market is less predictable than more traditional financial markets: as ETFs are intended to follow the price movements of their underlying assets, this volatility would also be reflected in the price of a Bitcoin Spot ETF. In addition, the price of the ETF may deviate from that of Bitcoin due to market forces or administrative issues, which could result in the ETF being overvalued or undervalued relative to Bitcoin.

Finally, the arrival of a Bitcoin Spot ETF would tie BTC even more closely to regulation, making the market more sensitive to political decisions: unfavorable regulatory measures could harm the value of the ETF, and thus lower the price of Bitcoin.

Conclusion

A US-regulated Bitcoin Spot ETF could have a significant influence on the crypto sector and the financial world more generally by potentially boosting adoption, credibility, innovation and regulatory clarity. This advancement would simplify access to crypto markets and allow even less technologically savvy investors to gain exposure to BTC price fluctuations without having to deal with the complexity of managing the token itself. However, as with any emerging investment instrument, the potential drawbacks and risks it poses should not be ignored.

In an ideal scenario, Bitcoin Spot ETFs would become new crypto investment channels. It is likely that direct investment in BTC and the various regulated instruments will coexist and give rise to different investment strategies to meet varying preferences and risk profiles. The advent of US-regulated Bitcoin Spot ETFs will mark the beginning of an exciting new era of adoption and legitimacy, not only for Bitcoin, but also for the crypto universe as a whole.

For more information

  • Bitcoin, a cure for uncertainty? Survey on cryptocurrencies as safe havens

  • Erasing borders: globally harmonized regulation for the digital economy

  • Binance Research: exploring the evolution of Bitcoin

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