Digital Currency Milestone Moment! SEC Approves Bitcoin Spot ETF

The U.S. Securities and Exchange Commission (SEC) approved Bitcoin spot ETFs for the first time in history, authorizing 11 ETFs to begin trading on Thursday. The U.S. SEC’s approval is a rare compromise. For 10 years, current SEC Chairman Gensler and his predecessor Clayton refused to allow such products to be launched.

What is a Bitcoin ETF

Before discussing Bitcoin ETFs, we need to first understand what ETFs are.

ETF (Exchange-Traded Fund), the full name is exchange-traded fund or index stock fund. It is an investment tool that is a fund product formed by combining multiple assets (such as stocks, bonds, commodities, etc.) to track changes in the “underlying index” and can be listed and traded on the stock exchange. Investors can buy and sell “underlying index” ETFs as simply as buying and selling stocks.

The Bitcoin ETF specifically tracks the price of Bitcoin. Its price and volatility are closely tied to the Bitcoin market price and volatility. Bitcoin ETFs allow investors to participate in Bitcoin investments through securities accounts without directly purchasing and keeping Bitcoins, which greatly lowers the threshold for traditional institutions and ordinary investors to invest in Bitcoins. In addition, Bitcoin ETFs can provide more liquidity and transparency, as well as more convenient ways to trade.

Types of Bitcoin ETFs

Bitcoin ETFs are mainly divided into ETFs backed by physical objects (spot Bitcoin ETFs), ETFs backed by synthetic assets (futures Bitcoin ETFs) and other types.

The first category is the physically-backed Bitcoin ETF, which tracks the spot price of Bitcoin. Actual Bitcoins are purchased and held by asset managers, with ownership of those Bitcoins expressed in shares of the ETF. By purchasing shares of an ETF, investors indirectly own Bitcoin. This approach allows individuals to gain exposure to crypto assets without the costs and risks associated with directly owning Bitcoin.

The second category is synthetic asset-backed Bitcoin ETFs, which track the price of Bitcoin derivatives, such as Bitcoin futures or other crypto trading derivatives. The U.S. Securities and Exchange Commission (SEC) has approved a number of Bitcoin futures ETFs. For example, on October 19, 2021, the first Bitcoin futures ETF in the United States, the ProShares Bitcoin Strategy ETF (BITO), was listed for trading, which tracks the price of BTC futures contracts traded on the Chicago Mercantile Exchange (CME). In this case, the ETF’s share price reflects the price movements of these derivatives, rather than the actual Bitcoin price itself.

Unlike ETFs that track the spot price of Bitcoin or are based on Bitcoin futures contracts, the third category of Bitcoin ETFs are issued with shares backed by holdings of Bitcoin-related companies. Compared with the above two types of Bitcoin ETFs, the third type of Bitcoin ETF is relatively niche.

Seeking SEC Approval

The SEC received the first spot BTC ETF application in 2013, and numerous others soon after. At the outset, the SEC outlined a number of requirements for clearance, such as closely monitored bitcoin-related marketplaces and agreements for surveillance sharing to thwart fraud and manipulation of the market. A number of firms submitted updated applications in the years that followed. Sadly, the results of these endeavors were often the same: withdrawal in fear of rejection or denial because of lingering worries.

Still, things started to change in 2023. The SEC’s rulings left many perplexed since it was not evident why spot ETFs were prohibited yet futures bitcoin ETFs were permitted. This idea appeared to be supported by U.S. courts in August, when the judge overseeing Grayscale’s case against the SEC ruled in favor of Grayscale, ordering the SEC to reevaluate its decision to reject converting GBTC to a spot ETF and declaring the SEC’s treatment of Grayscale to be “arbitrary and capricious.”

The filing for a spot bitcoin ETF by BlackRock, the largest asset manager in the world, in June marked another significant milestone. In order to discourage fraud and market manipulation, the plan includes agreements for surveillance-sharing, which might allay the main concerns raised by the SEC. When combined with BlackRock’s impressive record of approving ETF applications, this initiative inspired other businesses to do the same.

All of these changes have increased market confidence in the fall of 2023 and led to a rush of businesses resubmitting applications that had previously been turned down. The good picture was reinforced by anticipated deflationary pressures from the impending halving in 2024. The market is closely monitoring these developments for any indications of a breakthrough.

Pros and Cons of Bitcoin ETFs

Pros

  1. Lower the threshold for institutions and ordinary investors to invest in Bitcoin. Compared with traditional financial markets, the way to invest in Bitcoin is more complicated, requiring investors to purchase, store and keep Bitcoins on their own, which poses certain thresholds and risks for some institutional and individual investors from traditional financial markets. Spot Bitcoin ETFs can be traded through exchanges, making it easier for investors to establish Bitcoin positions. They can participate in Bitcoin investments like buying stocks without incurring additional learning costs, and investors no longer have to worry about private keys. , storage or security issues.
  2. Bringing more liquidity and stability to the crypto market. The listing and trading of spot Bitcoin ETFs can increase the recognition of Bitcoin in the traditional financial market and further promote the popularity and application of Bitcoin. This can attract more traditional investors to participate, thus increasing market liquidity. In addition, ETFs also increase the transparency and stability of the crypto market, reduce the risks of crypto investments, and help promote the development of the cryptocurrency market.
  3. Accelerate the compliance process in the crypto market. Bitcoin ETFs operate within a regulatory framework, making them a relatively safer and more protected investment option than trading cryptocurrencies directly. This will help drive the growth of Bitcoin and other cryptocurrencies and provide a positive boost to their acceptance in traditional financial markets.

Cons

  1. Investors in cryptocurrency ETFs do not actually own the underlying cryptocurrency, which means they enjoy the convenience of decentralized finance and cannot enjoy different goods and services by leveraging cryptocurrencies.
  2. Some ETFs that are niche or have small trading volumes may have large bid-ask spreads, which may result in higher costs and greater risks for investors when buying and selling. Additionally, Bitcoin futures ETFs that rely on derivatives markets may pose additional risks due to a lack of transparency in their operations.
  3. Investing frequently in small amounts in ETFs may result in higher transaction costs compared to investing directly in Bitcoin. In addition, Bitcoin ETFs require the use of complex technical systems for trading and settlement and may face technical risks.

Conclusion

The cryptocurrency market and the larger financial scene might be greatly impacted by a U.S.-regulated spot bitcoin ETF, which could lead to more adoption, legitimacy, creativity, and regularity clarity. A breakthrough of this kind would make it easier for investors who aren’t as tech-savvy to access cryptocurrency markets and benefit from swings in BTC prices without having to deal with the hassles of holding cryptocurrency themselves. Like any new investment instrument, there are dangers and drawbacks that we must overlook.

Spot bitcoin ETFs would, in an ideal world, replace the current cryptocurrency investing options. It is probable that direct investing in Bitcoin and other regulated products will coexist, allowing for a range of investment methods and accommodating different risk appetites and inclinations. The introduction of spot bitcoin ETFs subject to U.S. regulation will herald an exciting new age of legitimacy and adoption for both bitcoin and the larger cryptocurrency market.

 

 

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