Bitcoin and wooden cubes with ETF standing on them
Companies like Fidelity, BlackRock
A bitcoin ETF is a financial instrument that tracks the performance of bitcoin. Investors essentially buy shares of a fund that bases its value on bitcoin. However, these ETFs are typically futures-based, meaning they hold contracts that bet on the future price of bitcoin, rather than holding bitcoin itself.
In contrast, a bitcoin spot ETF tracks the real-time price of bitcoin and is directly backed by bitcoin. The fund holds bitcoin as its underlying asset. Unlike futures-based bitcoin ETFs, spot ETFs aim to provide more accurate price tracking and potentially lower fees because they are directly linked to the current market price of bitcoin. This offers investors a more direct exposure to bitcoin’s price movements.
A key development in this landscape is the upcoming launch of Europe’s first spot bitcoin ETF. Managed by London-based Jacobi Asset Management, this ETF was initially set to debut on the Euronext Amsterdam exchange in July 2022. With approval from the Guernsey Financial Services Commission, the ETF is set to launch later this year.
The United States Securities and Exchange Commission has made a significant move by acknowledging the spot Bitcoin ETF applications from Bitwise, BlackRock, VanEck, Invesco
While these applications haven’t been granted approval yet, the acknowledgement from the SEC suggests that they meet the necessary standards for continued deliberation. Crucially, these developments signifies an increased acceptance of digital assets by regulatory authorities, which could facilitate a broader integration of cryptocurrencies into conventional financial systems.
Bitcoin ETFs are a game-changer in the cryptocurrency landscape. They provide a regulated and accessible investment avenue, potentially drawing in a diverse array of investors – from Wall Street hedge funds to Silicon Valley tech firms, and even everyday retail investors. This could act as a powerful catalyst, thrusting Bitcoin into the “late majority” phase of the technology adoption lifecycle, as outlined in Vijay Boyapati’s article.
Bitcoin mainstream adoption curve
Additionally, bitcoin ETFs could play a pivotal role in bolstering liquidity within the bitcoin market. The demand for ETF shares, which is a reflection of investor sentiment, could trigger an uptick in trading activity. This increased activity could foster a more stable and mature market environment for the cryptocurrency. This viewpoint is reinforced by a report from J.P. Morgan, which suggests that the approval of bitcoin ETFs could significantly amplify bitcoin’s liquidity, marking a noteworthy development in the cryptocurrency market.
The top eight financial institutions with an interest in cryptocurrencies manage a staggering $27 trillion in combined assets. These institutions, which include BlackRock and Fidelity, are actively working to provide clients with exposure to bitcoin and other cryptocurrencies. Considering bitcoin’s current market cap is around USD$600 billion,
even a small fraction of the money managed by these institutions flowing into bitcoin could significantly increase its demand and potentially drive up the price. This underscores the potential impact of bitcoin ETFs on the cryptocurrency market.
Bitcoin spot ETFs, while providing direct exposure to bitcoin’s price, carry risks. Investors must trust the ETF provider to buy and safely store bitcoin, posing fraud and mismanagement risks. ETF customers must trust the provider to securely store bitcoin as they don’t own the actual bitcoin but shares in a fund who controls the keys to the bitcoin, introducing storage and operational risks.
Bitcoin investment from large traditional financial institutions, such as BlackRock, could pose significant risks to centralisation of power. For example, in the event of a blockchain fork an institution could potentially dictate which version of bitcoin is the “real” one, regardless of the consensus among other, smaller investors or bitcoin users. This could lead to drastic market implications, including the potential devaluation of the unselected bitcoin variant
The bitcoin whitepaper emphasizes the trust required in third parties for transaction verification. This trust is eliminated in bitcoin’s peer-to-peer network, where transactions are publicly announced, and nodes work collectively to reach a consensus, reducing the need for trust. However, with bitcoin ETFs, this trust in third parties is reintroduced, contradicting bitcoin’s original design.
Bitcoin spot ETFs present significant opportunities for the crypto market, including mainstream adoption, increased liquidity, and new revenue opportunities for advisors. However, they come with risks, particularly third-party risk. Despite these concerns, for entities like investment funds, pension funds, or financial advisors, bitcoin ETFs likely provide a more straightforward route for incorporating bitcoin into their portfolios.