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What Is Bitcoin ETF? Why Companies Compete To Launch It?

Why it matters to you:
Crypto market is not only about cryptocurrencies. Crypto-related funds is the next big step for the market: only a small amount of them is officially approved. When the regulators will start giving green lights for the Bitcoin funds en masse, it might influence the cryptocurrencies prices, and you have to be prepared for that.
A look at the history. Why Bitcoin spot ETF approval is importantThe landscape of Bitcoin ETFs: just a “playground” yet2023: BlackRock, ARK Invest, Grayscale start the race. What’s with the hype?Conclusion

Exchange-Traded Funds (ETFs) have become integral components of modern investment portfolios. It is an investment product which unites dozens, hundreds and potentially thousands of individual stocks and is traded as a single stock. These funds offer investors diversified exposure to various assets, such as stocks, bonds, futures – or cryptocurrencies. 

The crypto market witnessed a significant development and gained more attention with the introduction of Bitcoin ETFs. These financial products allowed investors to gain exposure to the world of cryptocurrencies through regulated exchanges. Their introduction is considered to be the next big thing for the crypto market and the investment world in general. But why?

A look at the history. Why Bitcoin spot ETF approval is important

The journey towards approving Bitcoin ETFs has been marked by regulatory scrutiny and complexities. The first attempts to legalize crypto funds started back in 2013 by the famous Winklevoss brothers – these twins were among early BTC mainstream investors and are known to general audience as founders of Gemini exchange. They decided to drive cryptocurrency awareness with the introduction of a regulated fund. 

Several other companies have also applied, following Winklevoss' steps, but since 2013 the US Secutities and Exchanges Commision (SEC) showed concern about the risks of “Bitcoin unregulated nature” and didn’t approve ETFs due to this reason. A lot of companies tried – but with no success. 

In February 2021 the crypto world rejoiced when the first approval of an ETF related to cryptocurrency took place in Canada. It was offered by Purpose Investment and began trading on the Toronto Stock Exchange. This milestone marked a pivotal moment in the cryptocurrency space. Despite the resilience of SEC, the approval and launch of the first Bitcoin ETF happened the same year in US. Starting October 19, the ProShares Bitcoin Strategy ETF (BITO) made its way to NYSE. Today, the crypto world holds its breath while SEC is about to approve new type of crypto-related funds. 

So, what is spot Bitcoin ETF exactly? These types of funds are designed to closely track the actual real-time price of BTC, not the futures. This is fundamentally new and opens a lot of opportunities to institutional investors, and will probably boost the growth of BTC price. Why is that? 

With time, the price of Bitcoin started reacting to the news regarding the ETFs. In March 2017, New York Times reported that the rejecton of Winklevoss ETF application by the SEC influenced the price of BTC which tumbled more than 15% after the news went public. Coincidence or not, but the launch of the first-ever approved Bitcoin ETF in 2021 fell on the biggest bull run of cryptocurrency market, when the price of single BTC stepped over the threshold of $60,000. During November 2021, when SEC approved BITO, crypto market reached its highest peaks ever, when Bitcoin was changing hands for the price close to $67,000.

The market demonstrated that the introduction of such product as exchange-traded fund is very important and long-awaited by serious players. Every news influences the market: the rejection of application pushes it down, but when the positive news about ETFs arrive, the BTC price is about to soar. That’s why the ETFs are so important for the cryptocurrency industry in general and one should check the developments closely in order to jump in when the bull run starts. 

The landscape of Bitcoin ETFs: just a “playground” yet

A comprehensive understanding of the crypto market involves examining the current landscape of funds. As of September 2023, only several Bitcoin ETFs have been approved by the SEC in the United States, obviously the largest and most influential market. The hesitation of regulators to approve ETFs, especially cryptocurrency-based ones, stems from concerns about market manipulation, price volatility, and investor protection. These uncertainties have led to rigorous evaluations before granting approvals.

The notable options are the ProShares funds, mentioned earlier. Additionally, the VanEck (XBTF), Valkyrie (BTF), Simplify PLUS Income (MAXI), and Global X (BITS) are also among the approved. These products offer various strategies and investment approaches, catering to different investor preferences and risk profiles. Their approval has been a significant development in the crypto market, as it currently provides traditional investors to gain some exposure to Bitcoin.  

Table 1. Bitcoin ETFs, traded on US markets

Data of September 24, 2023 (Source: ETF.com)

However, the total assets under management (AUM) of currently approved crypto-related ETFs barely exceeds $1 billion – it isn’t even a 1% of a single large traditional fund – a lot of them exceed $100 billion. The opportunities of Bitcoin fund investment is great: the most part of the traditional investors would like to get exposure to crypto market, but they wait for new funds to be approved. Supposedly, everything is going to change very soon in a positive way.   

2023: BlackRock, ARK Invest, Grayscale start the race. What’s with the hype?  

The pursuit of being the first to list a spot Bitcoin ETF in the US has attracted the participation of major financial institutions in 2023. 

It all rejuvenated with the interest of BlackRock, the world's largest asset manager with over $8 trillion in AUM. Back in the days, CEO of BlackRock Larry Fink used to call Bitcoin “An index for money laundering” – and such a sudden pivot has prompted several other institutions to refile once again. It means that they know something and get prepared. 

The race began in July after BlackRock’s file was formally accepted by the SEC – then followed by the WisdomTree, Fidelity/Wise Origin, Invesco Galaxy, Bitwise – the largest investments companies. Later on, ARK Invest and Switzerland-based 21Shares, a crypto asset management firm, announced their collaborative endeavor. 

Amidst this, probably the most important recent event for the crypto market is the Grayscale case. 

Grayscale runs a largest Bitcoin Trust in the world – it is backed by more that 643,000 BTC in their possession. They want to convert its Trust (GBTC.PK) into an exchange-traded fund, but it was rejected by US SEC a year ago. In March 2023, Grayscale testified before the court that a spot Bitcoin ETF would "better protect investors" with better regulation of the market.

On August 29, US Court of Appeals ordered Grayscale’s petition for review. Grayscale has shown that their proposed Bitcoin ETF is similar to the ones authorized. The court came to the conclusion that the SEC's decision to reject the submission was "arbitrary and capricious". The news immediately affected the market with a BTC price spike. Though the order of the Court itself doesn’t mean anything yet, and Grayscale has to come a long way still – it’s a huge win for the crypto market in general. The verdict could have a role in the choices that the SEC makes about its new plans. 

This case shows that the strict Comission starts losing its grounds. The inevitability of new funds approvals looms in front, and the clock is ticking. In light of the described events, analysts at Bloomberg have raised their expected approval chances for a spot Bitcoin ETF to 75% from 65% this year (or even 95% by end of '24). Meanwhile, K33 analysts believe in their recent report as of September that the market is “fundamentally underappreciating great news” and the approval of new funds could change the sentiment in a heartbeat – the crypto market can start growing any moment.  

Conclusion

The growth trajectory of cryptocurrency funds is highly promising. As regulatory barriers are gradually overcome, and institutional participation increases, substantial inflows into Bitcoin and other crypto assets are anticipated. This influx of capital could lead to further price appreciation and market maturation – perhaps, even in numbers never seen before. 

The introduction of spot Bitcoin ETFs represents a pivotal moment in the cryptocurrency market. Regulatory hurdles persist but are gradually being addressed. The landscape of Bitcoin funds continues to evolve, and the influence of institutional investors is expected to be a driving force in the industry's upcoming crypto market growth. Those who are looking for positive news to buy cryptocurrencies or crypto indexes should closely monitor these developments.

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Published: Sep 24, 2023
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