Since 2013, the SEC has rejected numerous applications from asset managers seeking to create bitcoin exchange-traded funds (ETFs), citing concerns about potential market manipulation. However, a court ruling in August ordered the SEC to reconsider its decision to deny Grayscale Investments’ application for a bitcoin ETF.
The SEC approved applications on Wednesday from Fidelity, BlackRock (BLK.N), opens new tab, and ARK Investments, among other companies. The following describes how the products function and the significance of the approval:
WHAT IS THE ETF SUITCASE?
They are going to be listed on the CBOE, NYSE, and Nasdaq. Physical bitcoin acquired from cryptocurrency exchanges and stored with custodians such as Coinbase Global (COIN.O), opens new tab, will make up their assets.
The goods follow a baseline set by bitcoin. Some follow an index that collects trading data from several Bitcoin-USD markets run by major cryptocurrency exchanges and is supplied by CF Benchmarks, a division of the cryptocurrency exchange Kraken.
With Coinbase, the biggest cryptocurrency exchange in the United States, Nasdaq and CBOE have established a market surveillance system in response to the SEC’s worries regarding manipulation.
The fees that issuers intend to charge are far below the average of the broader ETF market, ranging from 0.20% to 0.8%.
IS THIS DIFFERENT FROM OUTRIGHT BITCOIN BUYING?
Indeed. Investors can get exposure to the price of bitcoin without the hassles and hazards of direct bitcoin ownership by purchasing a spot bitcoin exchange-traded fund (ETF). These include creating accounts with cryptocurrency exchanges and wallets, some of which have a history of weak cyber security and are vulnerable to hacking.
The sector has also seen a number of scandals and bankruptcies, such as the collapse of the cryptocurrency exchange FTX, whose creator Sam Bankman-Fried was convicted of fraud.
While other exchanges have been charged with violating US securities laws, the largest cryptocurrency exchange in the world, Binance, recently entered a guilty plea to violating US anti-money laundering rules. Due to all of this, many investors remain cautious.
On the other hand, ETFs are available through ordinary investors’ pre-existing, heavily monitored brokerage accounts since they are listed on strictly controlled stock exchanges.
Additionally, the ETF format makes bitcoin more accessible to institutional investors—some of whom are prohibited from making direct investments in alternative assets.
WHY DOES IT CHANGE FROM CURRENT BITCOIN FUTURES ETFS?
Bitcoin futures ETFs, which track agreements to buy or sell bitcoin at a pre-agreed price, were approved by the SEC in 2021. Unfortunately, many investors find those products less appealing because they don’t accurately track price swings and the expense of rolling over futures contracts might reduce returns.
BITCOIN ETFS ARE SPOTTED IN EUROPE AND CANADA, RIGHT?
Indeed. Nonetheless, the US has the biggest capital market in the world and is home to some of the biggest asset managers and institutional investors worldwide.
WHAT AMOUNT OF MONEY COULD A BITCOIN ETF MAKE?
It’s not clear. Approximately $1 billion worth of shares were traded on the first day of the ProShares Bitcoin Strategy ETF (BITO.P), opens new tab, the first bitcoin futures ETF allowed by the SEC in 2021. Some analysts estimate a spot bitcoin ETF might make three times that amount on its first day of operation. Experts predict the amount may soar to $55 billion in only five years.
Despite the fact that bitcoin has increased in value by 70% after the Grayscale verdict, observers were unsure of how much more might be earned; some predicted that interest rates would become more significant.
But money isn’t the only consideration.
A spot bitcoin ETF is a major victory for the cryptocurrency sector, since it increases the sector’s respectability and advances bitcoin’s acceptance in the general public.
It also coincides with a larger power struggle between the SEC, which has been clamping down on the cryptocurrency industry, and the industry itself. For its part, the industry has won this particular struggle.
Hannah Lang and Suzanne McGee reported from Washington and Providence, respectively. Nick Zieminski and Michelle Price handled the editing.
