In Jan 2024, the approval of Bitcoin Exchange-Traded Funds (ETFs) by the United States Securities and Exchange Commission (SEC) created significant buzz in the Bitcoin market. At the time many Bitcoin investors believed Bitcoin ETFs could be a “game-changer,” bringing Bitcoin into the mainstream and boosting its price to the next level. On the other hand, some serious Bitcoin advocates argue that Bitcoin spot ETF assets are overhyped and may harm Bitcoin’s fundamental vision.
Through this detailed article, we’ll explore what Bitcoin ETFs are, their benefits, risks, and whether they are helping or damaging the Bitcoin market.
Bitcoin Spot ETFs Origin & Approval
In 2013, Cameron and Tyler Winklevoss, the co-founders of the Gemini crypto exchange, filed their first Bitcoin spot ETF application with the US SEC, but later, the SEC body responded to the application & directly rejected it citing concerns over market manipulation, lack of regulation in Bitcoin markets, and insufficient investor protection. Later many fund managers filed for similar applications but failed to secure regulatory approval from the SEC body.
In 2021, the American securities regulatory body approved the first Bitcoin futures ETF product, which injected a high level of optimism among Bitcoin investors for Bitcoin spot ETF, but the SEC body rejected spot ETF applications back to back.
In late 2022, Grayscale, a popular digital assets fund manager, decided to take legal action against the SEC body following back-to-back rejections of Grayscale BTC spot ETF application, & also secured victory against the securities regulatory body. In the same year, 2023, the world’s top fund manager, BlackRock, entered this game & filed for a Bitcoin spot ETF application. Following BlackRock’s application nearly a dozen of other fund managers also filed for similar applications.
Finally, in Jan 2024, the US SEC approved these applications.
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These funds allow investors to gain exposure to Bitcoin without directly buying or holding it. Instead of dealing with the complexities of owning Bitcoin, investors can buy these ETF funds directly through the regular stock exchanges, just like they would with traditional stocks or mutual funds and the fund issuers use the funds to buy Bitcoin.
These BTC spot ETF products also allow big Investors to allocate huge amounts of capital in Bitcoin, which was not easy before these funds.
Types of Bitcoin ETFs
Currently, Bitcoin spot ETF products are of two types
Spot Bitcoin ETFs:
These hold actual Bitcoin as the underlying asset.
Futures Bitcoin ETFs:
These track Bitcoin prices using futures contracts rather than owning Bitcoin directly.
So we can say that Bitcoin futures ETF products have practically nothing to do with the Bitcoin market.
Bitcoin ETFs are the best investment asset for those who don’t want to take any type of tension related to Bitcoin wallets, private keys, or dealing with unregulated crypto trading platforms.
Visible Benefits of Bitcoin ETFs
1) Accessibility for Traditional Investors
Bitcoin ETF products allow traditional investors to access a crystal clear method to invest in Bitcoin through regular brokerage accounts, about which they are already used to. The origin of these digital assets-based ETF products also eliminated the need for complex learning processes regarding cryptocurrency wallets and exchanges work for investors. In short, it made Bitcoin more accessible to the average person who is not techy enough but wants to allocate his money to the new financial sector.
2) Institutional Adoption
Bitcoin ETFs also played an important role in unlocking the path for institutional investors, like pension funds and hedge funds, to enter the crypto market. It is a basic for any market; when Institutional interest increases, then it helps to inject more money inflow into that market at a rapid rate.
3) Regulated Environment
ETF products operate under very strict financial regulations, which ultimately provide a safer investment method to invest in this unregulated market. So the origin of ETF products for Bitcoin helped to attract a very big number of conservative investors who would otherwise avoid Bitcoin.
4) Liquidity and Simplicity
ETFs are easy to buy and sell, offering liquidity and simplicity. Investors don’t need to worry about transferring Bitcoin or losing access to their funds due to lost private keys.
5) Boosting Bitcoin Awareness
The approval of Bitcoin ETFs by the U.S. Securities and Exchange Commission (SEC), a regulatory body that is known to take strict enforcement action against crypto companies, acted as a catalyst to create a better environment for Bitcoin enthusiasts to promote Bitcoin as a legitimate asset.
Risks and Drawbacks Associated With Bitcoin ETFs
1) Centralization Concerns
Satoshi Nakamoto, an anonymous creator of Bitcoin, designed the Blockchain for the Bitcoin network totally in a decentralized form so that no single entity can control it. However, the presence of Bitcoin raised a very big concern over the actual vision of the Bitcoin creator, as these ETFs are managed by centralized institutions. Big institutions are buying Bitcoin on behalf of ETF product buyers and it could consolidate power into the hands of a few big players.
2) Market Manipulation
Before the origin, many top experts from the regulatory bodies claimed Futures-based Bitcoin ETFs were vulnerable to market manipulation, as large institutions can influence the futures market, potentially causing artificial fluctuations in the trade price, which ultimately results in harm for smaller investors.
3) No Self Custody of Actual Bitcoin
When we invest in any Bitcoin ETF product then it means we are buying a centralised asset, which is issued by a financial institution, which means we don’t own actual Bitcoin. Also we can say we miss out on the benefits of holding Bitcoin directly, such as using it for transactions or storing it as a hedge against inflation. In short, we can say Bitcoin ETFs are only trading assets, not holding assets to fight against inflation.
4) High Fees
Bitcoin ETFs often come with high management fees, which can eat into profits over time. Holding Bitcoin directly is usually cheaper for long-term investors.
5) Limited Impact on Price
Since the inception of bitcoin spot ETF products, the majority of the Investors expect it will drive prices up significantly, their impact has been moderate. This is especially true for futures-based ETFs, which don’t require the fund to buy actual Bitcoin.
How Bitcoin ETFs Benefiting the Bitcoin Market?
1) Increased Legitimacy
The approval of Bitcoin ETF products helped to gain a legal nature for Bitcoin as an asset class. With the approval of these ETFs, many government regulatory bodies indirectly hinted that Bitcoin is being recognized as a valuable financial instrument.
2) New Investor Participation
These ETFs helped to bring new investors into the Bitcoin market, including those crypto sceptics who were previously against cryptocurrencies because of the unclear regulatory nature of digital assets. Overall these Bitcoin ETFs helped to increase people’s participation in the Bitcoin space, leading to higher liquidity and more stable prices.
3) Institutional Capital Inflow
Two years ago, the majority of institutional investors were hesitant to invest in Bitcoin due to regulatory uncertainties around the Bitcoin & Bitcoin market, but after that, these big players are now entering this innovative market through ETFs. Their involvement could bring stability and long-term growth to Bitcoin.
4) Financial Innovation
Bitcoin ETFs represent a step toward financial innovation, integrating the traditional financial market with blockchain & Crypto technology. Entry of Bitcoin in the traditional market via these ETF products helped to increase the inclination of institutional players to invest in those projects which could not only bring a better financial ecosystem in the form of business models but also to fill the gap between traditional finance & crypto finance.
Ways Through Which Bitcoin ETFs Hurting the Market?
1) Detachment from Bitcoin’s Core Principle
Bitcoin was created as a fully decentralized model, to allow people to participate in the Bitcoin network directly without any need of a middleman. It also allows people to use Bitcoin as a form of money in peer-to-peer that eliminates intermediaries like banks.
But with the Increasing adoption of Bitcoin in the form of Bitcoin ETFs, the centralisation of Bitcoin is increasing, which is totally against Bitcoin’s original purpose.
2) Speculation Over Use
Over the last couple of years, it has been found that Bitcoin ETFs encourage hyped-around money inflow in the Bitcoin market rather than the actual use of Bitcoin as a currency or store of value. The majority of Bitcoin enthusiasts believe that such a way of Bitcoin use could slow down Bitcoin’s adoption as a medium of exchange.
3) No Direct Impact on Bitcoin Supply
As we know, Futures-based ETFs don’t buy actual Bitcoin on behalf of the ETF investors, which means they don’t reduce the available supply of Bitcoin. This is a very big concern related to the basic principle of Bitcoin, which limits its ability to drive up prices significantly.
4) Bitcoin Price Volatility Risks
The ETF products based on Bitcoin futures can significantly increase market volatility. As we know, Futures trading is highly speculative and can amplify price swings, which may badly impact the long-term investors. Already Bitcoin faces backslash from the critics because of the volatility in the price issues.
Are Bitcoin ETFs a Game-Changer?
There is no doubt that Bitcoin ETFs have made a positive impact on Bitcoin by opening the door for new investors and legitimizing Bitcoin in traditional finance. Also, these products simplified the investment process in Bitcoin & provided a regulated avenue for big players to gain exposure to Bitcoin.
All these main Bitcoin benefits came with several challenges, like centralization, high fees, and a focus on speculation over utility pose significant challenges.
Bitcoin experts believe for Bitcoin to truly benefit from Bitcoin ETFs, ETFs must coexist with broader efforts to promote Bitcoin’s adoption as a decentralized currency and store of value, instead of a speculative asset.
The Future of Bitcoin ETFs
Future regulatory developments play an important role in the growth & adoption of any space, and this is also true for the Bitcoin ETFs market. Here are a few potential scenarios:
1) Approval of only Spot Bitcoin ETFs
If regulators approve spot Bitcoin ETF products only then it could have a better impact on Bitcoin adoption & its price, as the ETF issuers will be required to purchase actual Bitcoin.
2) More Global Adoption
However, approval of Bitcoin spot ETF in the US jurisdiction acted as a catalyst to create pressure on the other country’s regulatory bodies for similar applications, but still, the majority of the countries distanced from these ETF products, citing different economic environments.
If more countries approve Bitcoin ETFs, their net influence on the Bitcoin market will grow & this could lead to greater global adoption of Bitcoin and other digital assets.
3) Decentralized Finance (DeFi) & Centralized Finance (Cefi) integration
In the future, we may see hybrid financial products that combine the simplicity of ETFs with the innovation of decentralized finance, offering the best of both worlds.
Conclusion: Bitcoin Spot ETFs “A Double-Edged Sword”
Bitcoin ETFs are both a game-changer and overhyped, depending on how we view them. These centralised financial products make Bitcoin accessible to millions of new investors and boost the legitimacy of Bitcoin in traditional finance. However, these products also introduce some risks and several challenges that could undermine Bitcoin’s original vision of decentralization.
The real question is not whether Bitcoin ETFs are good or bad but how they are integrated into the broader crypto ecosystem. With thoughtful regulation, innovation, and education, Bitcoin ETFs can coexist with direct Bitcoin ownership to create a more inclusive and balanced financial future.
Here, we suggest investors follow the approach for Bitcoin ETF investment with caution, understanding both their potential benefits and risks. Whether they are a game-changer or overhyped depends on how they are used and their long-term impact on the Bitcoin market.
Read also: Czech Republic Country’s Central Bank governor considering Bitcoin Investment
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