In a landmark decision, the Securities and Exchange Commission (SEC) approved 13 applications to create a spot Bitcoin (BTC -1.83%) exchange-traded fund (ETF). With the inability to purchase Bitcoin directly, the spot ETF is heralded as the mechanism that will allow deep-pocketed institutions to gain Bitcoin exposure.
Now that Bitcoin has a home on Wall Street, a new chapter has begun in the cryptocurrency's historic story. Here's what every Bitcoin investor needs to know about this momentous event.
Image source: Getty Images.
Understanding the current landscape
To grasp the importance of this ruling, it's best to start with a little history. The crypto market has been eagerly waiting for the approval of a spot Bitcoin ETF for quite some time. Since the initial attempt to establish a spot Bitcoin ETF in 2013, there have been several other submissions, all of which were denied by the SEC.
The allure of a spot Bitcoin ETF lies in its distinctive functionality compared to existing investment instruments. Before their approval, investors could only gain exposure to Bitcoin indirectly through futures ETFs or trusts. However, these alternatives had limitations.
While functional, futures ETFs failed to precisely mirror Bitcoin's performance, as they relied on derivative contracts projecting its future movements. Similarly, trusts encountered challenges since their managers couldn't engage in the direct buying or selling of actual Bitcoins to rebalance the funds.
In contrast, a spot Bitcoin ETF empowers sponsors to directly transact Bitcoins, ensuring a direct alignment between the ETF's price and the actual market value of Bitcoin.
Where we are today
In June 2023, the world's largest asset manager, BlackRock (BLK 0.69%), made headlines when it became known that it applied to sponsor a spot Bitcoin ETF. Several other firms threw their hats in the ring in the following days and weeks, hoping to get a share of the Bitcoin pie.
While applications were reviewed individually, the SEC approved more than a dozen simultaneously to avoid giving any firm a head start. The list of approvals includes the likes of BlackRock, Invesco, Franklin Templeton, VanEck, Ark Invest, and many others.
All the applications share similar structures, with only minor nuances distinguishing them, such as lower fees or different redemption options. But they all share a common feature: the capability for firms to actively buy and sell Bitcoins, ensuring the efficient balancing of funds and effective tracking of Bitcoin's market value.
What to expect
For years, institutions like BlackRock were hesitant and dissuaded from entering the Bitcoin market due to a lack of clear legislation and ambiguous accounting standards. However, with the creation of a spot ETF and a green light from the SEC, investment firms can now offer Bitcoin exposure to clients confidently, since ETFs are standard financial instruments with more clarity around their management.
Furthermore, approval of spot ETFs is viewed as a way to democratize access to Bitcoin. Previously, the only way to gain direct exposure to Bitcoin was by purchasing it from a cryptocurrency exchange. Requiring significant technical aptitude, this likely hindered Bitcoin's widespread adoption. But now each ETF has its own unique ticker and trades on the stock market like any other equity, giving investors accessible Bitcoin exposure without needing any additional technical know-how.
More importantly, now Bitcoin can be easily added to pension funds, individual retirement accounts, and 401(k)s by investors and money managers. And here lies the multibillion-dollar opportunity that many Bitcoin advocates have been touting.
Assets managed by registered investment advisors total nearly $48 trillion. If just a fraction of this capital were to flow into Bitcoin, it could send its price to new highs. Estimates vary, but some analysts project these ETFs could attract up to $100 billion in capital by the end of the year alone.
What a Bitcoin ETF future will look like
Overall, the approval of these ETFs is undoubtedly a positive development for Bitcoin and the digital asset market as a whole. In the coming years, these ETFs will likely grow in popularity as investors seek the benefits that Bitcoin provides to portfolios. However, unlike much of the wishful thinking that is rooted in the euphoria of approval, this will likely be a gradual process, not something that happens overnight or even with 2024.
Regardless of whether this turns out to be a classic "buy the rumor, sell the news" event, what is more certain is that the arrival of Bitcoin ETFs means that additional demand will now be forced to compete for its finite supply of just 21 million. As Bitcoin begins its new journey on Wall Street, there is little doubt its best days are yet to come.
