The new spot Bitcoin (BTC -1.01%) ETFs are arguably one of the most important product launches on Wall Street in the past 30 years. In less than three months, they have already attracted nearly $30 billion from investors, and daily inflows on some days have been more than $1 billion.
Over the short term, these new spot Bitcoin ETFs will help to popularize the idea of cryptocurrency as a stand-alone asset class that deserves a place in your portfolio. Over the longer term, they could serve as the gateway to entirely new types of crypto investment opportunities. Let's take a closer look.
Exotic cryptocurrency ETFs
Most likely, Wall Street firms will continue to explore other types of crypto ETFs they can offer customers. If you think of the current batch of spot Bitcoin ETFs as the "vanilla" form of what Wall Street can offer, then we could soon see more exotic ETFs. There have already been applications for "inverse ETFs" that gain in value if the price of Bitcoin falls, as well as "leveraged ETFs" that enable investors to amplify their Bitcoin gains.
The early success of the spot Bitcoin ETFs could lead to similar products for other popular cryptocurrencies. For example, we could see the approval of a new spot Ethereum (CRYPTO: ETH) ETF sometime this year. If that gets approved, Wall Street might go hunting for other cryptocurrencies that are ripe for an ETF. Already, there have been murmurs about spot ETFs for both XRP (CRYPTO: XRP) and Solana (CRYPTO: SOL).
Tokenized assets
That's just scratching the surface of what's possible. Back in January, BlackRock (BLK -0.21%) CEO Larry Fink told CNBC that the new Bitcoin ETFs could be the stepping stones to asset tokenization. This is a trend that has been discussed for several years, and might just end up becoming one of the biggest transformational changes in Wall Street history. Citigroup projects asset tokenization to be a $4 trillion market opportunity by 2030, while the Boston Consulting Group (BCG) has identified this as a $16 trillion opportunity.
Basically, asset tokenization refers to the process of converting traditional assets such as stocks and bonds into digital assets that live on the blockchain. On the surface, that might sound a bit redundant. But there are several big advantages.
By tokenizing assets, you can potentially improve transparency, liquidity and yield, while also reducing transaction costs. Moreover, it makes it a lot easier to track who owns what, given the properties of distributed ledger technology.
Image source: Getty Images.
As a proof of concept, BlackRock recently launched a tokenized asset fund on the Ethereum blockchain. The BlackRock USD Institutional Digital Liquidity Fund ("BUIDL") will be backed by a mix of cash, U.S. T-bills, and repurchase agreements. Right now, it looks like the total value of the fund will be $100 million, and access will remain highly limited to qualified investors.
After investing in the fund, institutions will receive a crypto token (called BUIDL) that has some very interesting properties. You can think of it as a stablecoin pegged to the U.S. dollar that is also capable of paying out a daily yield. You can also think of it as a synthetic dollar-denominated asset that is native to the blockchain. In short, it's a hybrid of both traditional finance and decentralized finance (DeFi).
Decentralized finance
Right now, DeFi is the exclusive domain of crypto enthusiasts and highly sophisticated investors, so the goal is presumably to make this niche of the crypto world more mainstream. The company to watch here is Coinbase Global (COIN -7.68%), which created its very own blockchain (Base) last summer. This made Coinbase the first publicly traded corporation with its own private blockchain.
One goal of Base is to onboard customers to the world of DeFi without requiring them to know anything at all about DeFi. An example here is the so-called "Magic Spend" smart contract being created by Coinbase that will enable customers to gain access to DeFi investment opportunities (such as crypto staking) using cryptocurrencies they already own.
But will the SEC approve these products?
The only caveat, of course, is that the SEC could choose to get involved at any moment. It's one thing to launch a vanilla ETF, but another thing entirely to launch exotic crypto investments that might end up burning the uninformed investor. For example, if the SEC doesn't like the idea of crypto staking, it's hard to see how they're going to sign off on something called "Magic Spend."
As a prudent investor, you should certainly do your own due diligence before investing in any of these new products. Given that some of these products blur the line between traditional finance and decentralized finance, you need to fully understand what you're buying.
That being said, the new spot Bitcoin ETFs are an exciting first step. There's a lot more to come. For now, the companies I'm keeping an eye on are BlackRock and Coinbase. They seem to be at the forefront of what's happening next in the race to create entirely new digital assets.
