Why spot Bitcoin ETFS took forever – and became instant hits
THE US Securities and Exchange Commission’s decision to approve exchange-traded funds (ETFS) that invest directly in Bitcoin brought a new wave of investors to the oldest and biggest cryptocurrency.
ETFS have become an enormously popular way for Americans to invest their money in equities, bonds, commodities, currencies and real estate. Spot Bitcoin ETFS from the likes of Fidelity Investments and Blackrock, available since January in the US, are expected to attract many investors who previously kept crypto at arm’s length.
1. What is a spot Bitcoin ETF?
ETFS, a US$7 trillion industry, invest in or replicate the performance of a basket of assets or index. Buying shares in an ETF is easy, as they trade publicly on an exchange all day.
The newly approved spot Bitcoin ETFS actually hold Bitcoin, in contrast to previously available products that invest in Bitcoin futures – contracts to buy or sell an asset at a specified price at a later date.
The SEC had rejected spot Bitcoin ETFS over the last decade. It finally approved them in January.
2. How does a Bitcoin ETF work?
The new Bitcoin ETFS, either directly or through third parties, purchase and hold enough tokens to back the shares they issue. These shares track the ups and downs of Bitcoin’s spot price, according to indexes supplied by companies such as CF Benchmarks. This allows investors to get exposure to the virtual token without needing to buy and safely store Bitcoin themselves or on an exchange.
Issuers work with so-called authorised participants such as trading firms or large banks that create and redeem shares in the ETF as the market demands.
Meanwhile, market makers are on hand to buy and sell ETF shares in a bid to keep the fund’s price as closely tied to Bitcoin’s performance as possible.
3. Why did regulators resist a Bitcoin ETF for so long?
In addition to their worries about liquidity and manipulation, regulators expressed concern that Bitcoin’s volatility might be too intense for ordinary investors – Bitcoin gained 60 per cent in 2021; lost 64 per cent in 2022; and more than doubled in 2023.
The SEC had also questioned whether funds would have the information necessary to adequately value tokens such as Bitcoin, including whether they could validate who owns the underlying coins.
In 2021, SEC chair Gary Gensler testified to the Senate Banking Committee that the lack of regulatory oversight and surveillance in crypto markets had led to “concerns about the potential for fraud and manipulation”. As recently as Jan 9, Gensler posted on the X social platform that crypto assets posed “serious risks”.
In an attempt to allay some of the SEC’S concerns, Blackrock, the world’s largest asset manager, and other issuers proposed so-called surveillance-sharing agreements, a way to mitigate the risk of market manipulation and fraud. Coinbase Inc, the only publicly traded, pureplay spot-crypto exchange in the US, has emerged as ETF issuers’ market surveillance partner of choice.
4. How are the spot Bitcoin ETFS doing so far?
The spot Bitcoin ETFS attracted more than US$4.2 billion in net new flows by mid-february – by all accounts, a strong performance. Bloomberg Intelligence analyst James Seyffart expects the ETFS to gain a total of US$10 billion in net new flows in the first year and says they are “on track to go beyond it”.
5. What’s next?
Issuers are already thinking about which other cryptocurrencies could be the next to gain approval for a spot ETF. Ether and XRP have emerged as potential candidates with the most buzz. The likes of Blackrock and Franklin Templeton have already applied for a spot Ether ETF.