The United States Securities and Exchange Commission (SEC) has approved exchange-traded funds (ETFs) that follow the price of bitcoin, a game changer for the cryptocurrency industry, which has been trying to launch such a product for more than ten years.

Multiple asset managers have applied for bitcoin ETFs since 2013, but the SEC has rejected them on the grounds that they are prone to market manipulation. In August, however, a court ruled that the SEC was incorrect in rejecting Grayscale Investments’ bitcoin ETF application, compelling the agency to reconsider its position.

The SEC authorised applications from ARK Investments, BlackRock, and Fidelity, among others. Here’s how the items work and why approval is so important:

They’ll be listed on Nasdaq, NYSE, and CBOE. Their assets will include physical bitcoin purchased from cryptocurrency exchanges and stored by custodians such as Coinbase Global.

The products follow a Bitcoin benchmark. Some investors follow an index provided by CF Benchmarks, a subsidiary of cryptocurrency exchange Kraken, which collects trading data from numerous Bitcoin-USD markets run by major cryptocurrency exchanges.

To address the SEC’s worries about manipulation, Nasdaq and CBOE collaborated with Coinbase, the largest cryptocurrency exchange in the United States, to establish a market surveillance mechanism.

Fees will range from 0.20% to 0.8%, which is significantly lower than the ETF market average.

Is it different from buying Bitcoin outright?

Yes. A spot bitcoin ETF offers investors to acquire exposure to bitcoin’s price without the hassles and hazards associated with direct ownership of bitcoin. Those include creating crypto wallets and accounts with cryptocurrency exchanges, some of which have poor cyber security reputations and are vulnerable to hacking.

The business has also seen a number of bankruptcies and controversies, notably the implosion of crypto exchange FTX, whose creator, Sam Bankman-Fried, was found guilty of fraud.

Other exchanges have been accused of infringing US securities rules, while Binance, the world’s largest cryptocurrency exchange, recently pled guilty to violating US anti-money laundering regulations. All of this has left many investors concerned.

ETFs, on the other hand, are listed on highly regulated stock exchanges and may thus be accessed through ordinary investors’ current brokerage accounts, which are likewise rigorously monitored.

The ETF structure also makes bitcoin more accessible to institutional investors, many of whom are forbidden from investing directly in alternative assets.

Why is it different from existing Bitcoin Futures ETFs?

In 2021, the SEC approved a bitcoin futures exchange traded fund (ETF), which tracks agreements to purchase or sell bitcoin at predetermined prices. However, those products do not accurately track price fluctuations, and the expense of rolling over futures contracts can reduce returns, making them less appealing to many investors.

Aren’t there spot Bitcoin ETFs in Canada and Europe?

Yes. However, the United States is the world’s largest capital market, with some of the world’s largest asset managers and institutional investors.

How Much Would a Bitcoin ETF Bring in?

It is unclear. The ProShares Bitcoin Strategy ETF, the first bitcoin futures ETF approved by the SEC in 2021, saw around $1 billion worth of shares traded on its first day, and some analysts predict a spot bitcoin ETF might earn three times that amount on its first day. Some experts believe the sum might rise to $55 billion over the next five years.

While bitcoin has increased by 70% since the Grayscale verdict, economists believe it is uncertain how much further it could grow, with some predicting interest rates will play a larger impact.

But it’s not just about money.

A spot bitcoin ETF is a significant win for the cryptocurrency industry, enhancing its legitimacy and propelling bitcoin farther into the mainstream.

It also comes amid a larger tug-of-war between the cryptocurrency business and the SEC, which has been tightening down on the sector. When it comes to this specific war, the industry can declare success.

(Adapted from Reuters.com)

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