For most of its existence, the cryptocurrency industry has operated in an unregulated environment. While this has been positive for fast innovation, the consequences far outweigh the benefits, as institutions have been reluctant to risk their good regulatory standing by aligning themselves with blockchain and cryptocurrencies. Fortunately, a solution seems imminent: spot cryptocurrency ETFs. In this article, we’ll explore these ETFs, how they facilitate adoption, and what they mean for the market’s future.
An ETF, or exchange-traded fund, is an investment asset traded on stock markets. They typically hold a wide variety of assets and aim to track the performance of a specific index. For example, some ETFs attempt to track the entire stock market, either for a country or the world. A spot ETF, specifically, is an ETF that is required to hold an asset and derives its value directly from the performance of the underlying holdings of the ETF. Up until now, the only cryptocurrency ETFs have been future-based, meaning they track the price of the future price of an asset using contracts instead of holding the underlying asset itself. Practically, this means they derive value from speculating on the future price, which has a different risk level and audience.
Since Bitcoin futures ETFs don’t require the fund manager to hold Bitcoin, they have little to no effect on the spot price. They also have not seen mass adoption, with only about $1 billion in investment since their inception around 2020. Until now, spot ETFs have not been approved by the U.S. Securities and Exchange Commission due to concerns about the unregulated nature of cryptocurrencies and the potential for market manipulation. Since futures contracts trade on a future price, this is less of a concern, and they are also regulated under a different set of rules and guidelines.
For several years, some of the world’s biggest management companies and funds have petitioned the SEC numerous times to approve a spot Bitcoin ETF, none of which have ever been approved. One recent filer was Blackrock, the world’s largest asset manager with over 9 trillion dollars in assets under management. Grayscale, another of these companies, has had a Bitcoin Trust product available for the past several years. It holds Bitcoin and allows anyone to access the product through their brokerage accounts under the GBTC ticker. Due to how the legal structure of a trust works, there is no way for the normal investor to redeem GBTC for Bitcoin — this fact, along with the 2% annual management fee, causes GBTC to trade at a price around 10% lower than the amount of Bitcoin held in the trust. According to their court documents, Grayscale owns over 3% of the overall Bitcoin supply — a massive amount.
In 2022, Grayscale sued the SEC after the SEC denied Grayscale’s attempt to convert GBTC to an ETF. On August 29th, one United States Court of Appeals in Washington D.C. unanimously ruled in favor of Grayscale. This is a significant step in getting spot ETFs finally approved for the market after several years of attempts but it is far from approval for an ETF. Now, the SEC has to re-evaluate Grayscale’s application but cannot use potential fraud or manipulation as the reason for denial. Additionally, the SEC has 45 days to appeal the decision, which could happen.
If one or many spot ETFs are approved, it would pave the path for traditional investors to gain direct exposure to cryptocurrencies in a way that could move the price. Given the tens of trillions of dollars in these investment vehicles, any level of interest could cause serious movement in both the market capitalization and perceived legitimacy of the crypto markets. For the first time, Bitcoin could truly be a hedge against fiat currencies and other assets in the portfolios of large companies and products.
Though an ETF may still be a year or so away, we are closer than ever to the mass adoption that such a product would enable. The ability of traditional investors, whether retail, commercial, or institutional, to gain exposure to Bitcoin in their portfolios without having to deal with custody or regulatory concerns would be one of the most significant financial events in the history of cryptocurrency. Only time will tell if an ETF actually happens, but the future is looking bright for blockchain.
By Lincoln Murr