New bitcoin exchange-traded funds: Can the cryptocurrency break the $100,000 ceiling?

The Security and Exchange Commission’s decision opens up a new market that could accelerate its adoption by retail investors and large funds

Representation of Bitcoin cryptocurrency is seen in this illustration taken January 11, 2024
Representation of Bitcoin cryptocurrency is seen in this illustration taken January 11, 2024.DADO RUVIC (REUTERS)
Leandro Hernández

The cryptocurrency industry has already achieved a new milestone in its short history: the U.S. Securities and Exchange Commission (SEC) has approved a spot bitcoin ETF. This new development adds to the rally that the primary crypto asset has been undergoing since October last year, the price of which remains above $46,000 (€41,800). Asset managers BlackRock, Fidelity, ARK Investment, Invesco, WisdomTree, Bitwise Asset Management, Valkyrie and four others will be able to start listing these funds as of this Thursday.

There are major expectations: Bloomberg Intelligence estimates that this market could reach $100 billion (€91.2 billion) in a short time. However, the real question in the sector is how the price of the currency that reigns supreme in the crypto market will react. For the moment, the reaction has been cautious: in the past day, bitcoin has barely reacted, scarcely surpassing $46,000. But that has not stopped many analysts from believing that the asset could surprise in the coming months. “Surpassing the $100,000 barrier this year is a real possibility,” says Eric Demuth, the co-founder and CEO of the Bitpanda exchange.

Although there are funds that are somewhat similar, like hedge funds, there is no listed instrument with these characteristics on the market. Here are some of the keys to this important industry decision.

What is an ETF?

Exchange-traded funds (known as ETFs) are financial assets that are half stock, half mutual fund. Like equities, they can be bought and sold in the markets in which they are listed. At the same time, they can be invested in a diversified portfolio of stocks, bonds or commodities. The various returns on their assets are reflected together in a single total unit, always according to the proportion of the investment.

Unlike funds, which require a couple of days to execute buy and sell orders, ETFs are traded on open markets, like stocks, which makes them more liquid and transparent. They are one of the financial industry’s most revolutionary inventions in recent decades. The first of these, the S&P 500 Trust ETF from the State Street Global Investors firm, was created in 1993 and remains the world’s largest today, with nearly $400 billion.

How will a bitcoin ETF work?

The new bitcoin exchange-traded funds allow investors to gain exposure to bitcoin values without having to buy or sell the cryptocurrency directly on traditional exchanges, as had been the case until now. The bitcoin spot ETF will fluctuate with the digital asset’s price and replicate its price. If the digital currency rises or falls, the exchange-traded fund does the same.

In this case, the watchdog has been particularly clear about the limits of the new funds. “Today’s action by the Commission is confined to ETFs on a commodity that is not a security, bitcoin. It should in no way indicate the Commission’s willingness to adopt listing standards for crypto asset securities,” Gary Gensler, the chairman of the U.S. Securities and Exchange Commission, emphasized.

What are the advantages for investors?

The main advantage of these investment vehicles is that they diversify portfolios and facilitate exposure to different assets in a single product. The ease of the instrument and the interest of investors have made it “the most disruptive trend in asset management in the last 20 years,” according to the Oliver Wyman consulting firm. According to these experts, over $6.7 trillion is invested through these instruments.

In the case of cryptocurrencies, ETFs will allow interested parties to invest in this asset through the same manager with which they operate in the stock market, for example, without having to open a new account in an exchange.

Does a bitcoin ETF reduce volatility?

Yes and no. Cryptocurrency ETFs are issued by regulated companies operating in normal regulated markets, such as BlackRock and Fidelity, which operate with the approval of the authorities in the countries where they work. In that sense, operations are subject to supervision to avoid fraud, asset laundering or the financing of illegal activities, problems that have plagued the crypto industry in recent years.

However, this new vehicle does not imply a change in the asset’s very nature. “The price of cryptocurrencies entails a high speculative component that may even involve a total loss of the investment,” the National Securities and Markets Commission points out.

What are the disadvantages of ETFs?

Of course, management and trading facilities are not free. Exchange-traded funds have their own fees, which investors would not have to deal with if they had chosen a direct investment in cryptocurrencies. In the long run, these expenses will affect returns compared to owning cryptocurrencies directly and storing them in a portfolio of their own.

In addition, those who hold cryptocurrency investments through a fund will not be able to use them like regular currencies to make payments or purchases, an alternative that has yet to fully take off.

Why has the SEC changed its mind?

The market estimates that the bitcoin ETF’s approval by the U.S. authorities stems from the local Court of Appeals ruling in August, which allows the Grayscale Bitcoin Trust (GBTC) to be converted into a bitcoin ETF. The SEC — which monitors the U.S. market — decided not to appeal the Court’s ruling and took steps toward approval.

But this should not be confused with a change in Washington’s attitude toward cryptocurrencies. Over the past year, the SEC has employed a reactive strategy with the sector, levying heavy fines and sanctions that even rocked Binance, the sector’s largest platform, which has a presence in over 50 countries and over 167 million users worldwide. However, the United States has not moved forward with comprehensive legislation for the sector, something that Europe has done with the approval of the Markets in Crypto-Assets Regulation (MICA).

What are the industry’s expectations?

Following the ripple effects of the fall of FTX, which was the seventh largest cryptocurrency exchange platform, the industry is on the lookout for good news. The rapid rise in prices over the past three months to break through the $45,000 ceiling generated excitement in the sector.

A JP Morgan report, published in November, argues that, rather than attracting new money, the new funds’ approval will likely trigger a reorganization of existing investments within the crypto space. At the same time, it warns that the go-ahead from the authorities does not translate into regulatory relief, especially after the long crypto winter experienced last year.

The players that have dominated the sector so far also celebrated the news. Javier García de la Torre, the director of Binance Spain and Portugal, notes that the announcement “illustrates a new level of acceptance, maturity and generalization of the crypto market.” For the largest global cryptocurrency exchange platform, “direct investment in bitcoin and various regulated instruments will coexist” as the different solutions cater to “different risk profiles and preferences.”

Eric Demuth, the co-founder and CEO of Bitpanda, agrees that exchange-traded funds will make a strong shift and position themselves as “a key tool for institutions and large banks in the United States.” He notes that “over time, the additional liquidity in the system along with other factors, such as Bitcoin’s upcoming halving in mid-April, or the likely fall in interest rates, could lead to a six-figure Bitcoin price in the long term,” Demuth notes.

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