Following a notable shift in stance by Securities and Exchanges Commission (SEC) Chair Gary Gensler towards a Bitcoin Exchange-Traded Fund (ETF), many observers are now viewing this development as imminent, with some predicting approval within the coming weeks. This wave of speculation has triggered a sustained uptick in Bitcoin’s price and has had a ripple effect across the entire cryptocurrency landscape. However, the broader implications for the industry over the long term are worth examining.
An ETF is a financial instrument granted permission for trading on exchanges under SEC regulation. While the terms “ETF” and “ETP” (exchange-traded product) are often used interchangeably, ETPs encompass a broader category of products traded on regulated exchanges. In contrast, ETFs specifically refer to funds traded on the same exchanges.
In the United States, there already exist Bitcoin ETFs, albeit not of the spot variety; these are futures ETFs. The crucial distinction is that futures ETFs hold derivatives, specifically futures contracts of Bitcoin, rather than the actual cryptocurrency itself. A spot Bitcoin ETF, conversely, must hold physical Bitcoin as its underlying asset.
Although Bitcoin will increase in value after the approval of a spot ETF, it doesn’t mean that other cryptocurrencies will lose out. As Simon, our CTO, explains, “Recently, we have experienced high levels of Bitcoin dominance in relation to altcoins. The normal flow of capital goes to Bitcoin and then cycles to the altcoins after some time. This means that a sustained increase in the price of BTC will eventually lead to higher prices overall within the crypto space.”
The implications of a spot Bitcoin ETF approval extend well beyond price dynamics, as outlined by our CEO, Deniz, “I believe that the creation of a spot Bitcoin ETF will be a major milestone in the history of cryptocurrency. This event will signal a new precedent in the way institutional investors think about allocating to Bitcoin. The spot Bitcoin ETF could also be a spark for mass adoption, as there would be financial advisors around the country who would recommend that their clients invest a percentage of their portfolio into the ETF. “
Spot ETFs hold particular significance for the crypto market by enabling everyday American citizens to gain SEC-approved exposure to cryptocurrencies. This becomes especially pertinent when considering the substantial number of individuals with retirement funds or 401(k) accounts.
Under the present regulations, 401(k) funds can’t be invested directly in crypto; they can, however, be invested in securities that are traded on exchanges. The only way most US citizens can invest their 401Ks into crypto is through buying shares in companies like Microstrategy or Coinbase that hold or are involved in crypto.
Since the crypto aspect of these investments is only part of the overall business activities, it’s less than 100% exposure to crypto, unlike an ETF. As such, the approval of a Bitcoin spot ETF is likely to cause a surge in people moving their investments from standard shares to Bitcoin.
This potential mass migration could be a contributing factor behind the SEC’s cautious approach. Concerns exist that entities running these funds, without substantial prior experience in market stabilization, might inadvertently trigger price surges and introduce heightened market volatility.
One of the SEC’s primary mandates is to foster market stability. Hence, they may have been awaiting applications from larger, more experienced institutions capable of mitigating market turbulence effectively.
Enterprises like BlackRock, renowned for their expertise in managing ETFs and skill in balancing supply and demand to reduce market volatility, might hold the key to a smoother transition. Rather than a clandestine maneuver, this could be a pragmatic approach to ensuring that spot ETF approval does not disrupt the broader financial system.
Should BlackRock gain approval and enter the crypto space more fully, this could significantly affect regulations. As Wilson, our COO, points out, “BlackRock has massive authority over the finance sector and government policy. With the likely approval of the spot Bitcoin ETPs on the horizon, this paves the way for US regulations to enter the crypto space.
While this could be good news, we must remain vigilant in the details of these laws. If proposed regulations attempt to take away fundamental principles of Bitcoin, then we must unite and influence lawmakers to implement regulations that keep the blockchain freedoms we cherish.”
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