Bitcoin ETFs are approved! Here’s everything you need to know

By now you’ve already heard about the approval of spot Bitcoin exchange-traded products, more commonly referred to in the mainstream and social media as “ETFs” (“exchange-traded funds”).

You probably also heard about the shenanigans yesterday when the governing body for this type of thing, America’s Securities and Exchange Commission (“SEC”), released a tweet seemingly announcing the approval of the ETFs. This tweet turned out to be erroneous, the result of the SEC’s account becoming “compromised”, and it caused quite a stir in the Bitcoin price!

As is often the case with anything Bitcoin, events proceeded along soap opera lines with today’s almost reluctant approval by the SEC. They went to pains to point out that while Bitcoin ETFs are now allowed to proceed, this did not represent an endorsement of Bitcoin, and that investors should remain “cautious about the myriad risks” associated with the asset.

Let’s investigate what the approval means for everyday investors, and whether it will be a good or bad thing for the world’s original digital currency.

Why the change of heart?

I said “reluctant” because the SEC has knocked back several Bitcoin ETF applications within the last decade. Today’s change of tack comes after considering developments in US courts regarding the Commission's rejection of crypto asset manager Grayscale’s application to convert its Grayscale Bitcoin Trust into an ETF.

In that case, the U.S. Court of Appeals for the District of Columbia held that the SEC failed to adequately explain its rationale for denying the application. Basically, the SEC was called out by the courts for its obstinate (and ambiguously justified) stance on the concept of a Bitcoin ETF. Given the industry has continued to bang away with applications, the SEC has decided it’s best to step out of the way.

What did the SEC actually approve?

According to SEC Release No. 34-99306, the following 11 spot bitcoin ETFs have been granted accelerated approval:

• NYSE Arca: Grayscale Bitcoin Trust, Bitwise Bitcoin ETF, Hashdex Bitcoin ETF

• Nasdaq: iShares Bitcoin Trust, Valkyrie Bitcoin Fund

• Cboe BZX Exchange: ARK 21Shares Bitcoin ETF, Invesco Galaxy Bitcoin ETF, VanEck Bitcoin Trust, WisdomTree Bitcoin Fund, Fidelity Wise Origin Bitcoin Trust, Franklin Bitcoin ETF

The SEC hopes that by approving this many Bitcoin ETFs all at once, it will help create a “level playing field” in the market which would promote “fairness and competition” thus “benefiting investors and the broader market”.

Reducing the risks

The SEC promised it would do its part in scrutinising Bitcoin ETF providers, noting all providers would be required to provide “full, fair, and truthful disclosure” about their products to investors.

But there are many other protections already built into the financial system, which are afforded to investors in ETFs. Whilst Bitcoin is an unregulated “non-security” as the SEC puts it, ETFs are not. To put this another way, ETFs are securities, and as securities, they are heavily regulated. Bitcoin investors were always going to enjoy these protections – and this is a major reason the SEC’s reluctance to approve them up until now was seen by many as excessive.

Bitcoin ETFs will be subject to strict oversight by both the SEC and the exchanges they’re listed on. As a result, there are plenty of built-in protections for investors, including:

• The onerous disclosures typically included in public registration statements and required periodic filings.

• Regulated exchanges are required to have rules designed to prevent fraud and manipulation.

• Regulated exchanges themselves are closely monitored by the SEC to ensure they enforce exchange rules.

• The SEC has the power to investigate fraud or manipulation in the securities markets including schemes that use social media platforms.

• Broker-dealers who recommend Bitcoin ETFs to retail investors have a fiduciary duty under the Investment Advisers Act for investment advisers

Will the approval of ETFs be good or bad for Bitcoin?

The benefits of Bitcoin ownership are well beyond the scope of this article, and perhaps I’ll do a ChartWatch on the topic soon. Today I simply wish to focus on what impact the ETF approvals might have on the Bitcoin price, and whether this might even trigger you to consider investing in a Bitcoin ETF!

The obvious reason you’d want to buy a Bitcoin ETF is because you expect the price of Bitcoin to rise. So, is today’s development a positive or negative thing for the Bitcoin price?

Reasons the approval could be good for Bitcoin:

• ETFs are big business! Close to US$8 trillion is invested in ETFs globally, so Bitcoin is now on the radar of many more investors, it’s also getting plenty of great free press like this article!

• The fact that many of global finance’s biggest and most respected names are offering Bitcoin ETFs affords it extra credibility as a valid asset, which may encourage more investors to investigate Bitcoin (and other cryptocurrencies).

• Big institutional investors, which up until now haven’t been able to invest directly into Bitcoin because of restrictive mandates, generally can invest in ETFs.

• Smaller investors who may have baulked at the idea of setting up a crypto wallet and saving crypto keys can now invest in Bitcoin via their stock accounts without any of these hassles.

• ETF providers will most likely offer funds that are backed at least to some extent by actual Bitcoin. This means that if they haven’t already, they’ll likely have to buy Bitcoin to build up their reserves.

Reasons the approval could be bad for Bitcoin:

• Buy the rumour, sell the fact! The approval of Bitcoin ETFs has been highly anticipated, and the price of Bitcoin has been rising steadily this year likely as a result. Now that the approval has occurred, some investors may choose to take their profits

• Making Bitcoin more accessible via ETFs could increase the volatility of Bitcoin, as during sharp market downturns or crashes, often all assets are sold down. If this occurs, and ETFs are sold heavily to cover losses in other asset classes like stocks, it could force down the price of Bitcoin as well

Is an Ethereum ETF next?

This is the next logical question that arises from today’s development. For crypto Newbs (that is, those who are new to crypto), Ethereum is to Bitcoin what Betamax was to VHS. OK, I just lost anyone under 40 there! Basically, Ethereum was designed to be a “better” crypto as it allows users to attach to their Ethereum transactions certain digital conditions that would be executed without both parties’ future inputs.

These so-called “smart contracts” open a world of opportunities in terms of digital finance, which at its core, doesn’t rely on any governments or institutions to facilitate. In theory, anyone, anywhere with a computing device could be their own buyer, seller, borrower, or lender with a click of a button. Given the decentralised nature of this type of finance, it is more commonly referred to as “DeFi”. Many speculate DeFi is going to be the next big thing in terms of how the world does business.

Back to Ethereum. It was the first smart crypto to gain prominence in the wake of Bitcoin’s 2009 launch. It also stands as the second largest crypto by market capitalisation after Bitcoin. In November last year, ETF provider BlackRock applied to the SEC for an Ethereum ETF, which so far has not been approved. Today’s development will likely see further applications lodged, and the general consensus is Ethereum is the most likely crypto candidate to achieve ETF status.

Such approvals are unlikely to be imminent, however, given the SEC went to pains in its announcement today to specify that so far only the “non-security” Bitcoin is approved for ETFs. In the past, SEC Chair Gary Gensler has gone to pains to stress his view that other, smart cryptos like Ethereum are securities, and therefore are required to be regulated. In today’s statement, the SEC said their decision should “in no way signal [our] willingness to approve listing standards for crypto asset securities”.

I expect the SEC will want to take the process of approving ETFs on what it considers crypto asset securities very slowly, and they will watch to see how Bitcoin ETFs go first. On this point, however, I note stocks are securities also and they have plenty of ETFs over them! So, whilst it might take a little more time for the SEC to come around, ETFs on other prominent cryptos like Ethereum are inevitable.

This article first appeared on Market Index on 11 January 2024.