Bitcoin Spot ETFs: Why Do They Matter?

Over its 15-year history, Bitcoin has transitioned from a niche form of digital settlement into a $700B asset tracked by the largest asset managers in the world.

Born from the ashes of the 2008 financial crisis, Bitcoin’s introduction of an inflation-resistant medium of exchange attracted a small but passionate crowd. Many early adopters of the technology grew to firmly oppose traditional finance after the economic meltdown of 2008 destroyed trust between banks and citizens. To many of these investors, Bitcoin represented a speculative but alluring opportunity for financial self-sovereignty.

A decade and a half later, that value proposition is as solid as ever, and the very firms that many early Bitcoiners disparaged are knocking at the front door. Currently, the Securities and Exchanges Commission (SEC) is reviewing no less than twelve spot Bitcoin ETF applications, and the crypto markets have been surging as a result, with BTC up nearly 30% in the last 30 days.

While a BTC Futures ETF has been trading since late 2021, derivatives do not have a major impact on the price of the underlying asset. With a spot ETF approval, access to actual Bitcoin would become a reality for a tremendous amount of capital that is otherwise forced to be sidelined due to regulatory restrictions and technical limitations.

However, the benefits of a spot ETF likely go beyond initial liquidity flows and extend into public perception and education around cryptocurrency as a widely accepted asset class.

What Is An ETF?

Short for Exchange-Traded Funds, ETFs are investable funds that are accessible to a wide audience as they are listed on public stock markets. ETFs trade just like stocks but offer easy diversification “without the hassle” for casual investors and risk-averse investment firms.

For many traditional companies, inclusion in an ETF is excellent for exposure and increases the odds of capital flowing into the stock. Investors simply buy what their banks and other funds consider safe and diversified. Despite this, access to those individual assets is usually available for those looking to allocate to that specific stock, even if it is not included in an ETF.

Spot Bitcoin, on the other hand, can only be accessed through crypto-specific exchanges. Decentralized exchanges like Uniswap are off limits for many institutional investors and technically intimidating for those that are less crypto-native. While centralized exchanges are supposedly safer due to regulatory oversight, the collapse of FTX has proven otherwise.

With a spot Bitcoin ETF, access for retail investors becomes significantly easier, and access to spot Bitcoin becomes a reality for institutions restricted to ETFs and mutual funds. Unlike the existing futures ETF, purchases of shares in a spot ETF translate directly to purchases of actual Bitcoin, allowing demand to be authentically reflected in the price.

When Can We Expect An Approval?

Since Blackrock filed its application on June 15th, 2023, the odds of approval have trended upwards.

Given Blackrock’s steller approval percentage with the SEC, Grayscale’s recent victory in court over the SEC, and Chair Gensler’s predecessor saying the spot ETF “should be approved,” many crypto investors are now considering it a matter of when as opposed to if.

With a dozen ETFs currently being reviewed, analysts assume that the SEC will not want to stagger the approvals to avoid any accusations of favoritism, but rather decide on all the applications simultaneously.

Given ARK’s final deadline on January 10th, 2024, it's presumed by many that approval could come at any time between now and January 10th.

Indirect Effects Of An ETF Approval

Newfound liquidity to tap into is a dream scenario for many active crypto investors. However, it should be noted that there may not be an overwhelming demand for Bitcoin immediately after an ETF gets approved.

Given crypto's nature as a risk asset and the tumultuous state of the macroeconomy, it's possible that the first days, weeks or even months could be underwhelming as traders sell the news. However, approval of a Bitcoin ETF through trusted, FDIC-insured entities plants the seeds for a true paradigm shift in the perception of Bitcoin.

Investors worldwide remain largely skeptical of crypto, and perhaps rightfully so, considering the scale of deception and fraud that has occurred. ETFs do not further the crypto-native ethos of self-custody, but they are safe and regulated enough for financial advisors and banks to feel comfortable recommending to their clients.

The disconnect between those who write Bitcoin off as a scam and those who live and die by it often comes down to a lack of understanding of the underlying blockchain technology. After an approval, it becomes the job of many of these banks and financial advisors to educate their clients on what Bitcoin is, how blockchain works, and if they should allocate a portion of their wealth or retirement funds to it.

For many retail investors, there isn’t anyone more trustworthy than their banks. This certainly isn’t the case for many crypto investors, but most are willing to bite the bullet if it means more capital flowing into their investments.

Bitcoin In A Post-ETF World

Currently, the total cryptocurrency market cap sits at roughly $1.4T. Blackrock alone has over $9T total assets under management, and with 11 other multi-billion dollar funds racing to offer their clients spot investment capabilities on approval day, the total access to capital increases dramatically.

Earlier this fall, Blackrock CEO Larry Fink referred to Bitcoin as a “flight to quality” in a strong statement surrounding the recent crypto price action. Nations across the globe are developing digital currencies (CBDCs), and Bitcoin’s integration looks not only viable but attractive as a decentralized alternative to gold in a digitally native future.

Despite probabilities being stacked in favor of approval, there is always a chance that the applications are shot down yet again, especially considering the current administration's erratic behavior surrounding crypto.

But the investment thesis surrounding Bitcoin as digital gold is being promoted by one of the largest asset managers in the world and is simply becoming too large for the US Government to continue to brush off.

For an increasingly digital world, digitally native innovations are required, and spot ETF access would lay the groundwork for scaling a transparent and digitally native store of value in the form of Bitcoin.