Bitcoin, the largest and oldest cryptocurrency, has showcased its resilience through multiple market cycles. Over the last decade, retail investors have primarily been the driving force behind Bitcoin’s parabolic growth. Despite being over a $500 billion asset, Bitcoin continues to garner skepticism regarding its long-term viability. That said, Bitcoin has witnessed a remarkable journey from being viewed as a fringe asset to attracting the deep pockets of institutional investors. Recently, legacy asset managers have jumped onto the Bitcoin bandwagon by filing for their respective Bitcoin ETFs. This represents a seismic shift in favor of Bitcoin and the crypto sector’s narrative as a legitimate asset class that could prove to be a catalyst toward mainstream adoption.
A Bitcoin ETF is an exchange-traded fund that tracks the value of Bitcoin. ETFs are a type of investment fund that trades on traditional stock markets. Therefore, Bitcoin ETFs allow investors indirect exposure to Bitcoin as shares, without needing to register on a separate crypto exchange to directly buy the cryptocurrency or understand how to store it. Bitcoin ETFs provide a regulated and simplified avenue for retail investors to acquire BTC, thereby attracting a new breed of investors into the space.
Understanding Bitcoin ETFs
The emergence of Bitcoin ETFs has often been seen as a watershed moment for the digital asset’s push toward mass adoption. Financial institutions in countries like Canada, Australia, Brazil, and some European countries have already rolled out several Bitcoin ETFs like the Purpose Bitcoin ETF, EBTC – 21 Shares Bitcoin ETF, and QR Capital’s Bitcoin ETF, among others. On the other hand, the United States and the US Securities and Exchange Commission (SEC) have taken a rigid stance in approving Bitcoin ETFs and the crypto sector in its entirety. This reproving approach dates back to the first attempt at a Bitcoin ETF proposal in 2013 by the Winklevoss brothers which was ultimately rejected by the SEC.
However, the recent flurry of institutional FOMO (fear of missing out) who have re-filed applications for a Bitcoin ETF to the SEC has rekindled hope in the Bitcoin community. An acceptance in the US would mark a major stamp of approval for Bitcoin while allowing millions of uninitiated investors to conveniently access the digital asset.
5 Bitcoin ETF applications in 5 days!— Lark Davis (@TheCryptoLark) June 21, 2023
– Wisdom Tree
Before we consider how Bitcoin ETFs can play a pivotal role in driving adoption, it is important to understand how a Bitcoin ETF works. An exchange-traded fund is a type of investment that tracks the price of an underlying asset (gold, Bitcoin), or a basket of assets and industries (tech stocks, S&P 500). An ETF allows investors to buy shares of the fund and the price of the purchased shares correlates with the performance of the underlying asset or index. ETFs are traded on traditional brokerages like the NYSE and offer the flexibility of buying and selling shares throughout the trading day, just like any other individual stock.
Bitcoin ETFs work the same way as any other ETF. Therefore, the fractionalized shares you buy from a Bitcoin ETF are pegged to the price of Bitcoin. Companies buy Bitcoin, securitize the asset, and list it on a stock exchange for investors and traders. This allows investors to gain exposure to the digital asset without having to use crypto exchanges or worry about cryptocurrency wallets, private keys, self-custody, and secure storage. While this appears to contradict Satoshi’s (pseudonymous creator of Bitcoin) vision, it is a very appealing proposition for retail investors and institutions who don’t want to go through the hoops of learning about the technology.
However, if you are one of those investors or crypto enthusiasts who wants to have complete ownership of their Bitcoin and understand how crypto wallets operate, check out the article below
Recommended read: Cryptocurrency Wallets: Explained
The Importance of Bitcoin ETFs in Accelerating Adoption
The prospect of more Bitcoin ETF approvals can be a vehicle for mainstream adoption and price appreciation for various reasons.
Accessibility and Convenience
The truth is there are countless retail and institutional investors sidelined due to the learning curve that comes with investing in and holding Bitcoin and crypto. With an ETF, investors can gain exposure to Bitcoin and its upside potential on a familiar brokerage account without directly owning or securely managing the cryptocurrency itself. This accessibility makes it extremely convenient for traditional investors to enter the Bitcoin market.
The launch of any ETF requires regulatory consent. Therefore the approval of Bitcoin ETFs would establish a high degree of legitimacy and mainstream recognition of Bitcoin as an investment asset. This could entice a new and broader range of investors who may have withheld from investing in Bitcoin due to concerns surrounding regulatory uncertainty. Ultimately, a Bitcoin ETF effectively brings the once-neglected digital asset into Wall Street, alongside Google stock, Gold, and other traditional assets.
One of the biggest factors holding back capital allocators from buying Bitcoin was reputational risk.— Will Clemente (@WClementeIII) June 20, 2023
Now that both the #1 (Blackrock) and #3 (Fidelity) largest asset managers in the world are both endorsing Bitcoin, that reputational risk is surely fading.
The launch of more Bitcoin ETFs could likely generate considerable media coverage and public attention. This is especially true as larger asset managers enter to offer their own versions of a Bitcoin ETF. The ETF could prove to be an avenue through which individuals become more aware of the underlying technology and use cases of Bitcoin and other cryptocurrencies.
Renewed Surge of Institutional Interest in Crypto
Institutional adoption in cryptocurrencies and more specifically in Bitcoin is now a reality. Since 2020, we have seen a wave of traditional financial institutions and companies scrambling to get their share of the 21 million BTC that will ever be in existence. From Microstrategy to Tesla, these publicly traded corporations have opened the floodgates for heightened institutional interest. In fact, public companies that currently hold Bitcoin on their balance sheet account to a little more than 1% of Bitcoin’s total supply that can ever be created.
To learn more about some of the largest companies and entities holding Bitcoin, read this article: Bitcoin Billionaires: Who are the Largest BTC Holders?
Despite being in a bear market and amidst the SEC’s crusade against Coinbase and Binance over violating US securities laws, there has been a resurgence of institutional interest in Bitcoin. Financial giants BlackRock (the world’s largest asset manager), Fidelity, Invesco, Wisdom Tree, and Valkyrie have all filed for Bitcoin ETFs within a span of a week. Furthermore, news of a new crypto exchange backed by Citadel Securities, Fidelity, and Charles Schwab called EDX markets further reveals that large institutions are swooping into the sector.
As of now, investors in the US only have access to Bitcoin futures ETFs. The SEC is yet to approve a Bitcoin spot ETF despite batting away several applications. A Bitcoin spot ETF is backed with actual BTC wherein the fund owns and manages the underlying asset and the shares mirror the price movements of Bitcoin. Whereas, Bitcoin futures ETFs are backed by Bitcoin derivatives.
While there is no guarantee that these rounds of ETFs will pass the SEC’s jurisdiction, it is undeniable that Blackrock, the ten trillion dollar asset manager, represents the most serious application yet.
There seems to be greater demand for exposure to Bitcoin from institutional investors with every passing year. The recent spate of institutional interest is indicative of this trend. The launch of a Bitcoin ETF from these TradFi juggernauts sends a strong message to other financial entities, legitimizing BTC as an asset while signaling to other institutions that it is safe to follow suit.
For years, the retail investor has been largely responsible for propelling Bitcoin to where it is today. That narrative will most likely change very soon.