How Does the Approval of the Spot Bitcoin ETF Impact Cryptocurrency?

US SEC Grants Approval to All 11 Spot Bitcoin ETF Applications
US SEC Grants Approval to All 11 Spot Bitcoin ETF Applications | Image Credit:

The Securities and Exchange Commission (SEC) granted approval to the inaugural spot Bitcoin ETFs on Wednesday, January 10. Among these were funds managed by Fidelity, BlackRock, and Invesco. Eleven spot Bitcoin ETFs were authorized by the SEC in total.

Predicted to commence trading this week, their forthcoming introduction has already caused a stir in the cryptocurrency markets. Monday, January 8th, Bitcoin’s price increased by more than 7 percent after CNBC reported that sources with close ties to the SEC indicated approval was imminent.

But wait, weren’t Bitcoin ETFs already available for purchase?

Approval of the Spot Bitcoin ETF Impact Cryptocurrency
Credit: | Approval of the Spot Bitcoin ETF Impact Cryptocurrency

Both yes and no. Although crypto-related ETFs and trusts had been established earlier, prior to Wednesday’s approval, no spot Bitcoin ETF had ever been available in the market.

What is an ETF for spot Bitcoin?

A spot Bitcoin ETF is an exchange-traded fund (ETF) that replicates the price volatility of a stock by holding a substantial quantity of the cryptocurrency. As such, it is a highly liquid fund whose value fluctuates throughout the trading day. Comparable to a spot gold ETF, which represents its shareholders in the purchase of tangible gold bullion.

Other funds on the market attempt to monitor the price of Bitcoin through alternative methods. However, these are the first spot Bitcoin ETFs to receive SEC approval to trade on a major exchange.

As an illustration, the Grayscale Bitcoin Trust (GBTC) invested directly in Bitcoin prior to its conversion; however, in its capacity as a trust, it is unable to maintain its price in close proximity to its net asset value (NAV). ETFs can accomplish this by repurchasing shares in accordance with investor demand. However, due to its inability to do so, GBTC frequently trades at a premium or discount to its NAV; that is, its returns frequently deviate from those of Bitcoin.

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Additionally, there are funds such as the ProShares Bitcoin Strategy ETF (BITO), which is a legitimate ETF that trades near its NAV on a prominent exchange but invests in Bitcoin futures rather than Bitcoin itself. Additionally, its returns may differ from those of Bitcoin.

The recently authorized ETFs, which are positioned first among Bitcoin ETFs, are the first cryptocurrency funds to provide the optimal combination of trading on a major exchange, maintaining prices close to their NAVs, and holding Bitcoin directly.

How many ETFs targeting spot Bitcoin were approved? What are the associated costs?

Earlier this week, ten prospective spot Bitcoin ETF issuers submitted SEC forms detailing the fees they plan to impose. Hashdex was granted approval to retain spot Bitcoin in its crypto futures ETF, increasing the grand total to eleven. Certain funds are considering the introduction of novel Bitcoin ETFs, whereas others are seeking to convert their existing funds into ETFs. The fees associated with the authorized ETFs are detailed below:

In what ways do the approvals impact Bitcoin?

In an email interview, Peter Eberle, chief investment officer of Castle Funds, a California-based cryptocurrency investment firm, predicted that an approval would boost the value of bitcoin.

“At this time, many investors are unable to obtain exposure. Many individuals with 401(k)s, IRAs, and similar accounts, for instance, have limited access to Bitcoin. Moving forward, these investors will have the ability to allocate funds. “This will stimulate demand in the years to come,” Eberle predicted.

However, Eberle cautioned that the approvals of ETFs do not necessarily guarantee inflows of billions of dollars on the first day of trading, which could lead to an exaggeration of bullish sentiment.

He stated, “Expectations may be overly optimistic for a short-term effect.”

In an email interview, James Lawrence, the CEO of NFTY Labs, a blockchain startup based in Florida, expressed his strong confidence in Bitcoin.

“I believe Bitcoin will reach new all-time highs,” he predicted, adding that such peaks could surpass $100,000.

At the time of writing, Bitcoin is trading for less than $47,000; therefore, a price increase of $100,000 would result in a greater than 100% increase in the value of the cryptocurrency.

Tuesday saw what transpired on the SEC’s social media platforms?
A preview of the impact of a spot Bitcoin ETF approval on the price of Bitcoin was provided to investors earlier this week via an unauthorized post from the SEC’s official account on X (formerly Twitter).

The SEC issued a statement at approximately 4:00 p.m. on Tuesday, January 9, confirming the approval of multiple Bitcoin ETFs. Numerous news organizations, MarketWatch and CNBC were among those to report on the “approval.”

Gary Gensler, chairman of the SEC, announced a few minutes later that the statement had been published in error and that the SEC’s account had been “compromised.” As of the writing, it is unknown whether the account was compromised in order to publish a false statement or whether the SEC inadvertently published a legitimate statement early.

The price of Bitcoin increased by approximately $1,000 in response to the initial SEC post, but then declined by approximately $2,000 in response to Gensler’s correction post, before recovering marginally.

How do the approvals impact additional cryptocurrency investments?

Cryptocurrency tokens exhibit a strong correlation. If Bitcoin experiences a significant price movement, other tokens will inevitably follow suit to some extent. “It will also increase the probability that an ETH ETF will be established, which could provide substantial tailwinds for ETH,” Eberle said, referring to Ethereum and Bitcoin by their respective ticker symbols “ETH” and “BTC.”

Eberle stated that he believes ETF approvals will be temporarily restricted to Bitcoin and Ethereum.

“Considering that BTC and ETH are already traded as commodities on the CME,” he said, referring to the futures exchange Chicago Mercantile Exchange. “BTC and ETH ETFs appear to be the most likely candidates.” “The remaining tokens face more formidable obstacles, as the SEC continues to classify a significant number of them as unregistered securities.”

On the contrary, Lawrence is more optimistic regarding “other tokens,” also referred to as altcoins.

Lawrence predicted that institutions would seek to invest in smaller, more liquid assets besides Bitcoin and Ethereum. Furthermore, he expressed his conviction that crypto futures trading will endure and potentially expand even after spot crypto ETFs become operational. This belief is fueled in part by the 2023 launch of Coinbase’s international crypto derivatives exchange.

Expert opinion is divided regarding the immediate market ramifications of the approval of a spot Bitcoin ETF. Both parties concur that there is a high probability that it will impact the price of Bitcoin favorably. However, the extent of this positive influence and the number of other cryptocurrency assets impacted are yet to be determined.

Investors may become aware of the information beginning this week.

Disclosure: Bitcoin was in the possession of the author and editor at the moment of publication.