Trading Signals 05/02 – 09/02
U.S. Approves First Bitcoin ETF: What It Means?
The recent approval of the first Bitcoin-based Exchange Traded Funds (ETFs) by the U.S. Securities and Exchange Commission (SEC) marks a pivotal moment for the cryptocurrency market. This breakthrough, coming after a decade of anticipation, is set to significantly broaden the scope of cryptocurrency investment, potentially ushering in a new era of capital inflow into the crypto market.
Exchange Traded Funds (ETFs) have become increasingly popular over the last two decades, primarily due to their convenience and the diverse range of investment instruments they offer. An ETF provides investors access to a collection of assets, such as securities or commodities, which can be traded like stocks on stock exchanges. This means that by trading shares of an ETF, investors have the opportunity to earn returns based on the price movements of the underlying assets, without the need for direct interaction with those assets.
The introduction of Bitcoin-based ETFs is particularly significant in the context of the U.S. market. Despite the somewhat ambiguous legal status of cryptocurrencies in the U.S., these ETFs allow regulated organizations to invest in Bitcoin legally and indirectly. This is a crucial development, considering that nearly a quarter of all global crypto transactions are attributed to North America, with the U.S. market showing a higher dependency on institutional activities compared to other regions.
Bitcoin ETFs are expected to simplify the process of investing in cryptocurrencies for a wide range of investors, especially those who prefer traditional investment vehicles or are cautious about directly dealing with cryptocurrencies due to their complex nature and the perceived risks involved. This could lead to increased mainstream acceptance and integration of cryptocurrencies into conventional investment portfolios.
Furthermore, the approval of Bitcoin ETFs could serve as a catalyst for other countries to consider similar moves, potentially leading to a more global acceptance and integration of cryptocurrencies in the financial markets. This development is likely to have far-reaching implications, not just for Bitcoin but for the broader crypto market, potentially accelerating the adoption and integration of digital currencies into the global financial system.
Decade of Attempts
For over ten years, the U.S. Securities and Exchange Commission (SEC) consistently rejected proposals for a spot Bitcoin ETF, a fund that mirrors the current market price of Bitcoin and involves its actual delivery as the underlying asset. The first attempt to establish such a fund was by the Winklevoss twins, Tyler and Cameron, now owners of the Gemini cryptocurrency exchange, back in 2013, but it was unsuccessful. In a significant move, BlackRock, the world’s largest asset management firm, applied for a Bitcoin ETF registration in June 2023.
The SEC’s refusal to approve these applications from numerous companies was based on concerns about the crypto market’s maturity, the high risk of fraud, and the potential for manipulation of cryptocurrency prices. In 2021, the SEC did approve several Bitcoin futures ETFs, which deal in derivatives on stock exchanges, but these did not significantly influence the actual crypto market.
The landscape began to shift following a lawsuit in 2022 by Grayscale, a company managing the largest Bitcoin trust since 2013. Grayscale challenged the SEC’s decision to deny the launch of spot Bitcoin funds while approving futures-based ones. Grayscale’s Bitcoin Trust (GBTC) allows accredited investors to invest in Bitcoin through shares, but it’s not listed on major exchanges and faces several limitations. Grayscale’s original plan was to convert this trust into a fully-fledged ETF. In a landmark decision in August 2023, Grayscale won its lawsuit against the SEC. SEC Chairman Gary Gensler acknowledged that the Grayscale case was pivotal in changing the regulator’s stance.
Recent months have seen intense speculation about the timing of SEC approval for Bitcoin ETFs and the operational details of these new financial products. Following extensive discussions between potential issuers and SEC officials, a framework for the issuance and redemption of ETF shares was finalized, paving the way for their registration and subsequent exchange listings.
The competition to be a pioneer in the Bitcoin ETF market has drawn significant interest from major entities in both the traditional finance sector and the cryptocurrency industry. BlackRock leads as the most prominent issuer, thanks to its vast capital and extensive range of ETF products. Other notable approved firms include Fidelity, Franklin Templeton, and ARK Invest, managed by Cathie Wood. Renowned names in the crypto industry, such as Grayscale, Hashdex, and Valkyrie, are also among the 11 organizations greenlit to launch ETFs.
The establishment of ETF infrastructure has also advantaged various other firms. Coinbase, the largest crypto exchange in the U.S., is handling Bitcoin custody services for most of these ETF issuers. Meanwhile, companies like Jane Street and Virtu are playing key roles as authorized market makers.
Now that spot ETFs have been approved and their shares have begun trading on stock exchanges, it will be crucial to observe the influx of capital into this new market and determine which of the 11 issuers will dominate the market share.
Digital Gold Revolution
Over $100 billion is now invested in gold ETFs on the U.S. stock market, making gold investment as straightforward as buying regular stocks, without the need for physical storage or security. In a similar vein, Bitcoin ETFs simplify cryptocurrency investment by eliminating the need for investors to navigate crypto wallets, exchanges, and the risks of cyber attacks or fraud.
In the absence of ETFs, U.S. institutional investors have limited options for cryptocurrency investment. They typically lack the setup for direct Bitcoin custody and are restricted from trading it on traditional exchanges. Their alternatives include investing through futures ETFs or private funds like Grayscale’s GBTC, and indirectly through shares in cryptocurrency mining companies. The introduction of a legally tradable Bitcoin ETF on major exchanges like NASDAQ and NYSE removes these barriers.
Reflecting on the history of gold ETFs, which emerged two decades ago and led to a fourfold increase in gold prices, Standard Chartered Bank draws parallels with Bitcoin. The bank’s analysts anticipate a similar, albeit quicker, growth trajectory for Bitcoin following the U.S. approval of spot ETFs. They predict that Bitcoin’s price could soar to $100,000 by the end of 2024, driven by this new investment avenue.
In 2023, Bitcoin experienced a dramatic price increase of more than 150%, a surge that was particularly notable after BlackRock filed for a Bitcoin ETF in June. Prior to this, Bitcoin’s value hovered around $25,000. Currently, Bitcoin’s price stands at about $47,000, with its total market value surpassing $926 billion.
Experts at CryptoQuant believe that the sanctioning of a Bitcoin ETF could potentially raise the overall market value of cryptocurrencies by an additional $1 trillion. Although these are projections, they indicate that the approval of an ETF could not only significantly boost Bitcoin’s long-term value but also have a favorable effect on the broader crypto market by drawing in more institutional investments.