In early 2024, the cryptocurrency industry celebrated one of its biggest victories in a long time: the approval of the first spot Bitcoin exchange-traded fund (ETF) in the United States. On January 10, 2024, the U.S. Securities and Exchange Commission (SEC) said yes after years of a hard no, approving 11 applicants to offer spot Bitcoin ETFs in the country. This comes nearly three years after a similar decision in neighbouring Canada.
What are spot Bitcoin ETFs, and how do they work?
A spot Bitcoin ETF is an investment vehicle that allows everyday investors to gain exposure to Bitcoin through their regular brokerage accounts. This means they are not involved in the complexities of buying and storing the asset, but they are exposed to its price fluctuations.
Instead, the ETF buys Bitcoin directly from the market and holds it, usually using multiple layers of security, including cold storage, to avoid hacking. The ETF then invites investors to buy shares based on the number of bitcoins it holds. The share price directly corresponds to the price of Bitcoin at the time. Shares can be traded on traditional stock exchanges, allowing everyone to participate in the crypto markets.
Spot Bitcoin ETFs vs Bitcoin futures ETFs
Spot Bitcoin ETFs are not to be confused with Bitcoin futures ETFs. While spot ETFs hold BTC as their underlying asset, futures ETFs replicate its price using futures contracts.
Investors prefer spot ETFs to futures ETFs as they offer exposure to Bitcoin without the need for storage. They are more straightforward.
Each share in a spot Bitcoin ETF represents a specific number of bitcoins held. Bitcoin futures ETFs, on the other hand, indirectly track Bitcoin’s price via derivatives whose value can be influenced by market factors other than BTC’s spot price.
The SEC approved bitcoin futures ETFs in the United States in 2021.
The Decade-Long Journey
The journey to a spot Bitcoin ETF in the United States began in 2013 when the Winklevoss twins filed their first application with the SEC amid a growing crypto market.
Despite making numerous changes to their application in 2016, the Winklevoss twins were denied approval by the SEC in 2017, citing an immature Bitcoin market. Grayscale, which had also applied to convert its Bitcoin trust into a spot ETF in 2016, withdrew, blaming an undeveloped regulatory environment.
In 2018, the SEC turned down the Winklevoss twins’ second application, claiming that crypto exchanges lacked the necessary controls to prevent manipulation.
Three years later (2021), Canada approved its first spot Bitcoin ETF. The US SEC also approved the first Bitcoin futures ETF under Gary Gensler as the new Chair. The year also saw Grayscale reapply to convert its trust into a spot Bitcoin ETF.
The SEC rejected the reapplication in 2022, along with fresh applications from SkyBridge, Fidelity, and Bitwise. This prompted Grayscale to sue the SEC.
Cathie Woods’ ARK Investments joined the race in May 2023, filing its application and giving the SEC 240 days to approve or reject it. However, the idea gained traction when financial giant BlackRock applied in June. BlackRock’s application triggered a Bitcoin rally, bringing the price of BTC to a one-year high. It also attracted other issuers, including Fidelity, Franklin Templeton, and Invesco.
Grayscale won its lawsuit against the SEC in August 2023, after a Washington, D.C. appeals judge ruled that the SEC did not justify the rejection. In the same month, Europe saw its first spot Bitcoin ETF.
With a tough loss in court and mounting pressure from over ten new applications, it was only a matter of time. Over the next few months, the SEC and the applicants worked together to iron out the details.
Finally, on January 10, 2024, the SEC approved eleven spot Bitcoin ETF applications from:
- ARK 21Shares Bitcoin ETF (ARKB)
- Bitwise Bitcoin ETF (BITB)
- Fidelity Wise Origin Bitcoin Trust (FBTC)
- Franklin Bitcoin ETF (EZBC)
- Grayscale Bitcoin Trust (GBTC)
- Invesco Galaxy Bitcoin ETF (BTCO)
- iShares Bitcoin Trust (IBIT)
- Valkyrie Bitcoin Fund (BRRR)
- VanEck Bitcoin Trust (HODL)
- WisdomTree Bitcoin Fund (BTCW)
- Hashdex Bitcoin ETF (DEFI)
One Month On
Bitcoin’s price reaction to the ETF approval was somewhat surprising. While many expected an immediate jump, BTC fell from nearly $49,000 to below $40,000 in less than two weeks. However, the “sell the news” narrative faded, sending Bitcoin back above $50,000 for the first time since 2021 and to a new cycle high of $52,814.
While the price of Bitcoin fell in those first few days, ETFs grew at an incredible rate. Trading volume exceeded $1.74 billion in the first hour, $4.5 billion on the first day, and $10 billion by the third day. Grayscale Bitcoin Trust (GBTC) handled most of this volume, with up to $2 billion traded daily during the first two days.
GBTC experienced massive outflows in the early days, totalling approximately $6 billion in the first few weeks. This came from profit-takers who bought the fund before it was listed as an ETF. The outflows were also driven by investors looking for lower fees, as GBTC charges higher fees than all other ETFs.
In just one month, spot Bitcoin ETFs have accumulated over $11 billion in Bitcoin, demonstrating investor enthusiasm. BlackRock’s IBIT and Fidelity’s FBTC are the market leaders, with combined holdings of about $10 billion. In addition, spot Bitcoin ETFs account for approximately 3% of the current Bitcoin supply.
What’s Next?
Analysts say the full impact of spot Bitcoin ETFs has yet to be felt. Current net inflows necessitate the purchase of thousands of bitcoins per day, far exceeding the 900 new coins mined. This gap is expected to widen in May when the Bitcoin halving event reduces mined coins to 450 per day.
Impact of Spot Bitcoin ETFs on the Crypto Market
- Access unlocked: Traditional investors, wary of cryptocurrency exchanges, can now gain exposure to Bitcoin through their existing brokerage accounts. This could attract institutional investors and broaden the investor base.
- Potential Stability: Increased demand from ETFs could inject liquidity into the market, potentially stabilizing Bitcoin’s volatility.
- Regulatory scrutiny: There are concerns about potential manipulation and the security of large amounts of Bitcoin held by ETF providers. Regulatory oversight remains critical to ensuring market integrity.
And if the market continues to show growth, you may need an exchanger. And you know that HiRiBi is your reliable partner.
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