The introduction of Bitcoin ETFs in the US has been hailed as a landmark moment for the cryptocurrency industry, one it has waited on for nearly 15 years.
Bitcoin ETFs are projected to open up the crypto market to the masses, allowing asset management companies and financial institutions alike to offer investors the opportunity to engage and hold Bitcoin without directly owning it.
But how does a Bitcoin ETF work? Why is there such adulation stemming from the sector? And are there potential risks involved with investing in still such a relatively new financial instrument?
Essentially, a Bitcoin ETF allows large asset firms, such as Grayscale and BlackRock, to set up their own Bitcoin investment products that enable potential investors to buy shares in that investment product pool, rather than solely owning the cryptocurrency, as you would on a typical crypto exchange.
This is designed so that the ETF allows the digital currency to become a regulated listed security, to be traded on the largest exchanges such as Nasdaq and the New York Stock Exchange.
Grayscale wasted no time in launching its Grayscale Bitcoin Trust (GBTC) once ETFs were launched on exchanges yesterday, currently holding a market price of $40.69.
Bitcoin Futures ETF & Spot Bitcoin ETFs – The difference
There are two separate Bitcoin ETF terms that investors should be aware of before investing, Bitcoin futures ETF, and spot Bitcoin ETFs.
A Bitcoin futures ETF is the process of investing in futures contracts that are attached to the price of the cryptocurrency, enabling them to track and analyse its price movement.
Spot Bitcoin ETFs work differently as they invest in Bitcoin directly. The ETF’s share price is then connected to the market value of Bitcoin, a more stable approach to owning cryptocurrencies.
Both enable the cryptocurrency to become more widely available on a larger scale, including to those who are sceptical about the digital currency’s volatility as it presides under US government law.
Nick Jones, CEO and Founder of Zumo, believes that Bitcoin ETFs will make good on its promise to break into the mainstream and update the financial system.
He said: “Digital assets have now crossed the chasm to mainstream adoption and the future is very bright. With the stamp of legitimisation – and money flows – that US spot Bitcoin ETF approvals bring, crypto now has every chance to make good on its promises to democratise and update our financial system.”
The SEC & Gensler remains pessimistic
Crucial to the launch of the Bitcoin ETF was the approval from the US Securities and Exchange Commission (SEC), in particular its Chair Gary Gensler, who has been a staunch opponent of crypto.
Gensler had continuously pushed back against proposals from Grayscale to launch its own Bitcoin ETF, which resulted last August in a win for the asset company as the D.C Circuit Court of Appeals ruled against the SEC’s consistent rejections.
Following this ruling, Gensler announced in a statement last Wednesday confirming the approval of Bitcoin ETFs, that this ruling accelerated the launch as this was the “most sustainable path forward”.
The SEC Chair still remains vigilant in his stance against crypto and still asserts that the digital currency should fall under securities laws.
He stated: “As I’ve said in the past, and without prejudging any one crypto asset, the vast majority of crypto assets are investment contracts and thus subject to the federal securities laws.
“Though we’re merit neutral, I’d note that the underlying assets in the metals ETPs have consumer and industrial uses, while in contrast bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing.
“While we approved the listing and trading of certain spot Bitcoin ETP shares today, we did not approve or endorse bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.”
Jones also notes that another risk that crypto and blockchain brings is the large amounts of carbon emissions due to mining. A Joule report revealed that yearly crypto mining results in carbon emissions ranging from 22.0 to 22.9 MtCO2, the equivalent of emissions generated by entire countries.
He said: “Fundamental to that promise is that the Bitcoin and blockchain future should be a truly sustainable one. Following the COP28 summit promises made in Dubai, accessing Bitcoin fund products that take ESG factors into careful consideration must become a new normal.
“This is why we have disrupted the market by launching our Oxygen solution to help financial institutions differentiate themselves by aligning their digital asset activities with net-zero principles.”