Bitcoin exchange-traded funds (ETFs) have existed on stock markets in Europe for years, reaching assets under management of $6.5 billion. In February 2021, one began trading in Canada, marking the entry of the first Bitcoin ETF in North American markets.
But the retail-investor-friendly nature of ETFs has stopped U.S. regulators from approving any Bitcoin-based funds stateside. Problems related to transparency, liquidity and security have been cited as to why a cryptocurrency ETF may not be appropriate for mom-and-pop investors.
Still, investors and market observers have long speculated how a U.S. Bitcoin ETF could transform both the cryptocurrency ecosystem and the stock market. Many anticipate it could grant greater legitimacy to digital coins and usher in a new wave of crypto demand.
Here’s a closer look at the Bitcoin investment products that exist as well as the possibility for crypto ETFs down the road.
What Are Bitcoin ETFs?
ETFs are investment funds that can be traded on public markets like shares of a stock. The industry has grown rapidly since the mid-2000s, transforming stock trading for individual investors by giving them cheap, convenient access to a wide variety of industries and assets.
Bitcoin ETFs would allow investors to gain fast, easy exposure to the digital-currency market as well. They would involve wrapping the virtual currency into tradable shares that mirror its moves. Prices of Bitcoin surged to more than $50,000 per unit in early 2021.
Investors would no longer need to deal with the hassle of opening a separate account with a crypto exchange. They wouldn’t have to store coins in a secure, “hot or cold” cryptocurrency wallet. They also wouldn’t have to worry about losing or forgetting the electronic keys that allow access to virtual coins–a fate that some Bitcoin owners have suffered in recent years.
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Potential Impact of Bitcoin ETFs
Bitcoin hasn’t overtaken fiat currencies as a mode of payment. But prices experienced a resurgence in 2020 and 2021 as some investors turned to the digital coin as a store of value. Cryptocurrencies have also gained popularity as a speculative bet–a riskier investment that’s often based more on factors like momentum rather than fundamental analysis.
However, some market observers say U.S. Bitcoin ETFs could help the cryptocurrency market garner more mainstream legitimacy. Publicly traded ETFs that track Bitcoin prices would require approval from established organizations like the Securities and Exchange Commission (SEC)–the top regulator in the U.S.–as well as different stock exchanges like the New York Stock Exchange and Nasdaq.
Other Bitcoin-Based Investments
The history of U.S. Bitcoin ETFs is one checkered with setbacks and disappointment. Various ETF providers have attempted at least 10 times to obtain SEC approval to launch a crypto-based fund. The launch of Bitcoin futures–derivatives that have been used for commodities ETFs–rekindled hope for an approval in 2017 but to no avail.
Some investment firms offer cryptocurrency-based funds in a more limited version. Bitcoin investment trusts are over-the-counter products that accredited investors, ones that clear hurdles like net worth, can buy into through contractual agreements.
These are not publicly traded shares like a stock, and are thus less regulated and often much more costly than the underlying Bitcoin price. Still, inflows into Grayscale products have been substantial, totalling about $5.7 billion in 2020, with the money coming largely from institutional investors.
The largest Bitcoin exchange-traded product in existence is the Bitcoin Tracker EUR listed on the Stockholm Stock Exchange. Assets total $1.7 billion, and the product uses derivatives known as swaps to track prices. In February 2021, Sweden’s financial watchdog told investment firms and banks to avoid selling cryptocurrency-based ETFs to retail investors, saying they are unsuitable for “most, if not all, consumers.”
However, the debut of the Purpose Investments Bitcoin ETF, which started trading in Toronto in early 2021. While Purpose had applied to open its fund back in 2018, trading volume exploded on the first two days, nearing $400 million worth of shares.
Could We See a U.S. Bitcoin ETF Soon?
One of the criticisms of cryptocurrencies that caused Bitcoin ETFs to be rejected by the SEC was that the market was too small. But a broad rally across assets sent prices of digital currencies to new heights in early 2021, causing institutional investors to warm up to the virtual-coin market. The market cap for Bitcoin reached $1 trillion in early 2021.
Another development that has stoked hopes for a Bitcoin ETF was the nomination of Gary Gensler for chairman of the SEC. Gensler, who previously chaired the Commodity Futures Trading Commission, which oversees futures and options trading, is seen as more of an advocate. He has taught a blockchain class at the Massachusetts Institute of Technology and has said that greater oversight of the market could lead to greater mainstream adoption.
Pros & Cons of Bitcoin ETFs
Proponents of Bitcoin ETFs argue they would lower the cost to gain exposure to the cryptocurrency. Another potential benefit of Bitcoin ETFs could be that they centralize the cryptocurrency market, which started out as a fringe investment.
A defense of Bitcoin ETFs to those that warn against them is that other lightly regulated and volatile markets like commodities already have ETFs based on them.
Those skeptical of Bitcoin ETFs argue that their cons include introducing a volatile, highly speculative, and arguably overvalued asset to the U.S. stock market. That means if the Bitcoin boom ends suddenly, a larger population of Americans could be clobbered by the slump in its prices.
Critics have also pointed to how Bitcoin and cryptocurrencies have had problems like theft and potential market manipulation–all issues that could pose hazards to smaller investors in public markets.
The cryptocurrency universe began in 2009 as a sort of rebellion against the mainstream financial system dominated by governments and central banks. But since then, it’s attracted throngs of investors–both retail and institutional–and even prompted explorations of CBDC, virtual currencies issued by central banks themselves.
In addition, some ETF providers and investors have been clamoring for Bitcoin ETFs, products that could introduce greater overlap between the independent cryptocurrency market with the long-standing stock market.
However, while European and Canadian Bitcoin ETFs, as well as over-the-counter trusts, have proven to be popular, U.S. regulators have refrained from approving any. This has acted as an obstacle to vastly expanding the cryptocurrency world, but also as a barrier to the risk of overcharging an already volatile and potentially frothy market.
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