After years of tug-of-war with the North American Securities and Exchange Commission (SEC), asset managers can finally cheer: on 10.01.2024, the first 11 Bitcoin Spot ETFs were finally approved. Gary Gensler, CEO of the SEC, publishes a Statement on the SEC homepage, in which, from the Commission's point of view, he once again distances himself from recommending investments in Bitcoin: “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.”
Whether Gary Gensler personally endorses Bitcoin or not doesn't matter in this case. Many journalists have been commenting on the ETF approval as inevitable for weeks. This is undoubtedly a big step for major asset managers such as BlackRock, Grayscale and Fidelity, who have been fighting for approval for years. However, it is an even bigger step for Bitcoin itself, as the effects of these new spot ETFs could significantly contribute to the broad acceptance, social integration and future pricing of Bitcoin.
But behind the current media hype are some important questions that you should ask yourself if you want to invest in Bitcoin and are considering an ETF: What exactly is a Bitcoin Spot ETF and what are the differences compared to direct investments in Bitcoin? Who are these ETFs suitable for anyway and which important features of Bitcoin do ETF investors have to forego? What impact could ETF approval have on the Bitcoin price and the global adoption of Bitcoin in the future?
We'll take a closer look at these questions and more in this article.
A Bitcoin ETF (Exchange-Traded Fund) is a financial product traded on the stock exchange that allows private individuals and especially companies to invest in Bitcoin without having to buy the cryptocurrency directly. The differences between these new spot ETFs and the existing Bitcoin Futures ETFs are significant in some cases:
1. Direct investment: A Bitcoin Spot ETF invests directly in Bitcoin. This means that a provider of spot ETFs buys and holds actual Bitcoin to cover its financial product. Futures ETFs, on the other hand, are simply based on agreements to buy or sell Bitcoin at a fixed price at a specific, future date. No Bitcoin is held to cover these futures contracts.
2. Price fixing: The value of the spot ETF is closely linked to the current Bitcoin price, as the ETF is backed by real Bitcoin. The value of futures ETFs, on the other hand, depends on the price movements of Bitcoin futures contracts, which in turn are influenced by the Bitcoin price, but also by other factors such as current value decline (contango or backwardation) and market liquidity.
3. Storage and safety: With Spot ETFs, asset managers must take care of securely storing and managing the “physical” Bitcoin, which means an additional risk. In turn, this is not necessary for futures ETFs, as no holding of physical Bitcoin is required.
Although there has been no fundamental change in Bitcoin, the approval of ETFs is a strong signal for Bitcoin. The potentially large amount of new capital in the market could massively drive global Bitcoin acceptance. An ETF now also offers traditional and, above all, institutional investors easier regulatory access to investments in Bitcoin. We are also currently experiencing a media paradigm shift. While Bitcoin was ridiculed and criticized by many recently, some of these people have now changed their mind and are now speaking out in favour of Bitcoin. This shift in Bitcoin perception could sustainably contribute to the widespread social adoption and integration of Bitcoin into the existing financial structure.
Assuming that demand for spot ETFs goes as expected and hundreds of billions flow into the ETFs, then the volatility of Bitcoin should also fall in the long term and make the digital asset more stable in the long term. Because the higher the market capitalization, the more difficult it is for individual players to influence the Bitcoin price through their trading activities — according to the theory. With the new spot ETFs, asset managers must cover their ETF products 1:1 with Bitcoin, which is why the new capital also flows directly into Bitcoin when the ETFs are traded. Should Bitcoin ever be able to serve as a hard standard and unit of account, the volatility must decrease first.
Lastly, you have to highlight the simplicity of investing in Bitcoin through ETFs. As a rule, you don't need any technical knowledge or advanced knowledge about Bitcoin to invest in Bitcoin using ETF. The KYC and AML processes for consumers are usually easier with trading platforms for ETFs than with cryptocurrencies. In addition, you don't have to be familiar with trading, different order types or address formats and, above all, you don't have to deal with the secure storage of Bitcoin and key management.
Even though spot ETFs are a step in the right direction, there are significant differences to buying and storing “real” Bitcoin directly.
It is not for nothing that the credo “not your keys, not your coins” has become established among Bitcoiners and has often been proven. Just think back to the FTX debacle and imagine how many investors lost their money there because they thought their Bitcoin was safe on the exchange.
Of course, you can't compare Spot ETFs from BlackRock with the questionable activities of FTX, because Spot ETFs are traded on regulated exchanges and are subject to appropriate supervisory and compliance standards. This provides a certain level of security. And yet ETF investments provide a high level of security and control — let's now look at the benefits of buying Bitcoin directly:
Deciding between Bitcoin ETFs and direct Bitcoin ownership is about carefully weighing your personal priorities and risk tolerance and choosing the option that suits you best. Just ask yourself what financial goals you have, what you would like to use Bitcoin for and how much time and interest you would like to invest in Bitcoin.
Regardless of which path you ultimately choose, Bitcoin remains an exceptional asset that has already fundamentally changed the financial world. The mere fact that Bitcoin exists and works will continue to shape the way we think about money and transactions. The approval of spot ETFs yesterday is definitely a milestone in the history of Bitcoin.
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This article does not constitute investment advice and includes the personal opinions of several people. Investing involves risks. Any financial investment can result in the loss of invested capital. Your own research should always be carried out before concluding a transaction.
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