What Will the Future Decision on Bitcoin ETFs Be?

editorOctober 15, 2024

0 1 5 minutes read

What Will the Future Decision on Bitcoin ETFs Be?

One way to invest in Bitcoin is by purchasing a Bitcoin Exchange-Traded Fund (ETF). This allows investors to easily profit from price fluctuations without directly holding the cryptocurrency.

U.S. Securities and Exchange Commission at a Crossroads

Perhaps you’ve thought about buying Bitcoin but decided against it due to its complex storage process. To truly own your Bitcoin, you need a secure, non-custodial wallet. If you lose your wallet’s private key, you’ll lose all your assets with no way to recover them. This raises the question: Is there another way to invest in Bitcoin? In this study, we will explore the answer to this question.

Exchange-Traded Fund (ETF)

One way to invest in Bitcoin is by purchasing an Exchange-Traded Fund (ETF), which allows investors to profit from price fluctuations without the need to go through the complex process of directly buying and selling Bitcoin from exchanges or managing it in custodial or non-custodial wallets. These funds are approved by the Securities and Exchange Commission (SEC) and, like other securities, are tradable on stock exchanges, following each country’s stock market regulations. It’s important to note that the trading hours for these funds are limited to stock market hours, unlike Bitcoin, which can be traded at any time or place. Therefore, by purchasing these funds on the stock exchange, investors can benefit from Bitcoin’s price fluctuations without dealing with the technicalities and complexities of holding it. Approval of a Bitcoin ETF could also lead to a broader recognition of the cryptocurrency king.

Types of Exchange-Traded Funds

There are generally two types of Bitcoin ETFs:

Spot ETF:

This type of ETF is fully backed by actual Bitcoin, and its price follows Bitcoin’s market price. The major risk associated with this type of fund is that holding large amounts of real Bitcoin is very challenging, posing risks such as cyber-attacks and theft.

Futures ETF:

This type of ETF is not directly backed by Bitcoin but instead uses the futures contracts market, and its price is determined by Bitcoin futures trading. The first Bitcoin futures ETF was ProShares BITO, approved by the SEC in October 2021 and traded on the New York Stock Exchange (NYSE).

However, the SEC has refrained from approving a Bitcoin spot ETF over the past decade despite recent hints that approval may be forthcoming. In recent years, ETFs have been a hot topic in the crypto world, with investment management giants like BlackRock and Grayscale competing for SEC approval to launch their funds, showing no sign of giving up on their long-standing request.

Feature	Spot ETF	Futures ETF
Underlying Asset	Bitcoin	Bitcoin futures contracts
Price Discovery	Direct	Indirect
Asset Custody	Secure storage of Bitcoin	No direct custody of Bitcoin
Transparency	High, backed by real Bitcoin	Low, dependent on derivatives
Legal Framework	Evolving	Established

Advantages and Disadvantages of a Bitcoin Exchange-Traded Fund (ETF)

This raises the question: What advantages does a Bitcoin ETF offer that makes many investment companies eager for its approval and willing to face challenges with the stock exchange? Of course, we shouldn’t be biased, so we will also examine its disadvantages. A Bitcoin ETF is like a double-edged sword; while it offers many benefits, it can also distance Bitcoin from one of its most critical features—decentralization.

Advantages	Disadvantages
Ease of trading and storage	Risk of cyberattacks on custodians
Tax deductions or exemptions	Management fees
Reduction of operational risks	Asset traceability by governments
Increased market liquidity	Time restrictions on trading
Recognition of Bitcoin	Centralization
Diversification of asset portfolio	No direct ownership of Bitcoin
	Requirement for identity verification

Impact of Bitcoin ETF Approval on Bitcoin Price

The approval of a Bitcoin ETF doesn’t directly affect Bitcoin’s price but can influence it in several indirect ways:

Increased Adoption:

With the approval of a Bitcoin ETF, many companies and individuals may invest in these funds. The inflow of capital and increased demand could naturally drive prices higher.

Market Legitimacy:

Approval by the Securities and Exchange Commission (SEC) would validate Bitcoin’s legitimacy. This would build trust among the public and governments, potentially pushing prices upward.

Increased Trading and Liquidity:

The approval of an ETF would make Bitcoin more accessible to investors with limited knowledge, leading to higher trading volumes and market volatility. Analysts predict that there will be increased demand for Bitcoin with the potential approval. This scarcity and growing demand have driven up Bitcoin network transaction fees. According to YCharts data, transaction fees on November 16 reached around $18.65, a 117% increase from the previous day.

Why is the SEC Delaying the Approval of a Bitcoin ETF?

Preventing Price Manipulation:

The SEC’s biggest concern is price manipulation by opportunistic individuals or organizations. The decentralized nature of Bitcoin, lack of clear regulations, and high price volatility amplify these concerns.

Ensuring Asset Security:

Bitcoin’s storage presents unique challenges, and the SEC wants assurance that investors’ Bitcoin holdings are secure from theft and fraud.

Protecting Investors:

Volatility is a core feature of the cryptocurrency market, and the SEC is responsible for safeguarding investors from high risks and fluctuations. The SEC believes that participants in this market must be sufficiently informed. However, as the market becomes more widespread, public awareness and knowledge increase.

Lack of Regulatory Frameworks:

The cryptocurrency market is still evolving, and there are no clear regulations yet. The SEC may be waiting for governments to establish a legal framework before approving a Bitcoin spot ETF with confidence.

The Future of Bitcoin Spot ETFs, SEC’s Response to Bitcoin ETF Proposals

So far, regulators have not approved Bitcoin spot ETFs, as the U.S. Securities and Exchange Commission (SEC) has postponed these approvals due to concerns about market manipulation, fraud, asset custody, and investor protection. However, the SEC has recently decided to review requests from Grayscale and other large companies pending approval.

Analysts believe there is a possibility of Bitcoin spot ETF approval in 2024, as the SEC and the companies seeking these funds are in negotiations, which is generally a positive sign for approval.

This year, approximately 12 proposals for Bitcoin ETF approval have been submitted, including one from Hashdex in September to convert a Bitcoin futures ETF to a spot ETF. Nevertheless, the SEC has stated it needs more time to decide on the approval or rejection of this proposal; consequently, the deadline for the decision has been extended from November 17 to January 1.

The SEC has decided to allocate more time for reviewing the proposals submitted for the approval of a Bitcoin spot ETF, setting January 1, 2024, as the date by which it will announce whether the ETF has been approved.

Recently, the SEC has engaged in extensive discussions with Hashdex regarding its Bitcoin spot ETF proposal. Hashdex has argued in a memo that the crypto market has matured, and the Chicago Mercantile Exchange (CME) is sufficiently developed to manage a Bitcoin spot ETF. According to Hashdex, this market is less susceptible to price manipulation because the CME’s Bitcoin futures market has increased by about 50% since 2022. Hashdex believes that the growing investment in the Bitcoin derivatives market indicates strong interest from retail investors and institutions, which has reduced market volatility, as it becomes increasingly difficult to manipulate prices with a larger market value. It is not far-fetched to suggest that if a Bitcoin ETF is approved, all registered applications could be approved simultaneously, as occurred in 2021 for the Bitcoin futures ETF.