Over the past months, Bitcoin ETFs dominated the cryptocurrency, finance, and investing discourse. A flurry of attention-focused articles on the latest wave of spot Bitcoin ETF applications captured the collective interest. Stakeholders speculated on their implications. Following heightened anticipation at the beginning of 2024, the Securities and Exchange Commission of the United States (US SEC) finally green-lit the new securities.
As financial heavyweights like BlackRock, Fidelity, Valkyrie, ArkInvest, VanEck, Wisdom Tree, Bitwise, Invesco Galaxy, and others join the fray, they spearhead a new era in Bitcoin investments.
The road to Bitcoin ETFs and their recent approvals has been far from smooth. Over the past decade, advocates for long-term Bitcoin ETFs faced numerous challenges. In Bitcoin’s 15th year, we examine its phenomenal journey from niche experimental currency to formal security backed by the world’s most prominent asset managers.
How did the world’s first decentralized asset, created to minimize the role of central authorities, become the most-awaited investment news of early 2024? What events shaped the current unprecedented wave of institutional interest? What swayed the US SEC on its position and compelled it to approve the latest wave of spot ETF filings?
Bitcoin ETFs promise to bridge the experimental and largely decentralized world of cryptocurrencies with traditional finance structures. They are an unprecedented hybrid technological and regulatory innovation poised to transform how people view and invest in digital assets. They are not just new investment vehicles but also evolutionary catalysts for US financial markets and beyond.
Exchange-traded funds, or ETFs, are a $7.7 trillion industry. Their sheer size implies they are among the world’s most favored and familiar investment methods. ETFs have existed for thirty years and represent a profoundly ingrained investment instrument on Wall Street.
ETFs were designed to buy and sell more complex instruments, similar to how one would buy and sell company stock. In the last decade, Bitcoin entrepreneurs and proponents have tried to sell the idea of a Bitcoin-related ETF for the same purpose—to simplify and formalize investment in the digital currency. Before the recent approvals, no one succeeded except for Bitcoin futures ETFs—derivatives-based ETFs related to but not directly tied to Bitcoin.
After many years of trying, efforts to launch spot Bitcoin ETFs had finally lost steam. Yet, over the past year or so, market discussions around possible new Bitcoin ETFs came alive again. Finance publications announced more spot Bitcoin ETF applications, this time headlining with the names of trillion-dollar asset managers such as BlackRock and Fidelity. The filings implied the possibility of greater institutional interest.
According to pre-approval predictions, the potential of new institutional interest in Bitcoin ETFs could draw about $14 billion to the crypto market within a year of a BlackRock ETF launch. They said BlackRock, a holder of $10 trillion in assets, would consider a $14 billion pocket change and a highly feasible goal. With the Blackrock IShares ETF in place alongside strong competitors, the $14 billion influx prophecy is one to watch in 2025.
With a hypothetical $14 billion influx into the market, Bitcoin price could be driven up to $141,000, according to George Tung, founder of CryptosRUs with over 600,000 followers on YouTube. Moreover, the head of research at CoinShares estimates that as much as $31.34 billion could flow into crypto markets this year. CoinShares has a higher price target, anticipating Bitcoin price to skyrocket to $265,437—an over 600% boost compared to its current range.
Rate cut announcements from the Federal Reserve may boost confidence further. We have already seen such statements influence markets during the holidays.
The new wave of spot ETFs simplifies access to Bitcoin and the growth opportunities it presents, as predicted by some analysts. Whether it’s a better way to invest in the asset is disputed—some advocate for holding actual Bitcoin. To them, it is a disadvantage that ETFs don’t put actual cryptocurrency in your account.
The Bitcoin in ETFs, therefore, cannot be used for any other purpose, as investment does not equate to ownership of the actual currency. Moreover, ETFs will not provide the same pseudonymity or even anonymity that trading in the crypto or DeFi space does—an attribute that may discourage native crypto investors.
However, ETFs offer the advantage of easy tradability. An ETF or exchange-traded fund is a convenient way to invest in a single or group of assets like gold or junk bonds without purchasing those assets directly. In addition, unlike traditional mutual funds, ETFs offer round-the-clock buying and selling, just like stocks.
Those seeking to invest in Bitcoin without learning the nuances of direct purchase and ownership will find ETFs appealing. Thus, spot Bitcoin ETFs open the door to new investors who are not native to crypto and don’t want to take the additional steps of opening accounts in crypto trading platforms and learning the nuances of hot and cold wallets.
To understand Bitcoin ETFs better, we must examine their history and evolution. The path has been a bumpy one, full of regulatory roadblocks.
It has been nearly eleven years since the Winklevoss twins submitted the first filing for a Bitcoin ETF in 2013. It was called the Winklevoss Bitcoin Trust. In those days, Bitcoin traded at $90—a far cry from today’s prices.
The Winklevoss twins were never able to capitalize on their first-mover advantage. The United States SEC had rejected them twice over concerns about the risks of the once-nascent crypto market.
The Winklevoss Bitcoin Trust ETF would have traded under the ticker “COIN”—now since claimed by the most significant US crypto exchange, Coinbase.
Since the Winklevoss attempt, several ETF applications followed, soon trailed by about a dozen rejections. The succeeding applications were rejected because of inadequate investor protection in the bitcoin market.
The rejected ETF applications, however, varied in their nature and structure. Some were spot ETFs—bitcoin funds that directly owned the cryptocurrency. Others were futures-based investment products.
The futures ETFs held derivative contracts on the Chicago Mercantile Exchange (CME) to long-only funds to leveraged and inverse products. None of such proposals passed the scrutiny of the US SEC at the time.
The “Clayton era” marked a time when Bitcoin ETFs were at their lowest point. In the summer of 2018, the SEC rejected a shocking nine proposed Bitcoin ETFs in a single sweep—one day, to be exact.
Former SEC Chair Jay Clayton headed the commission from 2017 to 2020. He explained that the “rules and surveillance to prevent manipulative techniques” did not exist on all exchange venues wherein digital currencies were traded.
Moreover, custody was another sticking point. The former SEC Chair believed that ETF risk should only be confined to the underlying asset’s value and must not include other risks like untraceable disappearance or theft of the digital asset.
Bitcoin futures markets, which were in their infancy, were also a damaging strike against the spot ETFs. The SEC mentioned that while the CBOE and CME were regulated markets for bitcoin derivatives at the time, there was no basis in the record for the commission to conclude that those regulated markets were of a significant size.
In addition, in 2018, the United States SEC wrote that as bitcoin futures were trading on the CBOE and CME just recently—since December of 2017—the commission lacked a basis for predicting how such markets developed over time. The record was also considered insufficient for predicting their future success or size.
Even with the SEC’s consistent rejection of spot ETF applications, Bitcoin ETFs were gaining unprecedented momentum if one cared to look under the hood.
Technological acceleration, geopolitical change, institutional interest, and economic drivers converged to create the perfect climate for an ETF approval. What drove regulators to shift gears and become receptive to the current set of Bitcoin ETF applications? Persistence, luck, grit, and the boldness of one player in particular.
Technological Drivers
Being open source, Bitcoin is an evolving protocol. New developments in the Bitcoin protocol contribute to its value and relevance. However, the Bitcoin community does not take such changes lightly. Since Bitcoin is open to all, the fastidiousness of its core developers and overall slowness to change contributed to its reputation as a stable asset.
Taproot, implemented in 2021, is the most significant upgrade since SegWit in 2017. Taproot broadens Bitcoin’s potential applications and makes it better capable of supporting more complex smart contracts.
This development implies it becomes more competitive with its closest rival in market cap, Ethereum, regarding flexibility and capability. It also enhances Bitcoin’s privacy by obscuring the type of transactions executed. Such improvements to Bitcoin’s capabilities and features contribute to its value and continued relevance to cryptocurrency enthusiasts.
Being decentralized and without a CEO or founder, Bitcoin has benefited from Satoshi Nakamoto’s pseudonymity and eventual disappearance from Bitcoin’s development and decision-making. Without a founder to benefit from the markets, it has gained credibility as a decentralized coin.
The Bitcoin community remains fiercely protective of its original design and principles—decentralization and fixed supply. The decentralization attribute has proven it resistant to being labeled as a security.
Bitcoin does not fulfill the requirements of the Howey test and thus fails to be a security. While the US SEC cracked down on ICOs and other token offerings, declaring them securities, Bitcoin remained a non-security and decentralized currency.
The drastic changes to Bitcoin’s biggest rival, Ethereum, have yet to result in a significant spike in ETH’s price. Instead, the protocol’s shift in incentives, including its veering away from mining and movement to staking, has caused some investors and participants to waver.
True to its design, Bitcoin halves its mining rewards at exact points in its lifetime. The next Bitcoin halving is just around the corner. The upcoming halving on April 22 will further reduce miners’ rewards and the rate at which new BTC is created.
The reduced rate of new supply coupled with potential new Bitcoin ETF approvals could lead to a bullish sentiment. Both milestones could converge and heighten interest in Bitcoin ETFs further.
The development of custody technology and investment-grade protocols for exchanges and institutions to ensure the security of digital asset stores has also contributed to an increased perception of trustworthiness in Bitcoin and the products borne out of these custodians.
The recent announcement of the Fed about upcoming rate cuts drove markets to a year-end frenzy in 2023, indicating how influential such announcements are in driving up sentiment. The new year is starting on a similar note. While inflation fears marked the narrative in previous years, the Fed has declared that inflation has eased, though it remains elevated.
More importantly, the announcements end the US central bank’s successive rounds of 11 interest rate hikes beginning in March 2022. Today, the Fed is starting its retreat from its previously restrictive approach to monetary policy. This shift in policy could be a boon to risk assets like Bitcoin and, thus, Bitcoin ETFs.
Post-pandemic, markets were in a slump. The downturn has affected venture capital and, along with it, startups. Closures and layoffs in tech have become rampant. With tech companies downsizing, there is less enthusiasm for new crypto projects and startups, leaving Bitcoin as the “last man standing” in a leveled field of crypto experiments. This positions Bitcoin as a resilient asset, better able to withstand downturns than other crypto projects.
One key factor fueling the discussion around Bitcoin ETFs is the increased interest and involvement among institutional investors. Institutional participation has traditionally been a significant driver of mainstream financial products. Bitcoin is no exception to this phenomenon.
Notably, the recent piling of high-profile companies and institutional investors in cryptocurrency signals a shift in the perception of Bitcoin as a legitimate digital asset class. Institutional acknowledgment of Bitcoin’s potential as a store-of-value asset and the assurance of better digital custody capability has created new tradable products.
Companies like MicroStrategy have made headlines by including Bitcoin in their treasury. In previous years, high-profile companies like Tesla, Square, and Grayscale have also made public announcements about their Bitcoin purchases and stores. The confidence of such companies in Bitcoin as both a store of value and a hedge against inflation contributes to its legitimacy, thus influencing the consideration of Bitcoin ETFs.
The pessimistic news around FTX, Three Arrows Capital, and the Terra-Luna debacle appear to be fading. Today, they are little more than a postscript, and their effect on markets has waned. The string of legal actions and prosecutions against these companies’ financial irregularities has strengthened faith in the system and, over time, has separated them from the legitimacy of Bitcoin as an asset. A change in the sentiment around Bitcoin has contributed to a renewed interest among investors.
BRICS countries have taken a stand against dollar hegemony. This stance has led to increased receptiveness to cryptocurrencies and blockchain technology applications in creating new currencies. They use blockchain as a foundational tech for experimental alternatives to the US dollar.
CBDCs—Central Bank Digital Currencies—are the digital fiat equivalent of crypto. As the name suggests, such currencies are government-controlled and centralized. However, they improve the perception of blockchain tech and crypto coins among the general public, indicating a new chapter of maturity as the technology is assimilated into fiat or government-issued currency.
War and government sanctions have further led to the exploration of Bitcoin and other crypto as accepted forms of payment in severely restricted countries and regions. Political unrest and the restriction of human rights in different parts of the world have given rise to discussions about using cryptocurrency to achieve financial freedom.
Governments like El Salvador have led the way in declaring Bitcoin as legal tender and conducting mining operations in their country. This news has added to Bitcoin’s image as a credible store of value and as an alternative option for developing economies instead of gold.
Recent US crackdowns on exchanges like FTX and declarations of ICOs as securities have increased confidence in Bitcoin, which the US SEC views as the only truly decentralized currency.
Ethereum and Ethereum-based tokens have taken a plunge, but Bitcoin has traded steadily—sideways—for months, indicating its relative stability compared to potential securities. Confidence has flocked to Bitcoin even as it has wavered for other types of crypto.
Such events have brought Bitcoin to the forefront of various political discussions. Most of the feedback has favored bitcoin holders, boosting the currency and increasing the trust in its independence.
Under former SEC Chair Jay Clayton, as mentioned, the regulator rejected over 20 exchange rule filings for spot Bitcoin ETPs. Grayscale’s filing—which proposed the conversion of the Grayscale Bitcoin Trust to an ETP— was among those disapproved.
Crypto asset manager Grayscale Investments LLC scored a landmark legal victory against the US SEC in August 2023. In its effort to develop and launch a US-listed Bitcoin exchange-traded fund, it won a critical legal fight on the road to Bitcoin ETF acceptance.
The SEC previously denied Grayscale’s application to convert its spot GBTC (Grayscale Bitcoin Trust) into an ETF. While the agency approved bitcoin futures ETFs, it stood firm on its rejection of Grayscale’s spot ETF conversion, saying that the spot ETF application did not meet its bar. Grayscale then sued the SEC. Because the defendant was a regulator, the case went straight to appeals court.
A federal appeals court, composed of a three-judge panel, ruled that the US Securities and Exchange Commission was mistaken in rejecting the application to convert Grayscale’s flagship vehicle—GBTC—to an ETF.
Grayscale’s argument focused on the comparability of bitcoin futures and spot ETFs. Grayscale argued that the surveillance arrangements on Bitcoin futures ETFs should suffice for its GBTC spot ETF as both products track or rely on the price of the same underlying asset.
Bitcoin futures ETFs track bitcoin futures trading on the CME or Chicago Mercantile Exchange. The CME is considered the chief venue for the approved ETF products. According to the SEC, the CME prevents price distortions by surveilling real-time futures market conditions and price movements. These price distortions may be caused by manipulation and must be urgently detected.
Adopting the same reasoning, Grayscale’s lead counsel argued that a spot Bitcoin ETF offered better protection for investors because of the benefit of CME’s market oversight. The SEC disagreed, saying Grayscale lacked enough data to prove whether the surveillance on CME futures could accurately detect suspicious trading or manipulation in spot markets.
The court agreed with Grayscale’s finding that the proposed spot Bitcoin ETF was materially similar to the existing approved futures ETFs. It found the underlying assets—Bitcoin futures and Bitcoin—to be “closely correlated.”
Moreover, the surveillance-sharing arrangements with the CME were found to be identical and have similar probabilities of fraud or manipulation detection in Bitcoin markets.
The court ruled that the US SEC was “arbitrary and capricious” in rejecting the spot ETF filing. It failed to explain how Grayscale’s ownership of Bitcoin rather than Bitcoin futures made a material difference in the CME’s ability to detect fraudulent activities. The three-judge panel on the District of Columbia Circuit Court of Appeals vacated the SEC’s decision to block the spot ETF.
The unprecedented victory paved the way for the eventual success of other ETF applicants such as Blackrock, Fidelity, WisdomTree, VanEck, Bitwise, and Invesco. It boosted confidence in the instruments and ensured that the SEC could not use the argument again when rejecting a new Bitcoin ETF application.
The court decision put significant pressure on Gary Gensler, the SEC Chair, who, during his term, issued a blitz of enforcement actions against crypto industry players. Demand for a spot Bitcoin ETF also grew, with traditional players trying to break into the sector.
On January 10, 2024, Gensler’s statement opened: “Today, the Commission (SEC) approved the listing and trading of a number of spot bitcoin exchange-traded product (ETP) shares.”
The year 2024 may reshape the digital financial world for several reasons. First is the evolution of crypto assets into mainstream investable products, backed by the world’s largest institutions and under the guardianship of government-registered entities.
Second is the parallel maturation of Coinbase, the largest crypto exchange in the world. As global competitors like Binance appear to be retreating from the US, Coinbase is the last man standing in the crypto exchange race.
They are poised to play an essential role as the custodian of physically-backed Bitcoin ETPs, including those by ARK, Invesco, Valkyrie, Global X, Franklin Templeton, and Bitwise. Grayscale, the current owner of the world’s largest Bitcoin fund, plans to continue to use Coinbase to manage its BTC stash upon its planned transition to an ETF.
Third, we see a change in perspective among traders as Bitcoin moves mainstream. Sentiment will change and propel new demand for the coin. Fourth, the upcoming Bitcoin halving in Q1 2024 will further squeeze Bitcoin supply. The synergistic effect of reduced supply plus increased demand pressure from institutions could propel Bitcoin’s price to new heights.
Remember that to execute a spot ETF successfully, each major player must store millions—if not billions—of dollars worth of Bitcoin in its treasury. These scarcity-inducing events would make the asset highly appealing to institutions and the investing public.
On their first day of trading, the US-listed Bitcoin ETFs recorded an astonishing $4.6 billion in shares changing hands. Eleven newly approved spot Bitcoin ETFs launched a fierce competition for market share as they started trading. The ETFs included BlackRock’s iShares Bitcoin Trust (IBIT.O), ARK 21 Shares Bitcoin ETF (ARKB.Z), and Grayscale Bitcoin Trust (GBTC.P), among others.
According to LSEG data, BlackRock, Grayscale, and Fidelity dominated trading volumes. However, GBTC trading was mostly outflows—caused by traders who wanted to dispose of their GBTC holdings that had been stuck for a long time.
Despite the bullish predictions at the beginning of the year, Bitcoin showed a bearish trend. It dropped from $46,000 on January 11 to sub-$45,000 the following day. It fluctuated between $40,000 and $44,000 and hit a low of monthly $38,000 last January 23.
It may have been a case of “buy the rumor, sell the fact.” However, steadfast proponents believe this is temporary as GBTC outflows decline. With GBTC largely offloaded, Bitcoin reflected a post-shedding surge of 5%.
As a result of these financial giants competing for the top spot, a Bitcoin ETF fees war has ensued. The newly-minted spot Bitcoin ETFs from Grayscale, Blackrock, Fidelity, Ark/21 Shares, Bitwise, Invesco, VanEck, Valkyrie, Franklin Templeton, and WisdomTree sport fees that range from 0.19 percent to 0.39 percent, with Grayscale being an outlier at 1.5 percent.
After the Bitcoin ETF approval hype, clarity is emerging in the markets. Bitcoin ETF proponents warn not to overestimate the impact of such products in the short term and underestimate their influence in the long term.
The new breed of spot ETFs deepens the connections between Bitcoin and mainstream finance. Wall Street is now officially selling Bitcoin to Main Street, legitimizing it in the eyes of traditional finance. The implications of these instruments extend to new and broader risks, according to experts, as Bitcoin volatility and price dislocation now have the power to impact traditional markets directly.
The main advantage of Bitcoin ETFs is their ability to make investing in Bitcoin simpler and relatively safer for non-native investors. They combine the familiarity of a traditional trading instrument, the ease of buying and selling, and the trust of a fully regulated product with the innovation potential of the world’s most vital digital asset.
This is a guest post by Ivan Serrano. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
