What is a spot bitcoin ETF, and how will its approval by the SEC impact investors?

 

The Securities and Exchange Commission approved spot bitcoin exchange-traded funds, or ETFs, sponsored by Wall Street on Wednesday, a significant regulatory move that would make it simpler for regular people to invest in the digital currency.

The SEC approved the offering of spot bitcoin ETFs by a number of financial organisations, including asset management behemoths like BlackRock, Fidelity Investments, and Franklin Templeton, which cater to retail investors.

Until recently, the SEC had only approved bitcoin futures ETFs. Bitcoin prices have more than doubled since last year as a result of the SEC's approval of the ETFs, according to CoinDesk's Bitcoin Price Index. According to CoinDesk, prices for the cryptocurrency have already climbed 61% since October on expectations that the SEC will approve spot ETF applications.

Here's all you need to know about spot bitcoin ETFs.

What's an ETF?

ETFs are pooled assets that, like mutual funds, trade on stock markets and track a certain index, sector, or asset class such as gold. They, unlike traditional mutual funds, can be bought and sold at any time of day.

A spot bitcoin ETF provides investors with direct exposure to bitcoin without the need to hold it. Unlike conventional bitcoin ETFs, which use bitcoin futures contracts as their underlying asset, a spot bitcoin ETF has bitcoins as its underlying asset.  Each spot bitcoin ETF is run by a company that sells shares of its own bitcoin assets to other investors or through an authorised cryptocurrency exchange. The stock is traded on a typical stock exchange.

Which ETF applications were approved?

BlackRock's iShares Bitcoin Trust, Grayscale Bitcoin Trust, ARK 21Shares Bitcoin ETF, Bitwise Bitcoin ETP Trust, WisdomTree Bitcoin Fund, Fidelity Wise Origin Bitcoin Trust, VanEck Bitcoin Trust, Invesco Galaxy Bitcoin ETF, Valkyrie Bitcoin Fund, Hashdex Bitcoin ETF, and Franklin Bitcoin ETF have all been approved by the SEC.

Spot bitcoin ETFs vs. buying bitcoin: What's the difference?

In a few ways, investing in spot bitcoin ETFs varies from buying bitcoin directly.

First, according to Cory Klippsten, CEO of Swan Bitcoin, investors who invest in bitcoin ETFs do not own any bitcoin outright. Second, financial institutions will charge fees to trade and manage a bitcoin ETF. People who acquire bitcoin directly pay a transaction charge, but there are no costs associated with monitoring the investment.

There are several benefits to purchasing bitcoin through an ETF. Investors, for example, can keep and track their bitcoin ETF in the same brokerage account as their other investments.

What could be the impact of the SEC approving bitcoin ETFs?

Investors believe that the introduction of spot bitcoin ETFs will drive billions of dollars into the digital currency by making investing easier and less daunting.

Firms such as BlackRock and Fidelity are household names in financial services, and their decision to enter the sector pushes bitcoin farther into the mainstream as an investment class while also providing credibility to the opaque and unpredictable crypto economy.

"A spot Bitcoin ETF marks the end of crypto as a 'novel' asset class and the beginning of a world where it can be part of every portfolio," said Nathan McCauley, CEO of Anchorage Digital, a cryptocurrency platform provider for financial firms.

Experts predict that as demand for bitcoin grows, so will its price, resulting in even greater investment and interest in cryptocurrency. Increased investment in bitcoin, combined with the introduction of new products from trustworthy financial actors, might potentially hasten the passage of rational legislation aimed at eradicating fraud and normalising crypto as a means of investing, making payments, and conducting business in general.

According to Rajeev Bamra, senior vice president of Digital Finance at Moody's Investors Service, strengthening the regulatory framework for cryptocurrency is critical.

"Whether this trend will hold depends on the trajectory of global monetary policymaking as well as the availability of cryptocurrencies to institutional investors through products that meet regulatory standards, ensuring their safety and security," he added.