Spot Bitcoin ETF: What’s This and Why It Matters?
Dynamic and unpredictable, the crypto world never lacks info drives that put financial markets into motion. However, in the last months of 2023 and the first weeks of 2024, one topic has been having a much more powerful impact on the crypto market dynamics than the others. And the name for this game-changing force fitted within six capital letters: BTC ETF.
What will a Bitcoin ETF bring to the cryptocurrency market?
Those interested in crypto may have heard about big financial players’ plans to launch the first spot Bitcoin exchange-traded fund in the United States. Yet, if you haven't delved into this topic deeply, you may not fully comprehend what this news means and what potential consequences it may entail. If this is the case, we’re here to help you fill this gap.
So, what’s a spot Bitcoin ETF and why has the possibility of its launch in the US been shaking the cryptocurrency market for the past few months? Let’s find out.
Exchange-traded funds explained
An exchange-traded fund (ETF) is a specific type of fund that is publicly traded on stock exchanges and linked to a particular asset or index, exposing investors to its price fluctuations.
To put it differently, it is an investment instrument that tracks the performance of a particular underlying asset. Investors having their shares in the ETF may try to capitalize on its price movements without purchasing and holding the actual asset.
For an ETF to work as intended, it needs to be backed by the underlying assets owned by a fund provider. Upon obtaining ownership over such assets, this provider creates a fund to track their performance, registers it properly, and receives the regulatory approval of the overseeing body – in the case of the United States, the SEC (U.S. Securities and Exchange Commission).
Those investing in the ETF basically purchase a share in the fund, but don’t obtain direct ownership over actual underlying assets. However, since the value of their shares rises proportionately with the value of the underlying assets, these investors may capitalize from their price movements in the same way as the holders of the actual assets do.
This way, ETFs provide investors with investment opportunities associated with assets without them having to go through formalities of purchasing and holding such assets.
Bitcoin ETF: What is it and why is it important?
Considering the ETF definition above, it is not difficult to understand what a Bitcoin ETF is. Basically, BTC ETF is an exchange-traded fund that has Bitcoin as an underlying asset and exposes investors to price fluctuations of this cryptocurrency.
The principles of a BTC ETF’s functioning are also not unlike those of other exchange-traded funds. Investors simply buy ETF shares at the stock exchange of their choice and make gains if Bitcoin’s price goes up (and vice versa).
Some may ask a rather just question: why do we need a Bitcoin ETF if those who want to capitalize from crypto market volatility can simply buy BTC on a crypto exchange and get all the same benefits while also being able to use this crypto for other purposes? There are a few reasons for this:
Investor confidence. While cryptocurrencies have long become part of many enthusiasts’ lives, blockchain technology remains a terra incognita for many impactful Wall Street companies. Old-school investors require old-school investment assets, which they are used to finding on stock exchanges. When an asset receives the ETF associated with it, its reliability in the eyes of institutional investors rises hundredfold – and so does their interest in putting money into it.
Convenience. For investors who are already actively involved in stock exchange operations, delving into the crypto game may be associated with many extra steps. They would need to pick a crypto exchange, create an account, figure out how to invest in cryptocurrencies, and so on. Meanwhile, in the case of BTC ETF, it won’t be different from investing in any other fund. This way, investors will access the perks of crypto price fluctuations without having to deal with any formalities associated with asset management.
Safety issues. For crypto neophytes coming from other investment spheres, picking an exchange and buying BTC may already be challenging enough. However, when it comes to purchasing large volumes of digital assets, the actual hard part is protecting and securing them afterwards. If you’re holding your own crypto, the burden of security and risk management lies on you. Meanwhile, when it comes to BTC ETFs, underlying assets are protected by the fund providers, which gives you one less reason to worry.
This list can be continued for a long time. All the arguments in favor of introducing a BTC ETF can be reduced to one central idea: such a fund will make cryptocurrencies more accessible, convenient, and reliable for institutional investors, potentially causing an influx of new funds to the crypto market, promoting its further growth, and boosting cryptocurrency adoption.
Current state of affairs
The “will they – won't they” plotline around the regulatory approval of spot BTC ETFs by the SEC has been unfolding for a large part of 2023. The Commission had a few applications on the table, including those from major financial giants like Grayscale and Fidelity. However, it was in no hurry to approve all these proposals. Instead, for a few months, the SEC has been sending them back and forth with the applicants, obliging the latter to make numerous amendments and modifications so that the proposals meet the requirements of the US cryptocurrency regulations.
Finally, on January 10, 2024, the long-awaited decision has been announced: all 11 Bitcoin ETF applications under the SEC’s consideration have been approved. Next day, these ETFs started trading on major exchanges, immediately attracting considerable attention from investors, who poured almost $2 billion into the newly introduced funds within the first three days after their approval.
And although for now it is still unclear if this pace will be sustained in the future, one thing is certain: the approval of US-based spot BTC ETFs has opened a new page in the history of crypto integration into traditional investment landscape.
Bottom line
The buzz around spot BTC ETFs had been causing a colossal market impact on the crypto realm for a good portion of the 2023. These crypto-backed funds, designed to expose investors to Bitcoin’s price fluctuations while eliminating the need to directly purchase coins on crypto exchanges, were expected to shake the crypto domain – and they did, boosting Bitcoin’s price for months and attracting significant investments in the first few days after their approval by the SEC.
How will the regulatory approval of US-based spot BTC ETFs change the world of crypto? Time will tell. Meanwhile, it will provide those investors who don’t want to deal with creating crypto exchange accounts and navigating through the maze of financial innovation an opportunity to capitalize on Bitcoin’s frequent price fluctuations. And if ETFs are not your thing, and you prefer dealing with crypto in a traditional way, you can always buy BTC and other top coins on our platform. The choice is yours.
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