Traditional finance made a bold move into crypto recently with Blackrock, Invesco, WisdomTree, and Fidelity coming after Bitcoin ETFs. Consequently, the hype around these projects has sent Bitcoin and other crypto up a few percentage points.
In this article, we explore ETFs in general and Bitcoin ETFs, in particular, to understand where all the fuss is coming from.
➕ What are ETFs?
‘ETF’ is an acronym for exchange-traded funds. It exposes investors to an asset without the investor having to own the asset. It is designed to track the performance of a specific index, sector, commodity, or asset class. ETFs are popular among investors because they offer several advantages.
???? Advantages of ETFs
- ETFs provide diversification by holding a basket of securities, such as stocks, bonds, or commodities.
- They offer liquidity as they can be bought and sold throughout the trading day at market prices.
- They have lower expense ratios (operating expenses) compared to mutual funds because they are passively managed and aim to replicate the performance of an underlying index rather than actively selecting securities.
ETFs can be bought and sold through brokerage accounts, just like individual stocks. Investors can choose to hold ETFs for the long term as part of their investment portfolio or engage in short-term trading strategies.
➕ What are Bitcoin ETFs?
Now that we understand what ETFs are, we can relate to Bitcoin as an asset class. Bitcoin and Ethereum ETFs expose retail investors to Bitcoin without then owning or trading it. The investors enjoy a convenient, diversified, and cost-effective way to gain exposure to Bitcoin, without going through the hassle of trying to understand how blockchain works.
ETFs are where traditional finance and the blockchain industry meet – where smart money and dumb money exchange liquidity. Bitcoin ETFs are very coveted because of how volatile the price of Bitcoin is.
Over the years, the United States Securities and Exchanges Commission (SEC) has used every tool in its arsenal to come after Bitcoin and cryptocurrencies. However, the young industry has ever so slightly evaded these attacks.
Since traditional finance is highly regulated, institutions that want to start trading Bitcoin ETFs must get a license from the relevant regulatory authorities (AKA SEC).
➕ Why are Bitcoin ETFs a Big Thing?
As explained above, Bitcoin ETFs are where liquidity exchanges hands. Traditional investors bring their hard-earned cash to the CME and use it to buy BTC derivatives. The owner of the BTC derivatives then uses the money to buy actual Bitcoin from the market. This raises BTC’s price and market cap exponentially.
This is how money flows in the crypto industry:
Once the ‘dumb money’ (Fiat) has bought Bitcoin, early BTC holders start selling BTC and buying large-cap cryptos. This pushes their prices up. In turn, those who held large caps begin selling them and buying midcaps, and so on.
Finally, when the market cycle is over, the money flows back into Bitcoin from the low caps. Bitcoin, in this last phase, is just a conduit to cashing out since it is accepted by the majority of banks. By the time the fiat exits the cryptosystem, money had exchanged hands from TradFi investors to crypto investors.
This is what happened in 2017 and Bitcoin skyrocketed from $900 to $19,000. Now the market is entering a new cycle.
➕Blackrock, Invesco, WisdomTree & Fidelity are coming after Bitcoin ETFs
Since the 2017 crypto bull run, the United States has not readily approved another spot Bitcoin ETF – backed by Bitcoin. On top of that, the SEC, CTFC and other financial government agencies had been very vocal and anti-crypto.
However, several large investment giants have filed for Bitcoin spot ETFs with the SEC. It seems like they might get approved.
Before the 2017 Bitcoin bull market kicked off, BTC was trading at around $1000 and was trudging along very slowly. Toward mid-2016, the media began to cover Bitcoin more and prices started to rise faster, by 2017, futures contracts began trading on the CME and many in the market felt like Bitcoin was becoming a genuine financial asset class.
The ‘dumb money’ finally had access to a new financial instrument with the blessing of the SEC, CFTC and mainstream media. Bitcoin flew off and hit $19,600 – a 1,349% increase.
Investment Giants’ Bid to Gatekeep Bitcoin and Crypto via ETFs
This time, however, things are different because Blackrock will partner with Nasdaq in a surveillance-sharing agreement to mitigate manipulation. Moreover, the giants ganging up to control the Bitcoin market through ETFs will inadvertently bring:
- Mainstream Adoption: ETFs are familiar investment vehicles for many investors, and the availability of a Bitcoin ETF would make it easier for traditional investors to gain exposure to Bitcoin without having to directly purchase and store the cryptocurrency themselves.
- Regulatory Approval: Approval of a Bitcoin ETF by the SEC would signify a level of acceptance and legitimacy for Bitcoin as an investment asset.
- Accessibility and Convenience: Bitcoin ETFs would make it more accessible and convenient for investors to invest in Bitcoin. Instead of dealing with the complexities of purchasing and storing Bitcoin through cryptocurrency exchanges.
- Risk Management: Bitcoin ETFs could offer risk management features, such as diversification and professional management.
- Institutional Investment: Bitcoin ETFs could attract institutional investors who have been hesitant to directly invest in cryptocurrencies due to regulatory concerns, custody challenges, and compliance issues.
Final Thoughts
While there is a chance Bitcoin ETFs might not last long and are only here to temporarily drive Bitcoin price up in cycles, their approval is greatly appreciated by those in the industry. This article is meant to help you understand what ETFs are and where you lie in the ultimate exchange of liquidity. Hopefully, if you are on the wrong side you are making arrangements to be on the receiving end by learning as much as you can about Bitcoin and cryptocurrencies before this bull cycle ends.
