Investing In Crypto: The New Bitcoin ETF Era

Bitcoin, since its inception in 2009, has grown from a novel digital currency to a major financial asset that attracts both individual and institutional investors. Its unique characteristics, such as decentralized nature, limited supply, and borderless transactions, have positioned it as an attractive investment option. However, direct investment in Bitcoin involves technical complexities, security concerns, and regulatory uncertainties, which can be significant barriers to entry for many potential investors.

As the cryptocurrency market continues to mature, financial instruments that replicate Bitcoin, such as ETFs (Exchange-Traded Funds) and ETNs (Exchange-Traded Notes), have emerged as vital tools for traditional investors looking to explore the dynamic world of digital currencies.These instruments are designed to mimic the price movements of Bitcoin, providing a regulated and more accessible means for investment without the complexities and risks associated with directly purchasing, storing, and managing cryptocurrencies. They bridge the gap between the innovative cryptocurrency market and the traditional financial ecosystem, allowing for broader participation in digital asset investments.

As per definition, an ETF is a marketable security that tracks an index, commodity, or basket of assets but is traded on stock exchanges like an ordinary stock. A Bitcoin ETF, therefore, allows investors to gain exposure to Bitcoin’s price movements through a regulated investment vehicle without the need to directly own the cryptocurrency. An ETN, similarly, is a type of unsecured debt security that tracks an underlying index of securities and provides exposure to the price movement of Bitcoin, with the ease of trading it on a stock exchange just like any other corporate bond. It is expected that the ability to trade such instruments on the US market will contribute to the spread of cryptocurrencies in the portfolios of investors, both retail and institutional, worldwide.

The evolution of Bitcoin-specific financial instruments has significantly altered the landscape for investors interested in the cryptocurrency market. Spot Bitcoin ETFs and futures-based Bitcoin ETFs are two principal categories of Bitcoin replication instruments. Spot Bitcoin ETFs are designed to hold Bitcoin directly and provide investors with exposure to the cryptocurrency’s current market price, facilitating investment decisions based on real-time price movements. Conversely, futures-based Bitcoin ETFs derive their value from Bitcoin futures contracts rather than holding the cryptocurrency directly. Noteworthy examples of these instruments include the VanEck Bitcoin ETN and the 21Shares Bitcoin ETP, among others. Thanks to their low management fees and ease of understanding, ETFs are becoming increasingly popular in investor portfolios.

Beyond ETFs and ETNs, the financial market has innovated various other instruments to cater to the growing demand for Bitcoin exposure. Mutual funds that invest in Bitcoin or its derivatives offer another avenue for investors, combining professional management with the potential benefits of cryptocurrency investment. Similarly, Bitcoin futures provide a way for investors to speculate on the future price movements of Bitcoin, without holding the currency itself. Another notable instrument is the Grayscale Bitcoin Trust (GBTC), a company that operates like a closed-end fund and holds Bitcoin directly. Investors can buy shares of GBTC through their brokerage accounts, making it accessible to those familiar with traditional stock market investments. However, GBTC often trades at a premium or discount to the actual value of the Bitcoin it holds, reflecting market demand and sentiment towards the cryptocurrency.

The approval of spot Bitcoin ETFs by the U.S. Securities and Exchange Commission (SEC) on January 10, 2024, marked a watershed moment. This approval allowed issuers like BlackRock, ARK Invest, and Fidelity to list their Bitcoin ETFs on major exchanges such as the NYSE, Nasdaq, and CBOE. The culmination of a decade-long pursuit for the recognition of Bitcoin ETFs illustrates a significant shift towards mainstream acceptance and regulatory acknowledgment of cryptocurrencies.

On January 10th, the United States regulatory authority, the Securities and Exchange Commission (SEC), authorized the first spot Bitcoin ETFs. The approval came after a long and tumultuous journey and had been eagerly awaited by market operators. This decision by the SEC raises several considerations regarding investor access to this new asset class, the existence of equivalent products in the European market, and the effects of approval on the financial industry and cryptocurrencies in general.

The primary opening resulting from the SEC’s approval is that investors can now gain exposure to Bitcoin through ETFs without the need to manage digital wallets, hold cryptographic keys, or use cryptocurrency exchanges, with all the associated risks. The lack of familiarity with these instruments and distrust towards exchange platforms have so far limited the adoption of this type of investment. Additionally, security issues highlighted by companies like FTX have underscored the risks associated with cryptocurrency custody and the lack of regulation in the sector, an area that will remain unregulated in Europe until the MiCAR Regulation comes into force.

While the SEC’s decision is not entirely new for European investors, as there are already about 130 financial products on cryptocurrencies listed on European exchanges, these products are not regulated like ETFs and often follow different trends than Bitcoin. This aspect was crucial in the SEC’s approval, considering the risks of theft or loss of underlying cryptocurrencies, as seen with FTX.

The approval of Bitcoin ETFs in the US market, the most liquid in the world, provides significant legitimacy to this asset class, despite concerns about market manipulation or money laundering. Now attention is turning to the possibility of approving similar instruments for other cryptocurrencies, as evidenced by the recent 10% increase in the value of Ether, the second most widespread cryptocurrency, over 24 hours.

In conclusion, the approval of Bitcoin ETFs will allow asset managers and other institutional investors to invest more easily in cryptocurrency, potentially leading to a significant appreciation of Bitcoin, according to market expectations. However, in Europe, introducing harmonized funds that invest directly in cryptocurrencies will require amending current regulations, which require investments in liquid and listed instruments. The upcoming MiCAR regulation could further facilitate professional and retail investment in this asset class.

CC: Noemi Bruni and Paolo Marchetti