Why The Bitcoin ETF Is So Important
A Bitcoin ETF is likely coming very soon and it has the potential to start the next Bitcoin bull run. This would see Bitcoin’s price reach well above its previous all-time high of $69,000.
So what exactly is a Bitcoin ETF and why is it so important?
How Would A Bitcoin ETF Work?
An ETF — which stands for Exchange Traded Fund — is a type of publicly traded investment that tracks the performance of another asset or index. So, a Bitcoin ETF is an ETF that tracks the price of Bitcoin. A Bitcoin ETF works by having the firm that owns the fund control the Bitcoin, while investors just trade the ETF like they would any other stock.
There are actually several types of Bitcoin ETFs. The one that everyone is so excited about is a spot Bitcoin ETF. This type of ETF tracks Bitcoin directly and is backed by the actual asset. The other type of Bitcoin ETF, that is already listed on the stock exchange, is the Bitcoin Futures ETF.
The big difference here is that there is no Bitcoin directly backing the Futures ETF. Instead, it is backed by Bitcoin futures contracts. While this does allow individuals to get some exposure to Bitcoin on the stock exchange it is very different from being able to directly purchase Bitcoin. Many investors don’t want the extra risk associated with futures contracts and would much rather be able to invest in Bitcoin directly.
If you are already into Bitcoin, then you might be wondering, ‘Why does this matter?’ Anyone can go and purchase Bitcoin right now through an exchange, so why does having it on the stock market make any difference? There are several reasons why this is such a big deal.
Firstly, a Bitcoin ETF will make Bitcoin more accessible to those who aren’t already familiar with it. There are likely many investors who may be interested in Bitcoin but haven’t made that final leap into investing in it. Maybe they don’t want to put their money on a crypto exchange that they aren’t familiar with. While many crypto exchanges, such as Binance and Coinbase, are considered relatively safe, it’s understandable that many investors are hesitant to deposit significant amounts of money on these platforms, particularly after the events involving FTX in 2022.
Having Bitcoin directly on the stock market means investors can easily and comfortably move their money into Bitcoin while staying entirely on a platform that they are already familiar with.
The approval of a Bitcoin ETF would also add legitimacy to it as an investment. Many traditional investors are nervous about putting their money directly into a new type of asset like Bitcoin. They may be interested in it, but traditional finance has helped them grow their wealth and they may not want to risk their money on a new alternative.
If a Bitcoin ETF is approved that will be a huge thumbs up from traditional finance. This approval will likely make many investors feel more secure about potentially allocating small amounts of their wealth toward Bitcoin. It also helps that the ETFs currently awaiting approval are from well-known firms that many traditional investors are familiar with — BlackRock being the most notable.
To really get the best feel for how this could impact many older investors imagine that you’re a 60-year-old investor only a few years away from retiring. Would you really want to open an account with a company you know nothing about like Coinbase? It’s complicated, confusing, and scary. With a Bitcoin ETF, you would have the option to move some money that’s already in your brokerage account over into a BlackRock Bitcoin ETF.
For most investors, the Bitcoin ETF is going to be the better option. They don’t care about things like self-custody or having a hardware wallet. They just want to invest in Bitcoin as quickly and efficiently as possible. So, the fewer barriers they have the better.
A Bitcoin ETF would also allow many financial advisors to start offering Bitcoin to their clients. This would increase the ease and legitimacy of investing in Bitcoin even further. Long story short more people will be investing in Bitcoin if there is a Bitcoin ETF.
How Will This Affect Bitcoin’s Price
The most notable effect that the Bitcoin ETF will have is on Bitcoin’s price. If Bitcoin has more money flowing into it then it seems obvious that the price will climb. A lot of people have been comparing the Bitcoin ETF approval to that of the first US Gold ETF, which was approved in 2004. From 2004 through 2011 the price of gold increased by roughly 350%. That is a fairly substantial increase that can be, at least partially, attributed to the approval of an ETF.
A 350% increase on a more mature and stable asset like gold is very substantial. If gold can increase by that much then could a more volatile asset like Bitcoin increase by much more?
Galaxy Digital recently released a report that uses this comparison to Gold ETFs as a baseline for determining how a Bitcoin ETF could affect its price. They predicted that, in the first year alone, the price of Bitcoin would increase by 74%. Galaxy Digital believes that a Bitcoin ETF will dramatically open up the market of investors, which would result in $14.4 Billion in inflows in the first year alone. That would in turn result in the mentioned price increase.
Galaxy Digital also mentions that the overall price impact will likely be much larger than this due to the second-order effects of a Bitcoin ETF approval. This includes other international markets approving their own Bitcoin ETFs and other investment vehicles adding Bitcoin to their strategy. Basically, approval of a Bitcoin ETF would be the beginning of much wider adoption.
We have also recently seen just how much Bitcoin ETF news can move its price. Cointelegraph — a well-known crypto news site — dropped fake news that a Bitcoin ETF had been approved. Almost immediately the price of Bitcoin skyrocketed over 10%. While the price did come back down some, after it was determined the news was false, it still shows how much even the mention of an ETF approval can move price.
Later, there was additional news that showed several Bitcoin ETFs on the DTCC, which clears Nasdaq trades. This was important because it showed the BlackRock ETF with an actual ticker, likely the one we will see on the stock exchange. This sent more hope through the Bitcoin community and quickly raised the price of Bitcoin to $35k, a price not seen since early 2022.
Clearly, many investors are aware of the value a Bitcoin ETF could provide. Every single time that there is a little glimmer of hope one is about to be approved the price shoots up.
The History of The Bitcoin ETF
The excitement surrounding Bitcoin ETFs is not a recent development; in fact, it dates back over a decade.
All the way back in 2013, the first Bitcoin ETF was proposed by the Winklevoss twins —who are known most for their connection to Facebook. Ever since this initial Bitcoin ETF every single one has been shot down. Usually, the SEC cites something along the lines of market manipulation as the reason for rejecting them.
For many years there was very little progress on getting the SEC to approve a Bitcoin ETF, but in 2018 things started to look up. A record 9 Bitcoin ETFs were awaiting approval by the SEC. While it didn’t seem certain that any of them would be approved, it did seem more likely than ever before.
But the SEC struck them all down citing that approving one wouldn’t be consistent with the “… exchange’s rules be designed to prevent fraudulent and manipulative acts and practices.” Five years had passed with virtually no progress.
As we move forward to 2021 there was once again a lot of hope that a Bitcoin ETF could actually be approved. This optimism definitely helped the price of Bitcoin throughout that year. Bitcoin hit its all-time high price shortly after the first Bitcoin Futures ETF was approved. However, the Spot Bitcoin ETFs were denied.
2021 also saw another spot Bitcoin ETF get approved in a much smaller market — Canada. Still, it wasn’t enough to convince the SEC that the United States could handle one.
Now in 2023, we are waiting for the official approval of at least 8 Bitcoin ETFs. It seems incredibly likely that we are in the final stretch before a Spot Bitcoin ETF is approved.
One of the more prominent Bitcoin Funds— the Grayscale Bitcoin Trust — has been attempting to convert its trust into an ETF. After being rejected they sued the SEC on the grounds that it didn’t make sense to deny them while simultaneously approving a Bitcoin Futures ETF. They won this lawsuit in October 2023 and the SEC now has to review their application once again.
There are also many very influential players now pushing for the approval of a Bitcoin ETF. The BlackRock CEO went from claiming Bitcoin was a scam to now saying that investors are putting money into it because it is “…a flight to quality.”
It’s A Matter of When Not If
This change in opinion among large institutions shows that it is only a matter of time before we have several approved Bitcoin ETFs. The overall idea of what Bitcoin is and the purpose it serves are changing. Bitcoin is no longer a scam only used by criminals; it is a worldwide decentralized currency that has real value.
Maybe we will see the SEC deny these Bitcoin ETFs another time. Or maybe we will see them approved across the board. Either way, it is only a matter of time before one is approved and Bitcoin is accepted among the mainstream just like any other financial instrument.