Over the past six months, a craze in the crypto world has surrounded spot Bitcoin exchange-traded funds (ETFs). With over a dozen applications in review by the U.S. Securities and Exchange Commission (SEC), Bitcoin investors are taking notice. The interest has translated into price gains. Bitcoin is up over 150% this year alone, with most of the gains coming in the past six months. These gains are anticipation of the spot ETF approvals, which seem imminent. Let's take a look at how these approvals could impact Bitcoin and the overall crypto market.
What Are Spot Bitcoin ETFs?
Spot Bitcoin ETFs are a way for investors to access Bitcoin by way of equities. Investors can trade shares of an ETF holding BTC instead of having to trade Bitcoin directly on the blockchain. The ETF derives its value from Bitcoin, but investors can trade shares on the secondary market.
In late December 2023, over a dozen applications for spot Bitcoin ETFs are in the hands of the SEC. The exact date of the approval is unknown and widely speculated, but some believe it could happen as soon as early 2024.
How Will Bitcoin ETF Approval Impact Bitcoin?
There are two main schools of thought on how Bitcoin ETF approvals will impact Bitcoin. Let's take a look at the bullish stance first.
Bulls believe that the approval of ETFs will bring Bitcoin even higher. Their primary argument is that the ETF will allow new investors to access Bitcoin. At the end of 2023, the only way to directly access is through a crypto trading platform. With recent scandals and litigation (FTX and Binance), some investors are hesitant to open accounts on these platforms for fear of losing their money. ETFs can be accessed from virtually any brokerage account that offers equities. This feature opens the investor base and could bring in a host of new investors.
Bears believe that approvals are already priced in and will mark a sell-the-news event. Their main point of evidence for this is the recent run-up in the price of Bitcoin, which is experiencing its best year since the last bull market. If the event is already priced in, then the actual event will have little to no impact on the price. It could drive the price lower if the outcome is worse than anticipated.
How Will Bitcoin ETF Approval Impact Altcoins?
Another interesting question is how Bitcoin ETF approvals will impact all other tokens (referred to as altcoins). There are a couple of schools of thought on this, as well as additional layers of complexity.
Some see the approvals as a positive catalyst, which will bring heightened attention to crypto and lead investors not only to Bitcoin but other cryptocurrencies as well. Additionally, the idea of spot ETFs for other cryptocurrencies has been discussed. Most notably, BlackRock has filed an application for a spot Ethereum ETF. The approval of Bitcoin ETF is successful, the idea could be applied to other top cryptocurrencies.
Conversely, if the ETFs do not turn out the way investors hope they will, it could shed a negative light on crypto as a whole. Since Bitcoin is the largest cryptocurrency, the failure of spot Bitcoin ETFs could indicate a lack of willingness to invest in crypto as a whole.
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How Do Spot Bitcoin ETFs Work?
An ETF is an investment vehicle in which a firm acquires a large pool of assets. These assets are divided into shares and sold to individual investors. These Investments are popular as they can allow investors to gain access to diverse assets, as well as aBssets that may be difficult to invest in.
Bitcoin ETFs do exist, but they use futures contracts to closely track the price of bitcoin. This results in two main issues. The price is not always closely tied to bitcoin. For example, one popular fund, BITO, is up just over 100% this year whereas Bitcoin is up over 150% this year. While price movements are similar, discrepancies exist.
These ETFs are costly to manage. GBTC, a leading Bitcoin Futures ETF, has an expense ratio of 2%. This is much higher than most ETFs and others in the same industry. Futures contracts have to be continually rolled over and managed, which is costly.
Spot Bitcoin ETFs address both of these issues. For the first issue, the price aims to more closely resemble Bitcoin because the underlying asset will not be futures contracts but Bitcoin.
For the second issue, the investment pool is Bitcoin. While this is still somewhat costly to manage, estimates show that it will likely be lower cost than the current futures-linked ETFs.
How Will Spot Bitcoin ETFs Improve Bitcoin’s Liquidity?
Another potential benefit of spot Bitcoin ETFs is that of Bitcoin liquidity. If the ETFs are approved, it will likely bring a wave of new investors and large investment firmsinto the market. The firms that own the underlying Bitcoin will enact trades, which will increase volume that should positively affect Bitcoin’s liquidity. Investors may be able to enter and exit trades at a smaller spread and in a more timely manner.
However, investment firms may become the primary buyers of Bitcoin, which could hurt other buyers in the market. Additionally, Bitcoin already has solid volume, typically totaling over $20 billion. This is larger than most prominent stocks, such as Apple and NVIDIA on average.
What Will Happen After Bitcoin in ETFs Get Approved?
A handful of potential outcomes could result from Bitcoin ETF approval. Some of the top things to watch for are capital inflows from new investors in equity markets, additional price speculation and volatility, improved liquidity, price fluctuations in the overall crypto market and additional spot ETFs for other cryptocurrencies. However, most of this is purely speculative. Only time will tell what will happen across markets once spot Bitcoin ETFs are approved.
About Caden Pok
Caden has been involved with crypto since 2018, when he began investing, trading, and mining tokens. He took part in undergraduate research studying cryptoeconomics at the University of Michigan, where he will graduate Phi Beta Kappa with a bachelor’s in economics in 2025. He is experienced with DeFi technology and multiple blockchains, currently investing in Ethereum and Bitcoin.