Excitement is brewing in the investment world as anticipation builds for the arrival of spot exchange-traded funds (ETFs) designed to track cryptocurrencies. With Wall Street giants filing for spot Bitcoin ETFs, enthusiasm is on the rise, marking a significant step in bringing cryptocurrency closer to broader acceptance by major financial institutions.
A spot crypto fund would be a game changer for Bitcoin investing and track the market price of the underlying digital asset. It would give investors exposure without needing to mine or buy the currency and hold it in an encrypted wallet. This way, crypto holdings can securely sit alongside an investor’s portfolio of bonds, equities, and other assets, just like a traditional investment product.
In recent months, prices for major crypto tokens have been climbing. In August, the U.S. Securities and Exchange Commission (SEC) lost a legal battle over rejecting Grayscale’s application to turn its Bitcoin trust into an ETF. Investors believe it is only a matter of time before the regulators finally give the green light.
The SEC is reviewing between eight to ten applications by asset managers, including BlackRock, Franklin Templeton, and Fidelity, who are each vying to launch their spot in a Bitcoin ETF.
How will the arrival of ETFs for Bitcoin change the investing landscape? If successful, the arrival of these funds will create a new category for investors’ ETF portfolios. However, which funds attract the most significant inflows of capital and the impact on Bitcoins’ price action remains to be seen. Investors would do well to take a closer look at the regulatory dynamics to understand the risks involved before diving into the deep end with this new investment vehicle.
Just how long will investors need to wait? It’s impossible to know when the first fund will spring forth from the pipeline, yet several high-profile ETF analysts have said the chances of an ETF being approved in January are around 90%.
That would coincide with the SEC’s third deadline to decide on Blackrock’s application for the iShares Bitcoin Trust – the most widely anticipated fund in the application pipeline.
However, a looming deadline is no countdown to lift off. There’s no guarantee the fund will get the all-clear to hit the ignition.
Fund issuers are trying to pinpoint exactly what the regulator needs from them. Representatives of the world’s largest fund manager, BlackRock, met with SEC officials to discuss whether an “in-kind redemption model” or “in-cash” version of its fund may be preferable.
Even Greyscale, which has been in and out of court with the SEC, resumed talks with the ESEC in recent days to once again discuss issues around converting its Grayscale Bitcoin Trust (GBTC) into a spot ETF.
A Ways To Go?
However, the applications are still not out of the regulatory woods yet. Despite their best efforts, there may be more technical hurdles to clear to assure regulators that fund managers can safeguard investors’ assets. Recently, BitGo CEO Mike Belshe told Bloomberg it’s “quite likely” the SEC will reject applications where exchanges and custody are not separated. He singled out Coinbase, which is set to act as a custody partner for multiple ETF applicants.
“There are a lot of risks in that entity Coinbase that are not understood,” Belshe said. “I think that the SEC could quite likely come back and say: ‘Nope, you’ve got to separate out those things fully before we move forward.’”
Others see a long and winding road ahead for applicants. Famed investor and former “Shark Tank” host Kevin O’Leary recently warned that it could take another year and a half for a spot Bitcoin ETF to be approved. He explained that the spot ETF relies on a crypto exchange to confirm the asset’s real-time price, but the SEC has not yet found a transparent and compliant exchange. Coinbase, a likely candidate, is in litigation with the SEC, like several other exchanges.
O’Leary sees light at the end of the tunnel, but not for all digital tokens. When asked about his private conversations with large organizations about Bitcoin, he told the Benzinga conference that “all of them” are ready to buy Bitcoin — and only Bitcoin.
“They aren’t interested in the 10,000 token story. Bitcoin is proving itself to be liquid enough, it’s proving itself to be a storage of wealth, most people consider it a commodity,” O’Leary said.
Investors are already using Bitcoin to diversify their portfolios to guard against bond and equity volatility and geopolitical turmoil in a hedging strategy similar to investing in gold.
With the arrival of ETFs, Bitcoin could gain the investment-grade legitimacy it needs for further institutional adoption.
In 2022, Fidelity Investments, the largest 401(k) plans provider, launched a Digital Assets Account, allowing their clients to partially allocate their savings in Bitcoin. However, not all brokerage firms are so bullish. In July, Vanguard executives expressed caution, describing any plan to put a cryptocurrency fund option into a 401(k) lineup as “very premature.”
Retirement savings plans are highly differentiated based on individual preferences. Regardless of what large fund issuers offer, each person will need to personally weigh the pros and cons of holding a Bitcoin fund depending on their situation and priorities.
The outlook for a spot ETF remains complex. No matter the latest drama surrounding regulatory procedures, the underlying trend lines are shifting clearer, and Bitcoin continues to attract attention from institutional and retail investors alike.
In sizing up the potential for a spot ETF in their portfolio, investors must consider several factors, such as a time horizon, risk tolerance, regulatory considerations, and diversification options. With well-balanced exposure, a Bitcoin spot ETF can potentially deliver profitable results for investors.