Today marks the commencement of a new era in both the Bitcoin (BTC) realm and traditional finance. Spot BTC exchange-traded funds (ETFs) commenced trading on Thursday, January 11th, in the world's largest economy, the US.
The implications extend beyond the mere fluctuation of bitcoin prices. Furthermore, in the long run, this development may also have positive effects on other crypto assets.
Let's delve into the details.
What is it, what happened, and what comes next?
If you missed all the fervor surrounding BTC ETFs that intensified last year, here's a quick recap of what it is and what transpired.
ETFs serve as an investment instrument that provides exposure to an asset without direct ownership, representing one of the simplest ways to invest both for retail and institutional investors. This investment vehicle is highly popular in the US, and the Bitcoin industry has been unsuccessfully seeking approval from the Securities and Exchange Commission (SEC) for over a decade. While there are futures-based BTC ETFs in the US, spot BTC ETFs are deemed more investor-friendly, less risky, and necessitate actual BTC holdings.
The pursuit for this type of fund escalated last year when BlackRock, the world's largest asset manager, declared its intention to launch a BTC ETF. Additionally, in 2023, the SEC lost a crucial BTC ETF-related case in court, compelling the market watchdog to approve 11 spot BTC ETF applications on January 10th.
Trading commenced on January 11th, and the market is closely monitoring the influx of investments into ETFs. This will also signify the amount of BTC these funds are acquiring in a market where the supply of available BTC diminished last year. The prevailing opinion is that the launch of these funds might be gradual, taking months to gain momentum and witness more substantial flows.
This week, analysts at Standard Chartered estimated that ETF-related inflows might reach $50-100 billion by the end of this year. They suggest that this influx could potentially propel the price of BTC closer to $200,000 by the end of 2025. However, not all ETF experts share the same optimism, and some of them estimate that it’ll take years to reach $100 billion. Also, some argue that if the inflows reach $100 billion, it's more likely that the price of BTC could surge over $500,000 due to the relatively low supply of available BTC. As of the time of writing, BTC is trading at around $48,900, marking an 8% increase in a day and a 12% increase in a week. BTC is now up 180% in a year.
In summary, forecasts for ETF-related inflows and BTC prices vary widely. Only in the longer term will we witness how these dynamics play out in reality.
In either case, recent surveys indicate that ETFs are expected to attract more investors to the Bitcoin space. Consider this chart from a survey of 1500 Americans by Security.org:
Also, a separate survey of 437 financial advisors by Bitwise demonstrated the importance of an ETF when allocating their clients' money to BTC:
Meanwhile, analysts at Ecoinometrics emphasize that these new ETFs will enable Americans to allocate a portion of their retirement accounts to BTC, much like investing in a stock index or other assets. According to the analysts, the younger generations, being notably more drawn to Bitcoin as a long-term investment opportunity, could exert consistent buying pressure on BTC.
"You can't get anything more positive for the macro trend," they added.
Should you invest in a BTC ETF?
If you're interested in acquiring BTC, is an ETF the right choice for you? The answer depends on various factors, including whether you simply want to invest or transition to a different financial and monetary system. Additionally, you'll need to determine if you prefer learning how to directly hold and use BTC without intermediaries. In essence, a flow chart provided by the Bitcoin company River might assist you in deciding the most suitable method for acquiring BTC, should you choose to do so.
Spot BTC ETFs are not only about the price and investments. With the entrance of multiple traditional finance heavyweights into the Bitcoin space, including the aforementioned BlackRock, Fidelity, Franklin Templeton, and VanEck, the industry gains further legitimacy, drawing even closer to the multitrillion-dollar mainstream investment world.
Furthermore, as an even larger share of American voters and taxpayers embrace BTC, it will become more challenging for the government to implement Bitcoin-unfriendly policies, making a ban on this technology seem even more improbable.
It's worth noting that the implications of BTC ETFs extend beyond the borders of the US, contributing to the legitimization of this asset class in other regions as well.
For instance, Hong Kong has signaled its readiness to launch spot BTC ETFs, and the example set by the US might prompt Europeans to reconsider their own BTC ETF strategies.
Patrick Hansen, Director for the EU Strategy & Policy at Circle, the issuer of the second-largest stablecoin USD Coin (USDC), recently argued that with these new ETFs, US investors have a "much cheaper and much safer" option to invest in BTC-related security products compared to EU investors. Currently, spot BTC ETF fees in the US are in the 0.2-0.8% range, which is way lower than in other ETFs.
A double-edged sword
Another important consideration is how these potentially multi-billion funds and their sponsors might impact the entire Bitcoin ecosystem and the concept of Bitcoin evolving into a global, independent payment/monetary system.
Firstly, if these funds begin acquiring substantial amounts of BTC, it could lead to increased transaction fees and potentially exclude more vulnerable users who rely on BTC for their daily needs. Additionally, ongoing debates revolve around whether Bitcoin scaling technologies, like the Lightning Network, are the optimal solution in a high-fee environment and if this issue can be addressed promptly.
Conversely, if a significant portion of the BTC supply is locked in ETFs, it might eventually have a detrimental effect on the revenues of Bitcoin miners as the number of transactions would drop. Moreover, the reward for a found block in the Bitcoin blockchain is halved every four years during the Bitcoin halving process. (Currently, the reward stands at 6.25 BTC and is estimated to halve this April.)
Furthermore, there's a concern that, after consolidating enough power, ETF sponsors might attempt to influence Bitcoin rules, such as altering the existing proof-of-work consensus mechanism or removing the 21 million BTC supply cap. While these debates are intricate and extend beyond the scope of a single sentence, a more likely risk is that BTC ETF companies might seek to influence miners to only confirm compliant transactions, effectively introducing censorship into the Bitcoin blockchain. The market already witnessed initial signs of potential censorship in the blockchain last year (although this issue is currently more pronounced in the Ethereum (ETH) blockchain).
Finally, some Bitcoiners sense that the original concept of the cyberpunk network challenging Wall Street is now being overtaken by the very Wall Street giants that aim to transform BTC into just another tradable asset and accrue all possible fees through ETFs or new related investment vehicles.
However, there is a positive aspect as well. At least two BTC ETF sponsors – VanEck and Bitwise – have pledged to donate 5% and 10% of their BTC ETF profits, respectively, to Bitcoin developers and projects related to Bitcoin.
Another post-ETF approval narrative to monitor is the increasing speculation in the market about which crypto asset might secure its own ETF in the US next. The most likely contender is ETH, with the SEC already receiving multiple applications and a decision deadline approaching in May this year. However, due to the unclear status of ETH in the US, whether it is classified as a commodity or a security, the approval of an ETH ETF seems less likely. Furthermore, SEC Chair Gary Gensler emphasized this week that the approval of BTC ETFs "should in no way signal the Commission’s willingness to approve listing standards for crypto asset securities." Gensler uses the term "crypto asset securities" to refer to altcoins that are "investment contracts and thus subject to federal securities laws."
In conclusion, spot BTC ETFs bring about changes in both the Bitcoin and traditional finance realms, influencing them in various directions. Simultaneously, they present new opportunities and challenges, prompting serious questions that will test this 15-year-old decentralized network, the full extent of which is yet to be fully understood. With that said, this new era promises to be anything but boring.
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