Bitcoin ETFs: What does the SEC’s approval mean for investors?

Vijay Valecha, Special to the Gulf Business Jan 11, 2024

It has been more than a decade since the US Securities and Exchange Commission first rejected an application by Cameron and Tyler Winklevoss, the billionaire co-founders of cryptocurrency exchange Gemini, for a Bitcoin exchange-traded fund as it was too risky for investors.

Exactly 3,845 days after that first application – and in a major victory for the cryptocurrency sector – the regulator on Wednesday finally approved the country’s first spot Bitcoin ETFs, clearing the way for trading to begin today on the New York Stock Exchange, Cboe Global Markets and the Nasdaq and making Bitcoin more accessible to retail traders.

The price of Bitcoin initially jumped on the news, rising to $46,919.49 on Wednesday night. It has since pared those gains and was trading at $46,806.36 as of 3pm UAE time on Thursday.

The SEC’s decision marks a historic chapter in the cryptocurrency sector, according to Richard Teng, chief executive of Binance, the world’s largest cryptocurrency exchange.

“The approval illustrates a new level of acceptance, maturity and mainstreaming of the crypto market, providing the industry with more credibility and potential for further innovation,” Mr Teng says.

“Bitcoin ETFs will provide easier access to the crypto market, attracting more investors and liquidity.”

Bitcoin ETFs are similar to traditional ETFs – a basket of securities consisting of stocks, bonds, commodities or other financial assets that track global markets – but the digital token is the underlying asset, says Vijay Valecha chief investment officer at Century Financial

ETFs are popular with retail investors because of their low-cost fees and easy access to a range of diverse assets, enabling them to self-manage their portfolios.

“By purchasing shares of the ETF, investors can indirectly own a portion of Bitcoin without the complexities of buying and storing it themselves,” Mr Valecha says.

“This provides a convenient and regulated way to invest in Bitcoin, especially for those who may be new to cryptocurrency or face regulatory restrictions when directly investing in cryptocurrencies.”

It has been a tumultuous few years for the global cryptocurrency sector, which entered a “crypto winter” in 2022 after the collapse of a number of large platforms including Celsius, Three Arrows Capital and Sam Bankman-Fried's FTX.

The collapse of FTX, once valued at $32 billion, is the highest-profile cryptocurrency exchange failure to date, after traders pulled $6 billion from the platform in three days and rival exchange Binance abandoned a rescue deal.

Mr Bankman-Fried was convicted in November last year of defrauding customers of $8 billion in one of the biggest financial frauds on record in the US. He is scheduled to be sentenced on March 28.

Changpeng Zhao, founder of Binance, the world’s biggest cryptocurrency exchange, also pleaded guilty to criminal charges last November and resigned from the company as part of a $4.3 billion settlement with the US Department of Justice.

In a statement on Wednesday announcing the SEC’s approval of the ETFs, chairman Gary Gensler was at pains to point out that the regulator did not “approve or endorse Bitcoin”.

“Investors should remain cautious about the myriad risks associated with Bitcoin and products whose value is tied to crypto,” he said.

Here is everything investors need to know about the Bitcoin ETFs.

Are the ETFs less risky than investing directly in Bitcoin?

Bitcoin ETFs are expected to eliminate the risks associated with self-storage, potential hacks or fraud and legal uncertainties, while regulatory approval from the SEC lends legitimacy to the funds and provides investors with a sense of security, Mr Valecha says.

“Investing in Bitcoin ETFs presents a smart and safe alternative to directly owning Bitcoin, as it offers a regulated and straightforward approach to trading the cryptocurrency,” he adds.

“Furthermore, the liquidity of stock markets compared to crypto markets makes investing in a Bitcoin ETF a more preferable option.”

However, it's crucial to acknowledge the drawbacks, such as limited trading hours and administrative fees.

Investors will also lose the anonymity offered by direct Bitcoin ownership, as ETF investments will involve know-your-customer checks and rely on third-party custodians, Mr Valecha says.

“Nevertheless, the regulatory oversight on spot Bitcoin ETFs provides an added layer of protection and enhances their appeal, especially to institutions navigating legal considerations associated with investing in Bitcoin,” he says.

A representative of cryptocurrency exchange Crypto.com, which secured a licence to offer specified virtual asset service activities from Dubai’s Virtual Assets Regulatory Authority in November, says other risks include the correlation between the price of the ETF shares and the price of Bitcoin.

“For example, it is possible that the price of the ETF shares deviates from tracking the Bitcoin price closely, or the shares could sometimes trade at a discount or premium to the actual underlying Bitcoin the ETF holds,” the representative says.

Meanwhile, Jeff Billingham, director of strategic initiatives at blockchain data platform Chainalysis, says the approval of Bitcoin ETFs will boost global anti-money laundering efforts by providing a regulated channel for exposure to the world’s largest cryptocurrency.

“Providers of financial services, such as brokers, will be subject to ongoing surveillance and compliance. To ensure they can conduct business unhindered, these companies will need to implement strict know-your-customer and AML policies,” he says.

The regulatory oversight on spot Bitcoin ETFs provides an added layer of protection and enhances their appeal, especially to institutions navigating legal considerations associated with investing in Bitcoin Mr Valecha says.

What do Bitcoin ETFs mean for the crypto sector?

The approval of Bitcoin ETFs marks a pivotal moment for the sector, ushering in a regulated avenue for institutional participation – from independent broker dealers to bank wealth divisions and registered investment advisers – in the crypto asset class, according to Mr Billingham.

Not only will Bitcoin ETFs provide a simplified entry point for retail investors, they will also bring in new capital and broaden the market, Mr Valecha says.

Regulatory scrutiny will also increase and signal the end of the crypto sector's “Wild West” era, ushering in more rules and oversight, Mr Valecha says.

Which companies are launching Bitcoin ETFs?

However, crypto-native players such as Bitwise and Galaxy are also leveraging their Bitcoin expertise to compete for the ETF crown, Mr Valecha says.

“Grayscale's existing customer base, comprises trust shareholders, adds a structural advantage, but the high planned fee of 1.5 per cent may pose challenges in attracting new customers.”

Source:

The National News