In January 2024, the Securities and Exchange Commission approved eleven ETFs to hold spot bitcoin. Before this approval, the Securities and Exchange Commission had only approved bitcoin futures ETFS. Ahead of the announcement, the markets had perceived that the SEC would approve spot bitcoin ETFs in the United States and pushed up the price of Bitcoin by 61%. There are several benefits investors will achieve with new spot bitcoin ETFs. Fees will likely come down because of competition, and access to bitcoin will be more widely achieved as more large asset management companies begin to allow clients to trade bitcoin through an ETF that trades on an SEC-regulated exchange in the United States.

What is an ETF

Understanding an exchange-traded fund is helpful before we discuss how the new SEC is approved. An ETF (Exchange-Traded Fund) is an investment fund and exchange-traded product that pools together investors' money to invest in a diversified portfolio of assets such as stocks, bonds, commodities, or other financial instruments. It is designed to track the performance of a specific index, sector, commodity, or asset class.

ETFs are traded on stock exchanges, similar to individual stocks, and their shares can be bought and sold throughout the trading day at market prices. This situation allows investors to gain exposure to a wide range of assets and diversify their portfolios without owning the underlying securities directly.

ETFs are typically structured to hold a diversified basket of assets, which can help spread the investment risk. Most ETFs disclose their holdings daily, allowing investors to see the securities they own within the fund. ETFs can be bought and sold throughout the trading day on stock exchanges, providing investors with liquidity and flexibility.

ETFs generally have lower expense ratios than mutual funds due to their passive management style, which aims to replicate the performance of the underlying index rather than actively selecting securities.

ETFs are structured in a way that may provide certain tax advantages, such as the ability to minimize capital gains distributions. It's important to note that while ETFs offer benefits, they also have risks. The value of an ETF can fluctuate based on the performance of the underlying assets, and investors may incur brokerage fees when buying or selling shares.

Single Asset ETFs

ETFs can be indices like the S&P 500, bond funds, and single-asset ETFs. An ETF that only holds one asset is called a single-asset or single-commodity ETF. These types of ETFs specialize in tracking the performance of a specific asset or commodity, allowing investors to gain exposure to that particular investment without purchasing it directly.

For example, a Gold ETF invests in physical gold or derivatives that track the price of gold. They expose investors to the movements in the price of gold without needing to own and store physical gold. Oil ETFs track the performance of crude oil or oil-related derivatives. Investors can gain exposure to oil prices without directly trading futures contracts or physical barrels of oil. Currency ETFs track the performance of foreign currencies relative to a reference currency, allowing investors to gain exposure to currency movements without trading in the forex market directly.

What is Bitcoin

Bitcoin is a digital or virtual currency created in 2008 by an unidentified person or group using the pseudonym Satoshi Nakamoto. It is the first and most well-known cryptocurrency on a decentralized peer-to-peer network called the blockchain.

Bitcoin operates on a decentralized network, meaning it is not controlled by any central authority like a government or bank. Transactions are recorded on the blockchain, a public ledger maintained by a network of computers (nodes) spread across the globe.

Bitcoin has a maximum supply of 21 million coins, ensuring scarcity. New bitcoins are created through mining, where powerful computers solve complex mathematical problems to validate transactions and add them to the blockchain.

Bitcoin's blockchain technology provides a high level of security and immutability. Transactions on the blockchain are encrypted, making them difficult to alter. Additionally, the decentralized nature of the network makes it resistant to censorship and fraud.

What is Spot Bitcoin

A single-asset ETF recently approved by the SEC is a spot bitcoin ETF. Spot Bitcoin is the purchase or sale of actual Bitcoin for immediate delivery and settlement. It involves buying or selling Bitcoin at the current market price, with ownership of the Bitcoin transferred to the buyer upon transaction completion.

In spot Bitcoin trading, a form of cryptocurrency trading, the underlying asset is physically exchanged, meaning the buyer gains ownership and control over the actual Bitcoin. This is in contrast to derivatives like Bitcoin futures or options, where the contracts represent the value of Bitcoin but do not involve direct ownership of the asset.

Spot Bitcoin transactions occur on cryptocurrency exchanges or other trading platforms where buyers and sellers can interact directly or through intermediaries. The prices are determined by supply and demand dynamics in the market, reflecting the real-time trading activity and liquidity of Bitcoin. Spot bitcoin is traded on various exchanges. These exchanges facilitate the buying, selling, and trading Bitcoin and other cryptocurrencies.

How Would a Spot Bitcoin ETF Increase Volumes and Accessibility?

A spot Bitcoin ETF could affect Bitcoin trading volume and the broader cryptocurrency market. A spot Bitcoin ETF would provide an accessible and regulated vehicle for investors to gain exposure to Bitcoin. This may attract institutional and retail investors who hesitate or are restricted from directly investing in cryptocurrencies. The increased accessibility could result in higher trading volumes as more investors participate in the market.

ETFs generally have high liquidity, as they are traded on stock exchanges throughout the trading day. A spot Bitcoin ETF could bring greater liquidity to the Bitcoin market, creating a more efficient trading environment. Increased liquidity can lead to narrower bid-ask spreads, making it easier for investors to buy and sell Bitcoin at competitive prices.

A spot Bitcoin ETF with significant assets under management (AUM) could enhance market depth by attracting substantial investment capital. This increased capital flow could contribute to a more significant order book, reducing slippage and improving price stability. It may also attract market makers and institutional investors, further enhancing liquidity.

ETFs are based on the underlying asset's market price. With its continuous trading and transparent pricing, a spot Bitcoin ETF could contribute to more efficient price discovery in the Bitcoin market. This may increase trading volume as investors actively respond to market information and signals.

Launching a spot Bitcoin ETF may signal increased mainstream acceptance and legitimacy of Bitcoin as an asset class. This could encourage more traditional investors, including institutions, pension funds, and retail investors, to allocate some of their investment portfolios to Bitcoin. Such increased adoption and recognition can potentially drive up trading volumes.

ETF Fees Drive Traffic

Lower-fee ETFs can attract more trading volume for a few reasons. Lower-fee ETFs can be more cost-effective for investors as they have lower expense ratios than higher-fee alternatives. Investors are often attracted to lower-cost options that help preserve their investment returns over time. As a result, investors may choose to invest in ETFs with lower fees, leading to increased trading volume.

Lower expense ratios can potentially lead to better net returns for investors. ETFs with lower fees are more cost-efficient, allowing investors to keep significant investment gains. This better performance may attract more investors seeking higher returns, thereby increasing trading volume.

The ETF market is highly competitive, with many options available to investors. Lower-fee ETFs can be more attractive to investors and financial advisors when compared to higher-fee alternatives. By recognizing the demand for lower fees, ETF providers may actively market and promote their low-cost offerings, thus contributing to increased trading volume.

Investors have become more aware of the impact of fees on their investment returns. With increased emphasis on transparency and education within the investment industry, investors are increasingly mindful of minimizing costs. Consequently, there is a growing preference for lower-fee products, including ETFs, which can generate higher trading volumes for those ETFs.

Some of the largest ETF issuers were approved, including Blackrock, Fidelity, Franklin, VanExk, and Wisdom Tree. Grayscale and Bitwise, offering Bitcoin ETFs, were also approved.

The Bottom Line

The cryptocurrency ecosystem is gaining widespread acceptance. With the largest and most trusted ETF names in the world receiving approval from the Securities and Exchange Commission, investors should feel comfortable that the investment is safe and protected. The investments' security will be regulated, monitored, and protected under SIPC. Transparency and liquidity will continue to rise as fees decline and provide an alternative asset that can provide diversification to institutional and retail investors.