There has been a lot of discussion in the crypto space about a Bitcoin ETF and when it could finally be approved. This editorial takes a closer look at what a Bitcoin ETF is and why it is so important for the cryptocurrency market over the longer term.
ETF Definition: Exchange-traded Fund
The baseline definition for an exchange-traded fund (ETF) is a specific type of security that tracks the performance of an index, commodity, sector, or a basket of securities that can be purchased or sold on stock markets pretty much same way a regular stock can.
An ETF can easily be structured to track the performance of any asset – from the price of a commodity to the price of a cryptocurrency and, in our case – Bitcoin.
With an ETF, the underlying asset is owned and traded by a fund – this eliminates the need for investors to do it on their own. The fund would divide fragment the ownership of the asset into shares and that’s what investors can purchase.
ETF shareholders receive a portion of the funds’ profits through dividends (in case the assets – like stocks – share such, or earned interest paid).
Bitcoin ETF: Gateway to Traditional Investors
One of the predominant benefits of a Bitcoin ETF would be that investors won’t have to worry about safeguarding the underlying asset – the BTC.
This is a serious thing to consider. Many traditional investors are unaware or simply unable to store their bitcoins adequately. This is because the industry is still rather nascent and keeping full custody of your private keys and, respectively – your bitcoins, could be a challenging task.
Are There Any Existing Bitcoin ETFs?
Before diving into the specific advantages of a Bitcoin ETF, it’s important to note that there are some countries that have already approved products of this kind.
For example, the Ontario Securities Commission (OSC) in Canada, approved an application from the financial services company Purpose Investments Inc., to launch a Bitcoin ETF in a few Canadian territories. The Purpose Bitcoin ETF, as it is called, raked in over $400 million in assets within two days of its launch. Clearly, this is a sign that there’s huge demand, especially institutional, for it.
Another country that greenlighted a Bitcoin ETF is Brazil. The local regulator – the Securities and Exchange Commission (CVM), approved the application of a company called QR Capital and ts QBTC11 product – it went live on the Sao Paulo stock exchange in March 2021.
And yet, many believe that the most important jurisdiction to approve a Bitcoin ETF is the US. So far, however, the country’s Securities and Exchange Commission (SEC) has been reluctant to do so and has continuously rejected the applications of various companies such as VanEck, as well a the one made by the Winklevoss Twins.
Many people believe that an SEC-approved ETF will be a major catalyst for Bitcoin’s price because it would open the gates for institutions to receive exposure to BTC through an SEC-regulated instrument.
Why is a US-approved ETF a Game Changer in Bitcoin’s Adoption?
To better answer this question, we will take a closer look at what Gabor Gurbacs – the Director of Digital Asset Strategies at VanEck, which is one of the companies making the most serious efforts to push a Bitcoin ETF in the US.
According to Gurbacs, some of the main benefits of an exchange-traded fund include, but are not limited to:
Increased Liquidity via the AP & ETF Ecosystem
A larger pool of investors means more capital will flow into space, which provides liquidity for traders and investors to enter and exit the market more efficiently.
Lower Counterparty Risk
A regulatory sound environment leads to lower counterparty risk for both investors and exchanges. In fact, in our interview with the well-known investor Kevin O’Leary, he revealed that regulatory compliance is one of the first and foremost barriers to entry for institutions.
Better Valuation and Execution Practices
Similar to how NASDAQ regularly undergoes a thorough evaluation of their exchange to maintain regulatory compliance, we can expect the same standard to come from cryptocurrency exchanges that offer a Bitcoin ETF.
Separation of Duties: Trading, Custody, and Valuation
An exchange like Coinbase has already begun the process of offering custody services in addition to trading. This step is most likely a part of their broader plan to launch their ETF.
Once ETFs are approved, trading Bitcoin at an institutional level will be officially legitimized, giving confidence to more big investors to enter the market, which allows exchanges to reduce fees as trading volume increases.
Compliance With Global Regulations
Generally, more regulatory compliance (especially on a worldwide scale) leads to wider adoption for the traded assets. Currently, many governments are either hesitant to endorse the use of cryptocurrencies or are outright banning them due to a lack of regulatory oversight. Although complete regulatory control is not achievable for these governments, some form of mutual understanding over what the rules are around KYC, fraud prevention, etc. between the exchanges that trade bitcoin and Government generally leads to them endorsing the right for citizens to use these services.
Asset Management Experience
There are thousands of highly experienced asset managers that are patiently waiting on the sidelines for regulatory approval before they can offer cryptocurrencies as an asset to manage for their clients.
In many cases, it’s the clients who are hammering at their asset managers’ doors wondering when they can diversify their portfolio into the crypto space. An approved Bitcoin ETF would open the floodgates for highly sophisticated asset managers to provide higher returns for their clients by investing and trading Bitcoin and other cryptocurrencies.
It’s quite clear that an SEC-approved Bitcoin ETF would mean a lot for the entire cryptocurrency industry. Not only will it completely legitimize BTC as an investable asset, but it would also open the doors to many who are currently sitting on the sidelines because of the lack of regulatory-approved means of parking large sums of money into Bitcoin.