Bitcoin Spot ETF Approval: What It Means for Crypto Investors

The recent approval of Bitcoin spot exchange-traded funds (ETF) has set the crypto world abuzz. As a Jan 10, 2024 deadline approached, rumors were swirling and causing market volatility. The X account of the U.S. Securities and Exchange Commission (SEC) was hacked on January 9 to announce a phony approval before Bitcoin spot ETFs were finally approved a day later. What's all the fuss about — and why does it matter? 

This article unravels the Bitcoin spot ETF approval and explains how it works, the status of pending applications and its implications for crypto investors.

Key Takeaways:

• A Bitcoin spot ETF is an investment product that tracks the price of Bitcoin in the spot market, where it’s bought and sold for immediate delivery. 

• The applications of multiple issuers were approved Jan 10, 2024, paving the way for billions of dollars of Bitcoin spot ETFs to trade the first day.

• A Bitcoin spot ETF offers a method to invest in Bitcoin on a publicly traded stock exchange, simplifying access, boosting liquidity and providing transparency through a regulated fund. Approval marks a seminal moment for both the crypto industry and the financial markets.

What Is a Bitcoin Spot ETF?

A Bitcoin spot ETF is an investment product that tracks the price of Bitcoin in the spot market, where it’s bought and sold for immediate delivery. A spot ETF aims to mirror the spot Bitcoin price by buying Bitcoin in a secure digital vault. In contrast, current Bitcoin ETFs use futures contracts or other indirect instruments to gain exposure to Bitcoin. With the advent of a Bitcoin spot ETF, investors could access Bitcoin spot exposure on a traditional stock exchange, such as the NYSE or the Nasdaq, without directly buying and storing Bitcoin.

How Will a Bitcoin Spot ETF Work?

A Bitcoin spot ETF would work similarly to other ETFs that track commodities or currencies. The fund would have a sponsor or manager, who would create and redeem the fund's shares in exchange for Bitcoin. In addition, it would have a custodian to store and secure Bitcoin on behalf of the fund, which would charge a fee for its services and aim to track the performance of a Bitcoin price index.

Investors who want to invest in Bitcoin through a spot ETF wouldn’t need to buy, sell or store Bitcoin themselves. They would simply buy and sell shares of the fund on the stock exchange, just as with any other stock. A Bitcoin spot ETF would provide several benefits for investors:

• Ease of access: Investors wouldn’t need to deal with the tricky parts of buying and storing Bitcoin directly, such as setting up a wallet, finding a reputable exchange or protecting their private keys. They also wouldn’t need to worry about the regulatory or tax implications of owning Bitcoin in different jurisdictions.

• Liquidity: Investors could trade the fund's shares at any time during the trading hours of the stock exchange, with minimal transaction costs and spreads. They could also use various trading strategies and tools, such as margin, short selling or options that are either limited or not available in the spot market.

• Transparency: Investors would be able to see the price and holdings of the fund at any time, as well as the fund’s audited financial statements and reports. They could also verify that the fund holds the amount of Bitcoin it claims, and that the custodian has stored it securely and independently.

Current Landscape of the Bitcoin Spot ETF

Fifteen issuers, including BlackRock, Valkyrie, ARK 21Shares, Bitwise and Fidelity applied for approval for spot Bitcoin ETFs from the U.S. Securities and Exchange Commission (SEC). Prior to trading, the SEC needed to approve both the 19b-4 and S-1 filing forms for each ETF. Multiple issuers believed they were close to final approval after discussing final wording changes on spot Bitcoin ETF filings with the SEC on Friday, Jan 5, 2024, and many expected approval as early as Jan 9 or 10. 

By January 9, several leading financial firms had updated their S-1 filings, signaling the final stages before the possible approval of their respective spot Bitcoin ETFs. Notably, these filings have revealed sponsor fees, many of which are being announced for the first time. 

For example, BlackRock initially set a sponsor fee of 0.3%, which was later reduced to 0.25%. Its original discount was also reduced from 0.2% to 0.12% during its first year or until the ETF accumulates $5 billion in assets. VanEck has opted for a lower permanent fee of 0.25%, while WisdomTree's fee is higher at 0.3%. Bloomberg ETF analyst Eric Balchunas commented on the competitiveness of BlackRock's fees, highlighting the challenging environment for other firms. 

Similarly, ARK 21Shares reduced its fee from 0.8% to 0.21%, with no fees for the first six months or until reaching $1 billion in assets, a move Balchunas described as significant in the context of the ongoing fee wars. Additionally, Grayscale filed an amended S-3 form to convert its flagship Bitcoin trust into an ETF, lowering its fee from 2% to 1.5%.

These updates follow the recent final amendments to their 19b-4 forms. Now, the focus shifts to the SEC for their decision. After SEC approval, the ETFs can start trading the next day.

Hack on the SEC X Account

As if there weren’t already enough intrigue, the SEC’s X (formerly Twitter) account posted a false statement approving spot Bitcoin ETFs on January 9. The regulator confirmed that hackers had compromised the account, likely because they hadn’t set up two-factor authentication. The bogus tweet caused about $90 million in liquidations, after the price of Bitcoin rose and promptly fell when the truth came out.

Current Impact on the Crypto Market of Bitcoin Spot ETF Applications

The anticipation surrounding potential approval of Bitcoin spot ETFs in the U.S. has had a visible impact on the crypto market, notably affecting Bitcoin's price and overall sentiment. A flash-crash triggered by a Matrixport analyst's note predicting rejection of all BTC spot ETF applications momentarily pushed BTC below $41,000. However, Bloomberg Intelligence analysts’ estimate of a 90% probability of SEC approval by Jan 10, 2024 contributed to Bitcoin's rebound to $45,000. Soon after, BTC price further surged to $47,000 for the first time since April 2022, buoyed by investor optimism surrounding the anticipated approval of U.S. spot BTC ETFs.

According to a recent survey, financial advisors view the spot ETF approval as a significant catalyst, with 88% expressing interest in purchasing Bitcoin once these ETFs receive approval. They're considered preferable to existing futures-based options, and there's a prevailing belief that they’ll draw substantial investment into the world’s primary cryptocurrency. Analysts expect the ETFs could attract over $50 billion in inflows.

In addition, there's speculation that attention might shift to Ethereum once the Bitcoin ETFs are approved. Markus Thielen of Matrixport anticipates potential outperformance of ETH over BTC, with decisions on spot-based Ether ETF applications potentially arriving around May. Overall, market sentiment is bullish, given that ETF approval could mark a pivotal moment in mainstream adoption and acknowledgment of digital assets. It's expected to bolster market liquidity and transparency and potentially diminish volatility and manipulation risks. In addition, it’s seen as a catalyst for further innovation in the crypto space, potentially sparking advancements in futures, options contracts, decentralized finance (DeFi) and other use cases.

Bitcoin Spot ETF Application Approvals

On Jan 10, 2024, the SEC finally approved Bitcoin spot ETFs for the first time based on a 3-2 vote. Despite previously having spoken negatively about the risks of crypto, SEC Chair Gary Gensler cast the deciding vote in support of ETF approval. A federal court mandate to review Grayscale’s ETF application may have put the pressure on.

Meanwhile, applications from ARK 21Shares, Invesco/Galaxy, VanEck, WisdomTree, Fidelity^®, Valkyrie Investments, BlackRock, Grayscale, Bitwise, Hashdex and Franklin Templeton have all been approved.

What Does Bitcoin Spot ETF Application Approval Mean?

The SEC’s approval of Bitcoin spot ETF applications marks a huge moment for the crypto industry and the financial markets. Such a decision signals that U.S. regulators recognize Bitcoin as an asset class, and that the crypto industry has a shot at meeting their standards of investor protection and market integrity. This recognition could open doors for more innovation and the adoption of crypto assets, making it easier for all sorts of investors to get involved with Bitcoin.

Here are some potential developments following the approval of Bitcoin spot ETFs:

• Positive and bullish effect on Bitcoin's price and sentiment: Bitcoin spot ETF approval could increase demand for and confidence in Bitcoin, as more investors would see it as a viable and attractive investment option. More people would become aware of Bitcoin and want to get in on the action through the ETF. Some analysts and experts have estimated that a Bitcoin spot ETF could attract billions of dollars of inflow into the crypto market, and push the price of Bitcoin to new highs.

• Make Bitcoin more accessible: Bitcoin spot ETF approval makes it simpler for millions of U.S. investors to get involved with Bitcoin. They could easily buy and sell BTC through their regular brokerage accounts, IRAs, 401(k) plans and pensions. This development would mean that they wouldn't have to tackle the technical complexities of purchasing and storing Bitcoin themselves. It would mean having a streamlined way to invest in Bitcoin alongside their traditional investments, making it more accessible and convenient for everyday investors.

• Negative and bearish effect on the price and sentiment of Bitcoin alternatives: Bitcoin spot ETF approval could reduce the attention and demand for other cryptocurrencies, such as Ethereum, Litecoin and Bitcoin Cash. Investors might favor Bitcoin, the more established choice available through the ETF, potentially reducing the appeal of other cryptocurrencies. These alternative cryptocurrencies might also face more regulatory challenges as a result. The SEC could set stricter rules for them to qualify for their own ETFs, which might make them less attractive or accessible to investors as compared to Bitcoin.

• Mixed impact on crypto innovation: Bitcoin ETF approval could attract significant investments and attention to cryptocurrencies. This influx of capital and talent could spark more innovation and development within the industry, leading to new and improved services for everyone involved. Also, collaboration between traditional finance and crypto could birth innovative products that bridge both sectors.

However, there are concerns as well. The introduction of a Bitcoin spot ETF could mean more regulations and middlemen entering the crypto market, which might go against the very principles that have driven crypto's growth — decentralization and freedom from traditional financial controls. Again, being tied to the stock market and regulatory bodies could steer the crypto industry in directions that might not align with its original goals.

In essence, while a Bitcoin spot ETF could bring in resources and connections, there’s also the possibility it may compromise some of the fundamental values that make cryptocurrencies unique. There’s a balancing act between growth and staying true to the principles that sparked the crypto revolution.

The Bottom Line

The current Bitcoin spot ETF approval makes it easier for institutional and retail investors to get into Bitcoin without the technical and regulatory complexities associated with directly holding the digital asset. As a result, it’s been one of the most anticipated and influential events for the crypto world. This approval could transform how people invest in cryptocurrencies. Yet, it may overshadow other cryptocurrencies and introduce new regulations that challenge crypto's core principles. It would be a big step forward, but it also poses questions about maintaining the essence of decentralization in this evolving landscape.

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