In the midst of its unprecedented surge in mainstream popularity, Bitcoin has captured the attention of a myriad of newcomers eager to acquire a piece of the digital currency. Nevertheless, investing in Bitcoin can be intimidating and complex for newcomers. It involves technical aspects like crypto wallets, Bitcoin addresses, and private keys, which can be confusing and scare away potential investors. Additionally, the lack of clear regulations and the need for self-education in dealing with crypto exchanges and securing private keys pose challenges.
Investors who want to bet on Bitcoin may soon have more options to choose from if US regulators soften their opposition to exchange-traded funds tied directly to Bitcoin holdings. Major financial firms including BlackRock, Fidelity and Invesco have submitted applications to sell US “spot” Bitcoin ETFs that would be physically backed by actual Bitcoin.
In the past, the US Securities and Exchange Commission(SEC) has routinely rejected these products, citing wariness over volatility and potential manipulation. Investors took the BlackRock filing, in particular, as a sign that the SEC was close to dropping its longtime opposition to such financial projects. Bitcoin prices hit a one-year high in the days after BlackRock’s application.
How does a Bitcoin ETF work?
A Bitcoin ETF is managed by a firm that holds the actual Bitcoin. The price of the ETF is tied to the value of the Bitcoin held in the fund.
The ETF is listed on a traditional stock exchange, allowing investors to trade it just like any other stock. Unlike traditional ETFs, a Bitcoin ETF does not provide dividends since Bitcoin is decentralized. Investors are required to pay fees, a portion of which covers the custody and management fees associated with purchasing and storing the underlying Bitcoin.
A Bitcoin ETF in the United States would bring a higher level of mainstream trust and acceptance to Bitcoin investing. While some big companies have already invested in Bitcoin, it is still viewed as risky or even a gimmick by conservative investors.
Understanding Regulators’ Hesitation
The reluctance of regulators to embrace Bitcoin ETF can be attributed to various concerns. Liquidity and potential manipulation have long been key worries, with regulators cautious of Bitcoin’s notable volatility. The cryptocurrency’s recent annual returns of 305% in 2020, followed by a further 60% gain in 2021, and a subsequent loss of 64% in 2022 have raised red flags. The SEC has also raised questions about the ability of funds to accurately value tokens like Bitcoin, including verifying ownership of the underlying coins.
SEC Chairman Gary Gensler testified to the Senate Banking Committee in 2021, highlighting the lack of regulatory oversight and surveillance in crypto markets, which has sparked concerns regarding potential fraud and manipulation. To address these concerns, issuers like BlackRock have proposed surveillance-sharing agreements as a means of mitigating the risks associated with market manipulation and fraud. Coinbase Inc., the prominent spot crypto exchange in the United States, has emerged as the preferred market surveillance partner for ETF issuers, further bolstering efforts to assuage regulatory apprehensions.
BlackRock’s Bitcoin ETF Filing Ignites Market Speculation and Resurgence
BlackRock Inc., the largest asset manager globally, made headlines in June, 2023, by submitting an application for a spot Bitcoin ETF. This move sparked widespread speculation that the much-anticipated investment product could potentially receive approval from the SEC. The market responded with enthusiasm, leading to a significant rally in the cryptocurrency market. In the wake of BlackRock’s filing, other issuers such as Fidelity Investments and WisdomTree Inc. followed suit with their own ETF applications and resubmissions, generating a renewed wave of interest and anticipation in the investment community.
In late June, reports emerged revealing that the SEC had requested BlackRock, Fidelity, and other issuers to provide supplementary details in their filings. This development was seen by cryptocurrency enthusiasts as a promising sign of progress in the approval process. While some industry experts predict the eventual green light for at least one spot Bitcoin ETF by year-end, cautious voices warn against excessive optimism. The landscape is strewn with the remnants of approximately 30 previous attempts that failed to sway the SEC’s stance, serving as a reminder of the regulatory hurdles still in play.
Europe already ahead
After facing significant delays, Europe is finally preparing for the launch of its first Bitcoin ETF later this year. Jacobi Asset Management, a multi-asset investment platform based in London, plans to debut its Bitcoin ETF on the Euronext Amsterdam exchange.
Initially scheduled for July 2022, the listing had to be postponed due to unforeseen market conditions resulting from the collapse of the Terra ecosystem in May 2022 and the FTX collapse in November of the same year. However, Jacobi Asset Management has now decided to proceed with the ETF launch, citing a gradual shift in demand compared to the previous year. While the asset manager is still evaluating the specifics of the launch, they have indicated that they will announce a date soon.
Unlike the conventional approach of structuring crypto-backed financial instruments as exchange-traded notes (ETNs), the Jacobi Bitcoin ETF takes a different path. It is a centrally cleared investment product that provides exposure to Bitcoin, with custody services being supported by Fidelity Digital Assets. This marks a significant departure from the norm in Europe, where all crypto-backed traditional financial instruments were typically designed as ETNs rather than funds.
Looks like it is a brand new chapter for Bitcoin.
