On Wednesday, the Securities and Exchange Commission reluctantly approved the first exchange-traded funds holding bitcoin, saying it is still deeply skeptical about cryptocurrencies and that its decision did not mean it approves or endorses bitcoin.
The SEC gave the green light to 11 exchange-traded funds for Bitcoin even though it only faced a deadline for one application. The agency said that would provide competition and a “level playing field.”
Bitcoin ETFs could open the door to cryptocurrencies to many new investors who don’t want to take the extra steps involved in buying actual Bitcoin.
It’s a significant win for Wall Street, particularly trillion-dollar fund managers like BlackRock, Fidelity Investments, and Invesco, who have pushed hard to get the SEC to approve their applications. It’s also a win for the cryptocurrency industry. It has needed a win after nearly two years of turmoil that failed several crypto firms, most notably FTX, in November 2022.
The SEC’s approval, however, was lukewarm at best. The agency’s chairman, Gary Gensler, has repeatedly said cryptocurrencies need more regulation and investor protections.
“Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto,” Gensler said.
Other commissioners expressed alarm that the SEC agreed to approve the funds.
“I am concerned that these products will flood the markets and land squarely in the retirement accounts of U.S. households who can least afford to lose their savings to the fraud and manipulation that appears prevalent in the spot bitcoin markets,” Commissioner Caroline Crenshaw said in her dissent.
An exchange-traded fund is an easy way to invest in assets or a group of assets, like gold, junk bonds, or bitcoins, without directly buying the assets themselves. Cryptocurrency advocates hope the development thrusts the once niche and nerdy corner of the internet further into the financial mainstream. ETFs can be purchased quickly with any brokerage and traded on an exchange like the Nasdaq stock market.
The regulatory greenlight has been anticipated for several months; the price of bitcoin has jumped about 70% since October as crypto investors speculated that the broad use of bitcoin ETFs would drive up demand for the cryptocurrency. The cost of Ethereum, the second-most popular cryptocurrency, has also risen on speculation that fund managers will create ETFs around it.
Some analysts think ETFs may help stabilize crypto prices by broadening their use and potential audience. However, many remain concerned that broadly using crypto ETFs could put too much risk and volatility into Americans’ retirement accounts.
“The notorious price volatility of Bitcoin, as well as its fluctuating values against stablecoins and other cryptocurrencies, could expose mainstream investors to a less familiar spectrum of investment risks,” said Yiannis Giokas, senior director of Moody’s Analytics.
In a twist perhaps appropriate for the unpredictable crypto industry, a fake tweet from the Securities and Exchange Commission’s account on X Tuesday stated that trading of bitcoin ETFs had been approved; still, the agency had not issued any approval.
Here are some things to know about Bitcoin ETFs.
Why all the excitement over a Bitcoin ETF?
An exchange-traded fund, or ETF, is an easy way to invest in something or a group of things, like gold or junk bonds, without buying them themselves. Unlike traditional mutual funds, ETFs trade like stocks, which means they can be purchased and sold throughout the day.
Since the inception of Bitcoin, anyone wanting to own one would have to buy it. That would mean learning a cold wallet or opening an account at a crypto trading platform like Coinbase or Binance.
A spot bitcoin ETF could open the door to many new investors who don’t want to take such extra steps.
The bitcoin price has already soared in anticipation of the SEC’s approval, with bitcoin trading at $45,890 Wednesday, up from around $27,000 in mid-October. The price had sunk as low as $16,000 in November of 2022 following the bankruptcy of the crypto exchange FTX.
How would the ETF work?
The Bitcoin Strategy ETF (BITO) has been trading since 2021, but it holds futures related to Bitcoin, not the cryptocurrency itself.
The new bitcoin ETF will perform like the SPDR Gold Shares ETF (GLD), allowing anyone to invest in gold without finding a place to store or protect a bar. It’s the same reason some people invest in the SPDR Bloomberg High Yield Bond ETF (JNK), which lets investors buy one thing instead of the more than 1,000 low-quality bonds that make up the index.
How many Bitcoin ETFs could there be?
The SEC approved 11 ETFs, but more will apply for trading in the coming months.
What are the disadvantages of an ETF?
Longtime crypto fans might object. Cryptocurrencies like Bitcoin were partly created due to mistrust of the traditional financial system. Wall Street would become an intermediary between investors and cryptocurrency in the case of ETFs.
ETFs also charge fees, though they tend to be relatively low compared with the overall financial industry. These fees are shown through the expense ratio, which indicates how much of a fund’s assets the ETF will take each year to cover its costs.
When is it better to hold actual Bitcoin?
An ETF will not put actual cryptocurrency into investors’ accounts, meaning they cannot use it. Also, an ETF would not provide investors with the same anonymity that crypto does, one of the big draws for many crypto investors.
What concerns should investors have?
The biggest concern for an investor in one of these ETFs is the notorious volatility in the price of bitcoin.
Despite failing to catch on as a replacement for fiat, or paper, currencies, bitcoin soared to nearly $68,000 in November of 2021. A year later, it fell below $20,000 as investors generally shunned riskier assets, and a series of company blowups and scandals shook faith in the crypto industry.
Even as regulators and law enforcement crackdown on some of the cryptos’ bad actors, like Sam Bankman-Fried of FTX, the industry still has a modern “Wild West” feel. The hack of the SEC’s X account raises questions about the scammers’ ability to manipulate the price of Bitcoin and the SEC’s ability to stop them.