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Exchange-Traded Funds (ETFs) and Exchange-Traded Products (ETPs) have become integral components of modern investment portfolios. ETFs typically track an underlying index, offering investors diversified exposure to various assets, such as stocks and bonds, while ETPs encompass a broader category of securities that track indices, financial instruments, or commodities.
The Emergence of Bitcoin ETFs
Recently, the cryptocurrency market witnessed a significant development with the introduction of Bitcoin ETFs, primarily futures-based ETFs. These financial products allow investors to gain exposure to the world of cryptocurrencies through regulated exchanges. The first Bitcoin ETF, offered by Purpose Investment, made headlines when it soared past $500 million in assets under management. This milestone marked a pivotal moment in the cryptocurrency space and was introduced by an entity yet to be disclosed.
The journey towards approving Bitcoin ETFs has been marked by regulatory scrutiny and complexities. Various entities, including the U.S. Securities and Exchange Commission (SEC), have deliberated on the approval of such products. The SEC’s near-approval of an Ether futures-based ETF suggests a broader shift in the regulatory landscape, recognizing the potential of cryptocurrency ETFs.
Regulatory Perspective and Challenges
The hesitation of regulators to approve ETFs, especially cryptocurrency-based ones, stems from concerns about market manipulation, price volatility, and investor protection. These uncertainties have led to rigorous evaluations before granting approvals.
The Grayscale Case and Crypto Asset Prices
The Grayscale case, involving the Grayscale Bitcoin Trust, played a significant role in the rise of crypto asset prices. It demonstrated institutional interest in cryptocurrencies and provided investors with indirect exposure to Bitcoin.
Grayscale’s application to convert its spot Grayscale Bitcoin Trust (GBTC.PK) into an exchange-traded fund (ETF) that would be listed on the Arca market of the New York Stock Exchange was refused by the SEC a year ago.
Despite the fact that the agency has decided against approving spot bitcoin ETFs, it has given its OK to bitcoin futures ETFs. These ETFs monitor agreements to purchase or sell bitcoin at a predetermined price. The SEC determined that the proposal made by Grayscale and Arca to use the same market manipulation protections as were authorized for those futures ETFs did not satisfy its standard and so rejected the proposal.
In March, the primary lawyer for Grayscale, Donald Verrilli Jr., testified before the court that a spot bitcoin exchange-traded fund (ETF) would “better protect investors” due to the fact that it would provide these individuals with the advantage of CME regulation of the market. At this time, the majority of Bitcoin investments made by Americans are conducted via exchanges that are either less well-established or not regulated.
However, according to the SEC, Grayscale does not have enough data to assess whether or whether the CME futures monitoring agreement can also identify possible manipulation in spot market prices.
Grayscale has shown, according to the judge panel, that their proposed bitcoin ETF is “materially similar” to the bitcoin futures ETFs that have been authorized by the court. This is due to the fact that the underlying assets, bitcoin and bitcoin futures, are “closely correlated,” and that the surveillance sharing arrangements with the CME are “identical and should have the same likelihood of detecting fraudulent or manipulative conduct in the market for bitcoin.”
Taking all of this into consideration, the court came to the conclusion that the SEC’s decision to reject the submission was “arbitrary and capricious” since the SEC “never explained why Grayscale owning bitcoins rather than bitcoin futures affects the CME’s ability to detect fraud.”
This year, a number of companies, including the world’s biggest asset management BlackRock (BLK.N), Fidelity, WisdomTree (WT.N), VanEck, Bitwise, and Invesco, have filed spot bitcoin ETFs for listing on Nasdaq (NDAQ.O) or CBOE Global Markets. Among these companies are Bitwise and Invesco. Many people have suggested that trading in the underlying bitcoin market be policed by collaborating with Coinbase (COIN.O), which is the biggest cryptocurrency exchange headquartered in the United States. These applications have been accepted in a formal manner by the SECn.
It is not obvious what the judgment made by Grayscale implies for those applications, and it does not necessarily follow that the SEC is required to approve a Bitcoin ETF because of the finding. However, the verdict could have a role in the choices that the SEC makes about such plans.
As regulatory clarity evolves, more institutional players are expected to enter the market, potentially further impacting asset prices. Cryptocurrency and asset management sectors have been following the issue carefully since they have been lobbying the SEC for years to allow a spot bitcoin ETF as everyone awaits to see what will be next.
What other bitcoin funds have been approved so far
There have been so far seven approved Bitcoin funds. Among the notable options are the ProShares Bitcoin Strategy ETF (BITO), which was approved in October 2021, and the ProShares Short Bitcoin Strategy ETF (BITI). BITO provides investors with exposure to Bitcoin’s price movements and has gained significant attention in the cryptocurrency investment space. On the other hand, BITI is designed for those looking to profit when the daily price of Bitcoin declines, offering a unique approach to Bitcoin investment. Both of these ETFs are accessible for trading in the United States.
Additionally, the VanEck Bitcoin Strategy ETF (XBTF), Valkyrie Bitcoin Strategy ETF (BTF), Simplify Bitcoin Strategy PLUS Income ETF (MAXI), and Global X Blockchain and Bitcoin Strategy ETF (BITS) are also among the approved Bitcoin ETFs. These ETFs offer various strategies and investment approaches, catering to different investor preferences and risk profiles. It’s worth noting that the approval of Bitcoin ETFs has been a significant development in the cryptocurrency market, as it provides traditional investors with regulated avenues to gain exposure to Bitcoin’s potential price appreciation or depreciation.
Future Growth of Crypto Funds
The growth trajectory of cryptocurrency funds remains highly promising. As regulatory barriers are gradually overcome, and institutional participation increases, substantial inflows into Bitcoin and other crypto assets are anticipated. This influx of capital could lead to further price appreciation and market maturation.
In summary, the introduction of Bitcoin ETFs represents a pivotal moment in the cryptocurrency market. Regulatory hurdles persist but are gradually being addressed. The landscape of Bitcoin funds continues to evolve, and the influence of institutional investors is expected to be a driving force in the industry’s growth. Investors should closely monitor these developments as they navigate the evolving world of cryptocurrency investments.