What is the spot Bitcoin ETF?
For years, crytpo enthusiasts and bitcoin owners have been pushing the SEC to approve ETFs that mirror the value of bitcoin. There have been debates, is it a commodity or a currency? Is it too volatile for the SEC to introduce any security linked to it? And the SEC has been slow to come to a conclusion.
This week finally saw a big movement in the push to legitimize and democratize cryptocurrency. In a much anticipated decision, the SEC finally approved spot bitcoin ETFs.
At a high level, this means that everyday investors will now be able to purchase Exchage-Traded Funds that allow for a simple and direct way to own a security that is linked to Bitcoin. Approval of these funds allows investors to safely access cryptocurrency without the need to handle it directly. Approval would also further legitimize Bitcoin as a financial asset worth investing in.
One note on the how large of a shift this is: “Digital assets” is the first new asset class to be introduced in 175 years—the last came with the discovery of oil in the 1850’s!
How are people currently invested in Bitcoin?
Prior to this there were a few ways to invest in Bitcoin. One was to get a wallet and directly own Bitcoin. For the tech-challenged, this was…a challenge. This process has made directly owning Bitcoin inaccessible to a majority of the market.
Recently, companies like PayPal and Robinhood have introduced ways for you to invest in Bitcoin through their platforms. However, you do not directly own a coin in this case. In general, you are investing in fractional shares of coins owned by Robinhood or Paypal. This was a lightweight way for investors to get in on the crypto market.
Weren’t there already Bitcoin ETFs on the market?
They answer is yes. And no. The main difference between these new spot bitcoin ETFs and the bitcoin ETFs currently on the market is what a spot ETF holds. Spot bitcoin ETFs hold and directly track bitcoin, while the ETFs currently on the market (examples include BITO and XBTF) merely hold bitcoin futures contracts.
The SEC approved the spot bitcoin ETF. What happens now?
One day after the announcement, there were some notable events. Eleven new ETFs hit the market, resulting in $4.6 billion in volume in the first day of trading. Call it pent-up demand. These include BlackRock's iShares Bitcoin Trust (IBIT.O), Grayscale Bitcoin Trust (GBTC.P), and ARK 21Shares Bitcoin ETF (ARKB.Z).
The vote of confidence from the SEC is pushing up the value of crypto. Bitcoin hit its highest value in two years, as this decision gives it added credibility. Ethereum also hit its highest value since May of 2022 in anticipation that it could be next for an approved ETF.
Companies who were early movers in crypto accessibility saw stock prices drop (Coinbase & Robinhood), as these new mainstream options hit the market.
What should you be considering?
As the SEC is meant to protect investors, the introduction of an ETF is a sign to investors that there is some legitimacy to bitcoin. However, it is still a highly volatile offering. If you’re considering investing, make sure you think through how and where to invest.-
- Do you understand Bitcoin, what it is, and why it holds value? It’s different from investing in Honda. You know what a car is. So before you dump your savings into bitcoin, take some time to understand it.
- Keep an eye on the market. What kind of volume are the ETFs trading at? How closely are they tracking the value of bitcoin? High volume and a close mirroring could be a good sign.
- Do your research on each ETF, as they have different fees. Fees range from 0.2% to 1.5%—and many firms are offering to waive fees entirely for a certain period of time or for a certain dollar volume of assets.
Despite this decision by the SEC, this is still a highly volatile investment, so be sure your risk profile can handle including this in your portfolio. See beyond the headlines and the buzz and understand this is still a speculative investment. If you’re going to get in, this should make up a modest part of your portfolio (~1%), as we continue to advise clients to invest for the long-term instead of chasing short-term gains.
If you have questions, please reach out to Range.
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