The Echo-nomist

As the curtains fell on the year, Bitcoin wrapped up its journey on a high note, nearly touching the $45,000 mark—a substantial 170% surge from where it kicked off at the beginning of the year. However, the road to this triumph had its fair share of bumps and skeptics.

In the previous year, Bitcoin, having reached its peak in 2021, experienced a significant downturn in 2022. The collapse of the FTX exchange and the setbacks faced by prominent figures like Changpeng Zhao and Sam Bankman-Fried added to the challenges. Skeptics took pleasure in saying, “I told you so,” predicting that Bitcoin would never reclaim its former glory.

Fast forward to 2024, and the narrative took an unexpected turn. The U.S. Securities and Exchange Commission (SEC) became a focal point of attention for Bitcoin investors, who eagerly awaited a decision on the Bitcoin Spot ETF. To their delight, the SEC approved it. What exactly is Bitcoin Spot ETF?

The approval of the Bitcoin Spot ETF by the SEC served as a catalyst for the surge in Bitcoin prices. This financial instrument provided a more accessible and regulated way for traditional investors to gain exposure to Bitcoin, contributing to the renewed optimism within the crypto community. The year concluded with Bitcoin reclaiming some lost ground, leaving the question of its resilience and future trajectory open for contemplation.

But what exactly is spot ETF?

Bitcoins, being invisible currencies, are generated or “minted” by computers that verify a series of transactions occurring on a decentralized network known as a blockchain. It’s crucial to note that the total supply of Bitcoins is capped at 21 million, a limit expected to be reached by the year 2140. This inherent scarcity adds a layer of uniqueness to Bitcoin. The absence of regulation by any central bank or governing authority makes Bitcoin prices susceptible to significant fluctuations. The market can react sharply to various factors, even minor ones, such as rumors circulating on social media. Consequently, investing in Bitcoin becomes a risky investment, as its value can experience rapid and unpredictable changes, both upward and downward.

This perfectly sets the stage for Bitcoin ETFs (exchange traded funds). It allows investors to gain exposure to the price movements of Bitcoin without actually owning the cryptocurrency itself. The term “spot” in Bitcoin Spot ETF refers to the purchase and sale of the underlying asset (Bitcoin) for immediate delivery. Basically, a fund that invests in or buys Bitcoin is known as Bitcoin ETF. These funds are then listed on formal stock exchanges like Nasdaq and can be traded. They work like normal stocks and investors can buy/sell them. Which is why, when the price of Bitcoin rises/falls, these ETFs move parallelly.

Owning a Bitcoin actually comes with a lot of responsibility. You need to keep your crypto safe in a digital wallet of sorts. For that you need to remember a complex password and keep that safe as well. When you decide to sell your crypto, you need to figure out how your profits will be taxed and the government regulations on crypto is quite ambiguous as of now. Basically, it’s a lot of work to own crypto. With EFT, you don’t need to worry about all this. This responsibility lies with the ETF issuer, who manages the underlying bitcoins on behalf of the investors.

Grayscale tried to get the green light for a Bitcoin Spot ETF back in 2022 but they were faced with rejection from the SEC. That’s when they decided to take matters to the court.

Here’s the deal: Bitcoin ETFs aren’t all cut from the same cloth. Fast forward to June 2023, and the SEC gave a thumbs-up to something called a Bitcoin Futures ETF. These are quite different when compared to what big players like BlackRock and Grayscale were aiming for with Bitcoin Spot ETFs. Unlike Bitcoin Spot ETFs, which derive their value from the current price of Bitcoin, Bitcoin Futures ETFs are tied to legal contracts (futures contracts) that give investors the right to buy or sell Bitcoin at a predetermined price in the future. These contracts typically expire monthly and are regulated by the Commodity Futures Trading Commission (CFTC).

The SEC probably approved bitcoin futures ETF because it’s really tough to manipulate them. However, that’s what probably cost them the case against Grayscale because during the hearing, the court told SEC that since Futures and Spot ETFs go hand in hand. Since you approved one you don’t have a choice but to approve the other. That’s why the SEC reconsidered Grayscale’s application and eventually approved it. And so, after a decade-long fight with the crypto industry, the SEC finally gave in an approved spot bitcoin ETFs.

$4.6B worth of bitcoin ETF shares changed hands on Thursday, with Grayscale’s setting a record for the highest trading volume ever for an ETF’s first day. The SEC’s approval also sent the price of bitcoin to $49k on Thursday, reaching its 2-year high. It only lasted for a while as the price fell to $43k on Friday.

The funds that were approved by the SEC include traditional investment managers like BlackRock and Fidelity, as well as crypto-focused players like Bitwise, Ark Invest and 21Shares. Bitcoin ETFs attracted around $900 million in the first three days of trading, depicting the caution with which investors are approaching this new instrument. BlackRock, the world’s largest asset manager, led the way with $723mn of inflows, followed by Fidelity with $545mn (source: FT). The inflows into these 10 new ETFs (totaling to just over $2 billion), were offset by outflows worth $1.18 billion from Grayscale. These outflows were probably fueled by by the 1.5% fee they’re charging which is higher than the new market entrants. In comparison, BlackRock charges 0.25% and crypto-focused players like 21Shares and Ark Invest are offering temporary promo fees of 0%.

Bitcoin ETFs didn’t have an insanely impressive debut or anything. If anything, it was slightly disappointing. Even though they’re traded like stocks, their debut cannot be compared to stock market debuts by companies. While easier than directly buying Bitcoins, it’s still a new concept that investors will take time warming up to. It’s the long-term prospects of this new instrument that are more exciting.