On Wednesday, January 10, 2024, the Securities and Exchange Commission (“SEC”) approved the first U.S.-listed exchange traded funds (ETFs) to track bitcoin. The SEC approved 11 applications, including from BlackRock (BLK.N), Ark Investments/21Shares (ABTC.S), Fidelity, Invesco (IVZ.N) and VanEck. The approvals come a day after an unauthorized person published a fake post on the SEC’s account on social media platform X, saying the agency had approved the products for trading. The agency quickly disavowed and deleted the post. The SEC approvals mark an about-face for the agency, which had previously rejected Bitcoin ETFs due to worries they could be easily manipulated.
Cryptocurrencies were created as an alternative to fiat currencies, currencies established by and backed by a government such as the U.S. dollar and the Euro. However, cryptocurrencies are largely used as speculative investments due to their volatility and some officials and investor advocates have warned that Bitcoin ETF products carry undue risks. George Gagliardi, an investment advisor with Coromandel Wealth Management expressed concern that the cryptocurrency ETFs “have no underlying intrinsic value.” Gary Gensler, Chairman of the SEC, said “[i]nvestors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.”
Notwithstanding, approval of the ETFs is viewed as a major win for Wall Street and a game changer for Bitcoin. “It’s a huge positive for the institutionalization of bitcoin as an asset class,” said Andrew Bond, managing director and senior fintech analyst at Rosenblatt Securities. Bitcoin ETFs could open the door to cryptocurrencies to many new investors who do not want to take the extra steps involved in buying actual bitcoin. Further, because the ETFs offer investors exposure to the world’s largest cryptocurrency without directly holding it, the offering is seen as providing a major boost to a cryptocurrency industry plagued by scandals. Additionally, according to Cynthia Lo Bessette, head of digital asset management at Fidelity, the new products provide “increased choice for investors who want to engage with” crypto.
Dave Mazza, chief strategy officer at ETF provider Roundhill Investments, said he expects to see a “wave of buying,” similar to the first ever gold ETF in 2006 in the U.S. In an industry panel in October, Matthew Hougan, CEO of crypto firm Bitwise Investments, said that he expected spot bitcoin ETFs to pull in $55 billion in their first five years. However, other analysts, such as Standard Chartered, have estimated that the ETFs could draw $50 billion to $100 billion in 2024 alone.
As of the date of the SEC approvals, the market capitalization of Bitcoin stood at more than $913 billion, according to CoinGecko. Bitcoin has recently risen more than 70% in anticipation of the SEC approvals, hitting its highest levels since March 2022.
Broker Dealers should be very cautious in approving these products. If approved, they should take extra precautions in the individual sales process as these will be highly scrutinized in arbitration.