As we all know we just got the Spot ETF approval for Bitcoin a couple of weeks ago precisely January 10th, and a monumental achievement for the cryptocurrency community, this paves the way for Bitcoin (BTC) to be traded as a Security asset on the Exchange market, The United States Securities and Exchange Commission (SEC) had delayed the approval of the Bitcoin (BTC) Spot Exchange-Traded Product (ETP) since it’s first filling-10 years ago, having approved the Future-based ETF applications in 2021, with reasons that I can only summarise to be political gameplay.
To ensure that we are on the same page, let me provide a detailed explanation of what an ETF (Exchange-Traded Fund) is in general and how it is currently or will potentially impact the Bitcoin and cryptocurrency market as we know it.
Understanding ETFs
What are ETFs, ETF is an acronym for Exchange-Traded Fund which is a form of ETP Exchange-Traded Product, there are two basic types of ETFs, Futures-based ETF or Derivative-based ETF and Spot ETF, the difference being that spot EFT buys and Holds the Actual Commodity.
Before a commodity can become a traded entity on the United States Stock Exchange it has to go through the Securities and Exchange Commission (SEC) for Approval, after which the Authorised Participants usually a large Financial Firm can then Create or Redeem Shares of the ETF based on market demand.
P.S. The Approval requests are usually sent to the SEC by these Authorised Participants (APs), To further clarify this concept, think of it as a firm seeking approval to purchase a large amount of tradable commodity. The firm securely holds the commodity and then sells and issues shares corresponding to the sets of these held assets to investors. The share price is set to mirror or reflect the market price of the commodity.
An example of this is the Gold ETF, which operates in a way that the Authorized Participant (AP) plays a crucial role. The AP securely holds a significant number of the underlying gold assets, ensuring their safekeeping. In turn, the AP issues shares of the ETF to investors, allowing them to gain exposure to the performance of gold without actually owning the physical metal. These shares are designed to mirror or reflect the market price of gold, providing investors with a convenient and accessible way to invest in this commodity.
How Does The Bitcoin ETF Work?
Now that we have understood the overview of Exchange-Traded Funds (ETFs), let’s explore how they work with cryptocurrency and why they are essential for the growth of the crypto industry.
A cryptocurrency-based ETF operates similarly to other types of ETFs or publicly Traded Assets, the general idea is that investors buy shares of the Spot ETF Commodity from the Authorised Participants (AP) a fragment of the total share of the ETF. These shares can be bought from the Stock Exchange at a price that is relative to the crypto market price.
As I highlighted earlier, there are two forms of ETFs, the Future-based and Spot, In 2021 the bitcoin future-based ETF trading registered under the 1933 Act was approved, and this raised questions as to why the SEC didn’t approve the Spot ETF as well, because the commission’s basis for approving futures-based trading should also apply to spot trading, but instead claimed that the bitcoin market was still immature and there are outstanding probable manipulation concerns.
“Why didn’t the approval of the Bitcoin Futures-based ETF generate as much news coverage as the Spot ETF?” you might ask. well, that is one of the beauties of trading, cash flow is the basics of trading, The future-based ETF is more complex and difficult to manage, while futures-based approval was a great stepping stone towards getting this spot ETF, it didn’t have the same potential to disrupt the market as the spot ETF could, With spot ETF, Investors can directly hold and trade bitcoin, rather than just betting on it’s future price movement, and Future-based trading is Exposed to certain risk to an average investor, like rolling risk. The reason why the Spot ETF generated so much excitement in the crypto community is that this approval will open doors to a whole new range of investors and liquidity. These investors/traders wouldn’t require to be onboarded into the crypto space.
There were several dramas surrounding the approval of the Bitcoin Spot ETF. These included the cybersecurity breach claim by the SEC, the SEC Indictment of Conduct by Commissioner Hester Peirce, and the lawsuit by Greyscale. These events were related to the Bitcoin ETF approval. It was a struggle, but we ultimately succeeded. This victory is significant to the entire crypto industry.
How Did The Market React To The Approval of The Spot ETF?
The market reacted very positively to the approval of a Bitcoin spot ETF. In the weeks leading up to the approval, the price of Bitcoin rose significantly, as investors anticipated the news. When the ETF was finally approved, the price spiked even higher, reaching a new high of over $47,647. This reaction was driven by several factors. First, the approval was seen as a sign of mainstream acceptance of cryptocurrency as an asset, which boosted confidence in the asset class.
Second, the ETF made it easier for institutional investors to get exposure to Bitcoin, which led to increased demand. Finally, many investors saw the ETF as a safe and secure way to invest in Bitcoin, which further increased demand.
Overall, the Bitcoin market reacted very positively to the approval of a spot ETF, with the price rising significantly and setting a new all-time high. This was a clear sign of the excitement and interest in Bitcoin and crypto more broadly. However, it’s worth noting that the price of Bitcoin has since fallen from its all-time high, as the market has been affected by several factors, including macroeconomic conditions and regulatory concerns.
However, there are some speculations that the price drop of the commodity may be a result of ongoing manipulation by the ETF investors to get a low price entry into the market hence the lower the price of bitcoin, the more they can buy for the same amount of money, and if the price raises which almost definitely it would, they will make a greater profit. I can’t say for sure how accurate this is, but it’s good to put all present plausibility instances on the table.
What To Expect From The Market Going Forward
The success of the bitcoin ETF has shown that there is a significant demand for this type of investment, hence there are certain possibilities that there would be many of these to come in the near future with Ethereum presently next in line. News has it that some Ethereum ETF proposals as been sent to the SEC waiting on approval as the deadline has been fixed.
Going forward bitcoin ETF approval would increase confidence in the crypto industry and will possibly attract more investors to the space. However this doesn’t change the volatility of the crypto market but it definitely will give the Bitcoin market a tradable structure, I am very optimistic, like many analysts, about the long-term prospects for the cryptocurrency industry. We believe that the ETF is just the beginning of a new era of mass adoption of cryptocurrencies.
Conclusion
In conclusion, I think the approval of the Bitcoin ETF is a significant milestone for the cryptocurrency industry. It’s going to have a positive impact on the market and will lead to more mainstream adoption in the future. However, it’s important to remember that the crypto market is still in its early stages, and there will be ups and downs along the way. For those who are interested in investing in crypto, it’s important to do your research (DYOR) and understand the risks involved. In the end, the future of the crypto market is still unknown, but I’m excited to see what’s to come!
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