Bitcoin ETF Launches A New Digital Era

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Bitcoin ETF Launches A New Digital Era

Crypto assets have been in the spotlight since the start of the pandemic, dividing opinions on their path towards acceptance in Wall Street, as return-generating and diversification-providing alternative assets.

Whether this happens or not, remains to be seen, but crypto is overcoming its challenges every day and winning the war against the status quo. The SEC has refrained from rejecting the introduction of bitcoin ETFs and so we now have the Proshares Bitcoin Strategy ETF (NYSE:BITO). This means that US investors can now gain exposure to the crypto market without the need to invest through Canada.

The approval of BITO, or to be more precise, the lack of rejection from the SEC, marks an important milestone for the whole crypto market. The SEC currently lacks the will to object to crypto, as more and more people back the market. Two or three years ago, cryptocurrencies were seen as a fad or even a scam. Launching a digital-assets ETF was unthinkable and it wouldn’t have stood a chance of being approved.

However, things change fast for digital assets and they experienced substantial growth. The past shows us that the best path is never to forbid but instead to create the best conditions to protect investors from scams and against unnecessary volatility.

The crypto market has been plagued with scams, which include fraudulent token issues, ‘shady’ exchanges, fake digital wallets, Ponzi schemes, phishing scams and ‘pump and dump’ schemes. Some people have had the power to manipulate the value of tokens for their own benefit, at the expense of small investors, in a way that would never been allowed for stocks.

The lack of a legal framework and of institutional interest are key reasons why the crypto market has been prone to manipulation. However, the introduction of a bitcoin ETF opens the door for institutional and retail investors who couldn’t invest directly in the market, either for legal or security reasons, to start doing so indirectly. This new interest also brings with it the necessary trading volumes to reduce volatility and manipulation.

On its debut, BITO moved $24m and closed 4.85% higher, as bitcoin trades neared their all-time high. Proshares benefited from a first-mover advantage but Valkyrie will likely follow, launching its own bitcoin ETF very soon, as it has already been cleared by Nasdaq.

It’s important to note though, that the SEC is only allowing the launch of futures-based ETFs. These ETFs buy and sell futures contracts that are cash-settled in US dollars on the Chicago Mercantile Exchange, instead of dealing with the ’physical’ asset. They incur rolling costs and for this reason may not be well-suited to long-term investors, as these costs are a drag on portfolio returns over time. However, they will contribute to improving liquidity in the crypto market. Fundstrat Global Advisers, a New York-based research boutique, predicts that Proshares BITO may attract inflows of $50bn during its first trading year.

That being the case, demand for Bitcoin will be pushed higher. With other ETFs likely to launch over the next few months, I believe trading volume and price will be pushed higher as will the interest for alternative tokens like Ethereum, Binance Coin, Cardano, Ripple and Solana among many others. This creates very favourable conditions for the whole market, which is already in bullish mode. Over the last year, Bitcoin rose four times more than the S&P 500 and 5.6 times more than gold.

Invesco was leading the race towards the creation of the first bitcoin ETF in the US, but the company decided to withdraw its application just a few days before it would have been cleared to trade. Invesco declared that, instead of launching a futures-based ETF, they’re seeking to launch a spot bitcoin ETF in partnership with broker-dealer Galaxy Digital. They’re aiming for a “physically-backed” digital asset ETF. The approval of such an ETF would mark another milestone for digital assets. For now, the SEC is just ‘kicking this can’ forwards. However, the same happened with a futures-based ETF, which has now become a reality. It’s a matter of time until a spot ETF is also a reality. Time moves very quickly in these markets.

One big problem for institutional investors, including fund managers, concerning the crypto market is the low market capitalisations of the tokens involved. Bitcoin is by far the largest asset with a market cap of $1.2tn, which is somewhere between those of Amazon and Facebook. But the next digital asset on the list, Ethereum, has a market cap of $450bn, which is just one-third of Bitcoin’s market cap and compares with JP Morgan Chase and Johnson & Johnson. As the interest for digital assets grows, it’s inevitable that investors, look down the list when seeking diversification. Why hold just Bitcoin when there is also Ethereum, Cardano, Polkadot and many others? But, if the difference in the market cap between Bitcoin (first) and Ethereum (second) is big, it is even bigger when we reach Binance Coin (third). The top-10 list starts with a market cap of $1.2tn for Bitcoin and ends with a market cap of just $14bn for Shiba Inu (ignoring stablecoins). The tenth-largest market cap is just 1.2% of the largest. Bitcoin represents 48% of the market and 65% when taken together with Ethereum.

The total market cap for crypto grew from $400m one year ago to $2.5tn today. Bitcoin is already equivalent to a very large cap in the stock market. The growing institutional interest will continue to drive liquidity to this market and push the Bitcoin price higher. As the market matures, investors will look down the crypto list. This will open up the path to growth for other cryptocurrencies. Eventually, in 2022 we will hear about a spot Bitcoin ETF and a broader crypto ETF. It’s just a matter of time.

Turning digital assets into alternative financial assets featured in investors’ portfolios has a long road ahead and we’re just at the beginning. But digital assets offer a lot of potential and provide returns and diversification for investors. There’s no reason to miss out on it.


Comments (1)

  • Lawman says:

    An optimistic argument for this ETF.

    There are still strong disagreements about Bitcoin: some say it is worthless (Tulip mania) while others say it could be a long term store of value; even replacing Gold. Other ‘crypto’ is held in far lower esteem.

    This still leaves Volatility of Bitcoin. Given that the ETF does not trade in Bitcoin but in ‘futures’ which, the article indicates, are not suitable for long term holds, it seems this ETF may be best suited to experienced traders.

    This is not suitable for private investors.

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