Spot Bitcoin and Ether ETFs available from trusted traditional financial institutions will remove barriers and streamline mainstream adoption.
Exchange-traded funds (ETFs) in the United States have already seen considerable growth, and there are now a growing number of robust applications for offering Bitcoin ETFs for cash from some of the largest traditional financial institutions.
Taking these two factors into account, as well as Grayscale’s recent victory in the legal battle and Franklin Templeton Spot Bitcoin ETF Appit seems the question is when spot Bitcoin ETFs will be available to investors rather than if it will happen.
When available, they will help streamline and facilitate widespread institutional adoption of digital assets in the United States.
Growth of ETFs in the United States and Worldwide
ETFs can be a logical choice for investors: profitable and easily accessible. As a quick overview, the U.S. total ETF net assets under management (AUM) have exploded from $102 billion in 2002 to $6.44 billion in 2022.
Projected growth has not stagnated either. According to BlackRock— which shows a global total of $10 trillion in ETFs in 2022 — this financial product could reach $14 trillion in value, globally, by the end of 2024.
Spot Bitcoin ETFs are a natural progression in this financial product.
Spotting Bitcoin ETFs
While there is still some debate over whether a Bitcoin ETF in the United States would create a path to mainstream crypto adoption, many people in the digital asset world are increasingly optimistic, both regarding the potential for approval and its impact.
We believe this approval will help attract new capital to the market through demand for the product. Spot Bitcoin ETFs allow people to invest directly in Bitcoin in a simplified way. Investments are based on current market prices, with owners holding the crypto as they would a stock within the fund, making it familiar to people used to investing but new to crypto.
These opportunities already exist in Canada and are being launched in Europe; However, currently, eyes are on the US Securities and Exchange Commission (SEC) and BlackRock’s Bitcoin ETF spot application, which was quickly followed by applications from other pillars of traditional finance; the following companies have filed for spot Bitcoin ETF listing on Nasdaq: Fidelity, VanEck, Invesco, WisdomTree, Valkyrie and Bitwise.
To date, the SEC has not approved any one-time applications for Bitcoin ETFs, citing market manipulation of Bitcoin prices as the primary reason for most denials. BlackRock’s (BLK) iShares Bitcoin Trust app, however, contains one element that could lead the SEC to agree to the creation of the fund: a proposed supervisory sharing agreement with Nasdaq and a major US digital asset exchange that will serve barrier against market manipulation. .
This surveillance sharing agreement would ensure transparency of trading and clearing activities in the market as well as identification of clients. Additionally, if this approach gains SEC approval, it would serve as a guide for other companies to follow.
Once these spot ETFs become available, making it easier to invest in Bitcoin, this will naturally lead to more institutional fund flows, especially as the number of distribution sources increases. Given that Bitcoin’s supply is limited to 21 million, this capped availability could lead to positive price action as a growing number of institutional investors have smoother access to the coins.
Because the likelihood of SEC approval appears high, several large asset managers have recently applied to offer Ethereum ETFs: Van Eck, Volatility Shares, Bitwise, Grayscale, Roundhill, and Proshares.
Hedge funds increase their exposure to digital assets
On a related topic, “Restoring Trust in Crypto: 5th Annual Global Crypto Hedge Fund Report (2023)” notes how traditional hedge funds have continued to seek to increase their exposure to digital assets despite the volatile environment of 2022.
More than half of traditional hedge funds currently investing in cryptoassets intend to maintain the same levels of capital deployed this year, while almost half (46%) intend to deploy more capital in this asset class by the end of 2023. Notably, none of the respondents said they planned to reduce their exposure.
Curiosity about cryptocurrencies has increased slightly among funds that are not yet investing in cryptoassets. More than a third (37%) of respondents confirm that they are simply waiting for a longer maturity before investing, and more than two-thirds (69%) of curious survey participants are hedge funds managing more than ‘a billion dollars.
There is optimism about the future: 93% of crypto hedge funds expect the market capitalization of cryptoassets to be higher at the end of 2023 than it was at the end of 2022.
As for investors in crypto hedge funds, they want the following: mandatory asset segregation; mandatory financial audits; independent statements of reserve assets; and platform security. To further strengthen the confidence of these investors, the hedge fund industry is making greater use of standard liquidity management tools and improving its counterparty risk management policies. They focus on optimal custody solutions, and the reliance on third-party custodians is strong, with 80% of crypto and traditional hedge funds choosing this as their primary custody route.
THE SEC Proposed Rule Mandating qualified custodians would strengthen regulation in this direction, appropriately segregating assets and protecting investors, which is what the hedge fund industry and its investors want in risk management.
ETFs offer the best path to traditional financial adoption today
Spot Bitcoin and Ether ETFs available from trusted traditional financial institutions will remove barriers and streamline mainstream adoption, helping investors navigate a crypto ecosystem that can seem complex and intimidating.
Once available through familiar traditional financial institutions, the process will be more comfortable and welcoming. Some investors may limit exposure to digital assets to ETFs, while others may ultimately expand beyond that into the broader world of crypto investing. Traditional asset managers increasing allocations to digital assets will also help drive widespread adoption in the future.
Adam Sporn is BitGoResponsible for Prime Brokerage and institutional sales in the United States.