Last Sunday, it was confirmed that the Securities and Exchange Commission in the US would not block the very first bitcoin-based ETF from beginning trade.
This is a hugely significant announcement for crypto investors and likely a watershed moment in terms of global, mainstream acceptance of crypto assets as an asset class.
Let’s get up to speed with what an ETF actually is, why this is big news for crypto investors, and what effects this news could have on bitcoin’s price.
WTH is an ETF?
An exchange-traded fund is a type of investment fund that tracks the price of another asset or basket of assets and can be traded on an exchange. If that still sounds like finance nerd language to you, that’s because it is. So, let’s use an example to put this in context.
The SPDR S&P 500 ETF is the largest ETF in the world. It tracks an index called the Standard & Poor’s 500, which includes 500 of the leading publicly traded companies in the US.
The S&P 500 index is considered one of the best gauges of the performance of large-market-cap companies in the US. Now, if you were to decide to take “large-cap US companies” as the basis of your investment strategy, it would likely be a full-time job keeping up with factors driving the stock prices of those 500 different companies. That’s where ETFs come in. You could simply invest in the SPDR S&P500 ETF and gain exposure to that entire market segment with a single, simple investment.
The plot thickens in the case of a futures ETF, which is exactly the kind of ETF that Proshares has managed to get through the SEC as of this past weekend. In a nutshell, a futures ETF allows investors to “bet on” price movements of another asset without exposing themselves to any of the risks that owning the underlying asset might come with.
What does this mean for bitcoin?
A bitcoin ETF comes with many fringe benefits, but all others pale in comparison to one overruling fact. A bitcoin ETF gives large institutions and high-net-worth individuals the opportunity to gain exposure to bitcoin on their own terms and in a highly regulated setting.
The fact is, there is already massive institutional interest in bitcoin. Research indicates that even a relatively small investment weighting of 1-5% in your investment portfolio can drastically improve that portfolio’s overall performance. This can mainly be attributed to the fact that bitcoin is largely uncorrelated to other asset classes, so its returns can make up for the lacklustre performance of more traditional assets.
The Grayscale Bitcoin Trust, perhaps the primary vehicle for institutional investors wanting to add bitcoin to their hefty portfolios, currently holds over 654 000 bitcoins. That’s 3.47% of all circulating supply. Trusts like this one are the most popular financial instruments used by institutions looking to gain exposure to bitcoin, but they come with a host of challenges. Grayscale investors, for example, can only sell shares in the trust after owning them for six months. By entirely sidestepping concerns like the custody and security of the underlying asset, a futures ETF offers “whale-sized” (very large) investors a simpler and less-risky road to major bitcoin investments.
What does a bitcoin ETF mean for you?
If you’re not an institution or someone who owns a mega yacht and a collection of exotic big cats, should you even care about the approval of a bitcoin ETF? Historical data says yes. The table below shows how the bitcoin price responded over the 12 months prior to other major launches in the bitcoin investment space.
Twelve months before launches of both bitcoin futures by CME and Coinbase’s direct listing, the bitcoin price skyrocketed. In both those cases, though, we saw a sharp pullback post-launch. Many investors don’t believe this will be the case with the approval of Proshares’ bitcoin ETF, though.
Unlike CME’s futures and Coinbase’s direct listing, this is just the first approval out of nine other proposed bitcoin ETFs, all scheduled for launch before the end of 2021. Rather than being a single pivotal event in the history of bitcoin, this is just the beginning of a series of events set to change big money’s relationship with bitcoin.
Furthermore, institutions generally invest and make changes to their portfolios on a quarterly basis. This means the first time we are likely to see any significant volumes of trade in these new ETFs is January 2022. So, it’s unlikely that this or indeed any of the ETFs launching in 2021 are going to drive massive shifts in the bitcoin price in 2021.
That is exciting news for retail investors looking to get involved in the current Bitcoin rally, which just saw Bitcoin achieve its highest ever weekly close.
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