Bitcoin has spiraled to the center stage following recent U.S. Securities and Exchange Commission (SEC) regulatory changes that have made investing in cryptocurrency more accessible. This transformation comes from the approval of 11 exchange-traded funds (ETFs) that directly invest in Bitcoin. The significant anticipation among cryptocurrency investors regarding the approval prompted a 155% surge in Bitcoin prices in 2023, reaching over $42,000. Many experts and stakeholders believe this move is transformative for the entire cryptocurrency industry and represents a major step towards legitimizing digital assets.
What is a Bitcoin ETF?
An ETF, or exchange-traded fund, is a “pooled” investment security that operates similarly to a mutual fund. When investing in ETFs, investors receive a bundle of assets that can be traded during market hours — potentially lowering risk and exposure while contributing to the diversity of your portfolio. Unlike cryptocurrencies that require a wallet for transactions, ETFs can be traded on stock exchanges like traditional stocks. Purpose Investments Chief Information Officer Greg Taylor explains, “It’s a category that’s grown very quickly for many investors who prefer the convenience and liquidity of investing directly through an ETF.”
The SEC’s Landmark Decision:
The SEC’s approval of spot Bitcoin ETFs marks a historic moment for the $1.7 trillion digital asset sector. Noteworthy firms, such as BlackRock, Invesco, and Fidelity received approval to launch ETFs on their respective platforms, ending a decade-long opposition by the SEC. This decision was influenced by an appeals court ruling as well as increased scrutiny on the direct correlation between cash trading and Bitcoin futures contracts on platforms like CME Group. The SEC’s previous reservations, based on concerns about fraud and manipulation, were addressed through a comprehensive examination of the correlation between spot and futures trading. This order highlighted the potential for surveillance-sharing agreements with regulated markets like CME Group to help identify abnormalities and ensure investor protection.
Impact of U.S. Regulatory Changes on Canadian Investors:
Recent U.S. regulatory changes may not directly affect Canadian investors, but they present potential shifts in investment strategies. As Canadian investors express a growing interest in the U.S. market, the intense competition from U.S. based ETFs prompts a reassessment of options. In response, Ninepoint Partners Managing Director Alex Tapscott notes that this competitive landscape will encourage Canadian platforms to align their fees more closely with their U.S. counterparts. Emphasizing the proactive response of particular Canadian platforms, including Fidelity Investments, these entities have prompted them to lower their Bitcoin ETF account fees to 0.39 per cent. This fee adjustment may draw in Canadian investors looking for U.S. exposure, encouraging them to choose local platforms.
Understanding Bitcoin ETFs: What Investors Should Consider
Comprehending the cryptocurrency market’s inherent volatility is essential for investors exploring Bitcoin ETFs.
Both Greg Taylor and Alex Tapscott emphasize that while potential gains exist, so do potential losses. Taylor advises caution, stating,
“It’s more volatile than other parts of the market so people need to be wary that this is not something you make into the core of your portfolio, it’s something that you can use as a complement to your portfolio and maybe offer some diversification.”
Additionally, Tapscott adds that educating oneself about the ins and outs of cryptocurrency is crucial before diving into the markets.
Potential Risks Associated with Bitcoin ETFs:
Acknowledging tracking error risk, these ETFs aim to mirror the performance of Bitcoin, in turn providing investors with proportional exposure to its price movements. Ideally, if Bitcoin experiences a 10% increase, the ETF should also see a ten percent rise, and vice versa. However, within the first week of trading, discrepancies in performance were observed among different Bitcoin ETFs. For instance, BlackRock’s iShares Bitcoin Trust was down six percent, VanEck’s Bitcoin Trust was down seven percent, and WisdomTree’s Bitcoin Trust was down twelve percent. These variations raise potential concerns about the challenges of accurately tracking Bitcoin, a globally traded asset available 24/7.
Taking into account custodial concerns, specifically, the potential loss of assets due to a custodian’s insolvency, negligence, fraud, poor cyber security, or inadequate record-keeping, are all possible outcomes that need to be considered. A custodian, specifically a crypto custodian, is a certified company that safeguards the digital assets of companies or individuals on their behalf. Coinbase Global, chosen as the custodian for a majority of Bitcoin held by major Wall Street players and eight out of the eleven ETFs, represents a critical aspect of this risk. While the security measures in place are likely robust, historical incidents such as the collapse of FTX in November of 2022 underscore the importance of acknowledging potential threats.
The success of Bitcoin ETFs: A Retrospective
Since the SEC’s approval in December 2023, Bitcoin ETFs have experienced significant success. They have witnessed a substantial turnover of $4.6 billion on their inaugural trading day, again, signaling strong investor interest. Todd Rosenblithc, head of research at VettaFI, reiterates the importance of these funds, “This is a key milestone in the ETF industry… For a generation of investors embracing ETFs as their go-to investment vehicle, this opens the door for them to get exposure to this emerging asset class.”
Looking Ahead: The Future of Bitcoin ETFs
As Bitcoin ETFs continue to gain traction within the digital asset industry, experts anticipate an influx of new offerings and increased competition.
The initial success of Bitcoin ETFs has set the stage for major fund companies to explore diverse crypto product offerings.
The race to lower fees is expected, potentially turning these ETFs into loss-leading products. Conducting thorough market research is crucial to properly navigate the evolving landscape of crypto ETFs and stay informed about the dynamic environment.
