Key Facts
- The SEC approved spot bitcoin ETFs in mid-January, which are funds that own actual bitcoin instead of derivatives.
- The funds debuted shortly after approval and saw heavy interest, with prices shooting up in early trading.
- The prices came crashing down a short time later, costing many speculators and leading to concerns about the ETFs as an investment vehicle.
Bitcoin made its Wall Street debut in mid-January, and reviews are mixed. The crypto-currency has been immensely popular with new investors and speculators as prices climbed rapidly, making millionaires and billionaires of those who got in early.
However, unlike the top crypto gambling sites, the Wall Street establishment has been slower to embrace Bitcoin, out of concern for its stability and lack of regulation. Several high-profile crashes and fraud cases have further added red flags to mainstream acceptance of crypto as an investment vehicle.
That started to turn on January 11, 2024, however. That’s when the Securities and Exchange Commission approved spot bitcoin ETFs (Exchange-traded funds). Eleven funds were able to begin trading a short time later.
What Is a Spot Bitcoin ETF?
The SEC has allowed trading on bitcoin futures since 2021. That allowed investors to essentially bet on future changes in the price of bitcoin, but funds couldn’t own crypto-currency itself. Spot ETFs are allowed to purchase and own bitcoin as an investment vehicle.
The thought was that SEC acceptance would lend to Bitcoin’s acceptance as part of the investing establishment.
“A spot Bitcoin ETF marks the end of crypto as a ‘novel’ asset class and the beginning of a world where it can be part of every portfolio,” Anchorage Digital CEO Nathan McCauley told CBS News.
There was also hope that the ETFs could serve to stabilize prices, avoiding some of the booms and crashes of the early years of the currency.
The initial interest in the ETFs also fueled concerns of a bubble, as the demand to get in on the party could significantly overvalue it.
“Fear of missing out is a poor investment strategy,” Morningstar’s Bryan Armour told CNBC.
Ringing the Bell
Ten funds started trading in mid-January, including funds from Grayscale, BlackRock and Fidelity. However, many major financial firms shied away from the initial rush to invest in crypto funds. A statement from Vanguard announced that “Bitcoin ETFs will not be available for purchase” on their platform, and the company has no plans to develop any cryto-related ETFs in the near future.
“Our perspective is that these products do not align with our offer focused on asset class such as equities, bonds and cash, which Vanguard views as the building blocks of a well-balanced, long-term investment portfolio.”
The SEC also hedged, with chair Gary Gensler, a longtime skeptic of the value of crypto, issuing a statement. “Bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion and terrorist financing,” he cautioned.
UBS, another major investment firm, also limited availability of bitcoin ETFs for its investors.
Mainstream Acceptance
So full acceptance of crypto didn’t come with its Wall Street debut, and the price stability hoped for also didn’t materialize, as the funds saw a quick spike in value, followed by a big drop.
The funds attracted inflows of $1.4 billion in the first two trading sessions, and total trading volume topped $4.5 billion, with half a million trades. Bitcoin prices, which had been in the $41,000-$42,000 range, increased dramatically, landing in the $47,000 range, with trading nearing the $49,000 mark very briefly.
Grayscale attracted the majority of the early attention, and three funds—Grayscale, BlackRock and Fidelity—made up 87% of the spot ETF volume on day one.
While Grayscale led in volume, much of that came as initial investors sold off the asset in large numbers, preferring other options. Grayscale’s fees were one reason why. Their ETF has 1.50% fees, six times those of other options. The fees resulting from the higher cost of acquiring bitcoin were considered a potential red flag when the SEC first approved the funds.
After the initial boom, there was a large sell-off, with more than $83 million in liquidations. Bitcoin prices fell to $45,000, and the currency is currently trading again in the $42,000 range.
What’s Next?
The turbulence of the ETFs will likely slow somewhat as initial interest in the product wanes, but it’s not clear if we’ll see price stability in bitcoin. The market will likely continue to grow, with more funds likely being introduced in the future.
As the market becomes more crowded with options, there will likely be some high-profile failures, but even if Bitcoin didn’t earn full acceptance from the establishment, an important first step has been taken.
