Bitcoin ETF Approved: What's Next?
On January 10, 2024, the US regulator, SEC, has approved an exchange traded fund (ETF) that invests directly in Bitcoin1. This is a major milestone for the $1.7 trillion crypto industry as it further legitimizes this burgeoning asset class.
What happens next after the approval? Here are some of the key takeaways.
Increased Liquidity
Investors now have an easy to access vehicle to get direct spot exposure to Bitcoin mostly without worrying about custody or the underlying technology nuances.
Before the ETF, if an investor want Bitcoin exposure, they have the following options:
Purchase spot Bitcoin through a crypto exchange
Buy a close-ended trust fund named GBTC (only available to accredited and institutional investors)
Buying spot bitcoin has custody as well as theft risks. GBTC was gated for most investors and it has limited liquidity. With the introduction of the ETF, investors with a brokerage account can buy one of2 the Bitcoin ETFs easily and without worrying about custody risk.
Increased access to Bitcoin will increase the overall liquidity of the market. Higher liquidity will reduce cost of trading Bitcoin over time.
Bitcoin Derivatives
Before the ETF, Bitcoin’s derivative markets are consisted mostly of perpetual futures traded on off-shore exchanges of questionable legality. There were no Bitcoin option markets3 traded on a regulated exchange in the US. If needed to trade with size, there are various liquidity providers and market makers who might trade option contracts on Bitcoin governed under an ISDA agreement.
With the availability of an exchange traded ETF, we expect exchange traded options to become available in late 2024. We also expect capital to flow from off-shore to on-shore regulated trading venues as the industry matures.
About 7 years ago, in 2017, CME launched Bitcoin futures. At that time, Binance and Bitmex dominated the futures open interest. Today, CME commands the #1 spot for futures open interest for Bitcoin. We expect the same for options for Bitcoin when it launches later this year or early 2025.
Conclusion
After the ETF, we look forward to Bitcoin’s halvening event in April or May of this year. We will have a different blog post about this unique to Bitcoin event.
The Bitcoin ETF broadens access to Bitcoin as an asset class. Bitcoin is a unique digital asset that is analogous to gold (store of value) as well as medium of exchange. We expect activities across both spot as well as derivative markets will continue to grow. These developments will serve to increase adoption of crypto as alternative financial rails.
Disclaimer: The information provided in this blog post is for educational and informational purposes only and is not intended as financial advice. The content is not meant to provide, and should not be relied upon for investment, accounting, legal, or tax advice. You should consult your own financial, legal, tax, or other professional advisors before engaging in any transaction. The views expressed on this blog are the author's own and do not necessarily reflect the views of any financial institutions or other entities. Investing in financial markets involves risks, and there is always the potential of losing money when you invest in securities. Past performance is not indicative of future results.
This is not the first Bitcoin ETF in the world: Canada approved the world’s first Bitcoin ETF in February 2021: the Purpose Bitcoin ETF.
There are a total of 11 Bitcoin ETFs approved in the US. https://www.thebanker.com/Much-anticipated-the-US-SEC-approves-bitcoin-ETFs-1705393382
There are options on BTC futures which is listed on the CME: https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.html but they are options on Bitcoin futures not Bitcoin.