The possibility of the first-ever spot Bitcoin ETF launch in the United States is growing. Some other countries, including Canada, already have such ETFs. Even rumors of its approval in the US alone have been enough to make the cryptocurrency market skyrocket. It happens as investors expect trillions of dollars to inflow into the industry because of the tool's launch. However, there is a downside here that the crypto community prefers not to talk about.
What is a spot Bitcoin ETF, and why is it so anticipated?
A spot Bitcoin ETF (exchange-traded fund) is a fund that buys Bitcoin so that investors can profit from its price growth without direct investments. Instead, they acquire the fund's shares, akin to investing in company shares.
With ETFs, investors can invest in cryptocurrency without registering a wallet and, therefore, worrying about the safety of their coins. Shares of a spot Bitcoin ETF can be purchased through a regular brokerage account, bridging the gap between the cryptocurrency industry and traditional financial markets.
There are two types of cryptocurrency ETFs:
1. spot: cryptocurrency is purchased directly for the fund. In our case, Bitcoins;
2. derivatives: derivative financial instruments are purchased for the fund, for example, Bitcoin futures.
A derivative-based Bitcoin ETF, such as BITO from ProShares, was launched in the US in October 2021. However, investors do not want to work with derivatives; this is still not pure Bitcoin, and there are more requirements there. BITO is built on Bitcoin futures contracts — contracts for the crypto's purchase or sale at a predetermined rate and on a set date.
As a result, BITO did not meet the need but rather fueled interest among all market participants.
👨 Investors believe that spot Bitcoin ETFs could make the market grow.
⛴️️ Large corporations could use spot Bitcoin ETFs as a convenient and legal tool for making money on cryptocurrency.
🗽The authorities want to gain control over investments in the digital asset market, because spot Bitcoin ETFs will be fully regulated by the United States.
What is a Spot Bitcoin ETF? What was wrong with previous attempts to launch it? Why was the race to launch the tool resumed in the summer of 2023? Check the answers in our article: What is a spot bitcoin ETF, and why does everyone talk about it.
Fake stories that are heating up the market
On October 16, 2023, the popular cryptocurrency magazine Cointelegraph tweeted that the first spot Bitcoin ETF had been approved in the United States. In 10 minutes, Bitcoin gained 10% from $27K to $30K, pulling up the entire market. A few hours later, Cointelegraph issued a refutation. At the moment, the market corrected slightly to $28.4K. However, overall, it continued to grow due to expectations of the actual launch of a spot Bitcoin ETF in the United States.
From time to time, new fakes about the launch of a tool spread on the Internet, but here is what actually fuels investor sentiment:
📝 A spot Bitcoin ETF from BlackRock was listed on the Depository Trust and Clearing Corporation (DTCC). DTCC is a company that provides post-trading, clearing, and settlement services. It usually adds the ticker to the list when the tool is almost ready to launch. Everyone thought this was a good sign.
☀️ Experts give positive forecasts. Analysts at financial services company Cantor Fitzgerald believe that a spot ETF could be approved very soon. Bloomberg predicts its launch in early 2024 with a 90% probability.
🤝 Companies that have applied to launch a spot Bitcoin ETF are cooperating with watchdogs. This is indicated by the adjusted applications. For example, VanEck added that it will buy a block of 50 thousand shares of its Bitcoin ETF; it will also invest in its own tool, which means it will share the investment risks. VanEck also clarified the source of data on the cryptocurrency rate: the MarketVector Bitcoin Benchmark Rate index. BlackRock made adjustments, too. The company added information about the pricing tools and reporting methods to its application.
The downside of Bitcoin ETFs
Despite the general market excitement and the constant BTC growth, spot Bitcoin ETFs face three problems:
1. The decision to launch depends on the US Securities and Exchange Commission (SEC)
The head of the Commission, Gary Gensler, has repeatedly made it clear to the members of the crypto community that he is against the tool. So, it is hard to predict a completely positive outcome.
2. Rapid market growth after the spot Bitcoin ETF launch in the United States is not guaranteed
On December 17, 2017, when the Bitcoin futures was launched, BTC reached its local maximum close to $20K. After that, the rate declined and returned to the same levels only 3 years later, on December 5, 2020.
Same with Bitcoin options on the Bakkt investment platform in September 2019. Everyone expected that the tool would attract institutional investors to the market and fuel Bitcoin's growth. However, following the launch, BTC fell again.
Both options and futures allow investors to buy or sell Bitcoin at a predetermined price and within a certain time frame. Only the terms are different.
With futures, both parties have obligations: the buyer must sell the cryptocurrency, and the seller must buy it back.
With options, only the seller has the obligation, and the buyer can get out of the deal.
Spot Bitcoin ETFs mean no obligations and no scheduled settlements.
3. The market already has a tool for making money on BTC without direct purchase: Microstrategy shares
Microstrategy has been the largest Bitcoin investor among public companies since August 2020. Over time, Microstrategy’s bet on Bitcoin “tied” the company’s shares to the BTC rate: when BTC rises, Microstrategy shares also go up, and vice versa. As of November 2, 2023, the company holds 158,400 BTC or almost 1% out of the total supply of 21 million coins.
The vertical line is August 12, 2020, the date of Microstrategy’s initial Bitcoin purchase. Microstrategy stock price is a colored curve; Bitcoin is orange. As the company began investing in BTC, its stock price began to follow the cryptocurrency rate.
Microstrategy has become one of the main BTC ambassadors. Now, market participants who are hesitant to buy cryptocurrency directly can earn money on the company's shares using such platforms as Robinhood or eToro.
Are we buying BTC and waiting for the spot Bitcoin ETF to be launched?
History shows that crypto market expectations do not always align with reality. For instance, Bitcoin futures and options launches, despite widespread optimism, never triggered a surge in the market. In fact, they led to declines in BTC’s price. There is no guarantee that this will not happen to a spot Bitcoin ETF.
At the same time, Bitcoin halving is getting closer. It will take place in the spring of 2024. Typically, halvings push Bitcoin to reach new all-time-highs (ATH). Therefore, the upcoming halving can support the possible market growth or compensate for any BTC declines in case of collapses after unsuccessful spot Bitcoin ETF launch.
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This article is not an investment recommendation. The financial transactions mentioned in the article are not a guide to action. Itez is not responsible for possible risks. The user should independently conduct an analysis on the basis of which it will be possible to draw conclusions and make decisions about making any operations with cryptocurrency.