Exploring the Correlation of ETFs with Bitcoin

Exchange-traded funds (ETFs) have risen to prominence as an alluring investment avenue for both retail and institutional investors since their inception nearly three and a half decades ago. Marketed as a cost-effective substitute for mutual funds, ETFs bestow upon investors the advantages of diversification and trading flexibility while eradicating convoluted security protocols.

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The prospect of greenlighting a spot Bitcoin ETF has occupied the center stage of deliberations within the digital asset realm for roughly six years. Nonetheless, the Securities and Exchange Commission (SEC) has consistently rebuffed or postponed verdicts on every proposal for a spot bitcoin ETF, citing deficient trading volumes, a dearth of dependable custodial services, and inadequate compliance measures to counteract fraudulent and manipulative practices.

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With the passage of time, cryptocurrency markets have undergone substantial transformations, witnessing substantial expansion in trading volumes across various exchanges and structured financial products. Moreover, custodial solutions and security protocols have undergone notable enhancements. These favorable evolutions, coupled with BlackRock's recent ETF filing that incorporates a surveillance-sharing agreement (SSA) designed to tackle concerns of market manipulation, have significantly bolstered the likelihood of a triumphant application.

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Spot Bitcoin ETFs furnish individuals and enterprises with an avenue to invest in Bitcoin devoid of the intricacies involved in navigating cryptocurrency exchanges and custody procedures, all the while offering the potential for amplified returns. The primary objective underpinning the creation of such ETFs is to render Bitcoin more accessible to retail investors, obviating the necessity for substantial capital outlays and intricate security protocols. By presenting a publicly tradable investment instrument that is already acquainted to retail consumers, spot bitcoin ETFs extend to users a low-friction means to gain exposure to spot Bitcoin.

A Summary of Filed Bitcoin ETFs

BlackRock has made a bold move into the crypto world by submitting a filing for a Bitcoin ETF with the U.S. SEC. To ensure pricing accuracy, the company plans to utilize Coinbase Custody and the exchange's spot market data. Collaborating with Nasdaq, BlackRock has implemented a unique SSA framework to safeguard against potential bitcoin-related market manipulation risks.

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This filing by BlackRock has intensified the race for a Bitcoin ETF, with other funds like Bitwise, WisdomTree, VanEck, and Fidelity swiftly following suit. However, the SEC informed Nasdaq and Cboe exchanges that their initial filings lacked comprehensive information about their surveillance-sharing arrangements, prompting adjustments.

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In response, Cboe resubmitted five spot bitcoin ETF 19b-4 filing applications, including Wise Origin Bitcoin Trust, WisdomTree Bitcoin Trust, VanEck Bitcoin Trust, Invesco Galaxy Bitcoin ETF, and ARK 21 Shares Bitcoin ETF. Notably, Cboe highlighted its agreement on terms with Coinbase for SSA agreements.

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Likewise, Nasdaq resubmitted its 19b-4 filings for BlackRock's iShares Bitcoin Trust and Valkyrie's Funds' Valkyrie Bitcoin Fund, both of which list Coinbase as a surveillance-sharing partner. Asset management giant Fidelity also reentered the pursuit of a spot bitcoin ETF, filing a similar application that mentions an SSA mechanism.

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Subsequently, the SEC officially acknowledged spot bitcoin ETF applications from asset managers Valkyrie, BlackRock, and Bitwise. Meanwhile, the remaining ETF applications from Wise Origin Bitcoin Trust, WisdomTree Bitcoin Trust, VanEck Bitcoin Trust, and Invesco Galaxy Bitcoin ETF are presently under pending review.

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The influx of ETF filings has fueled a noticeable increase in Bitcoin dominance, rising from 45.9% to approximately 49.02%.¹

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Pros and Cons of Spot Bitcoin Exchange-Traded Funds (ETFs): Exploring the Upsides and Downsides

Advantages:

1. Leverage without Complexity: Investing in ETFs based on cryptocurrencies provides an opportunity to gain exposure to the underlying asset without requiring in-depth knowledge of how it works. By opting for this investment option, individuals can avoid the risks associated with owning the coins directly or engaging with cryptocurrency exchanges.

2. Familiarity: Investors can purchase ETFs through either stock exchanges or traditional brokerage accounts, which are often more familiar options. By providing a wider range of choices, investors can access vehicles that best align with their investment goals and preferences.

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Disadvantages:

1. Lack of Actual Ownership: Bitcoin, as an unregulated digital asset, offers a hedge against traditional financial systems and provides privacy through the Bitcoin blockchain. However, Bitcoin ETFs, regulated by the government, eliminate these advantages by not granting actual ownership of Bitcoin.

2. Fees: Similar to other ETFs, spot Bitcoin ETFs incur fees that investors must pay to cover the management costs. It's important for individuals to review the Bitcoin ETF expense ratio to understand the percentage they need to allocate from their holdings for these fees. Lower expense ratios are generally more favorable for investors.

3. Restricted Cryptocurrency Trading: While Bitcoin can be traded for various other cryptocurrencies like XRP, Ethereum, Polygon, or Litecoin, Bitcoin ETFs do not allow trading for other cryptocurrencies. These ETFs function as investment funds strictly tracking the price of Bitcoin, not as digital coins or tokens.

Examining the Performance of Gold Following the Launch of its First ETF

The crypto community has been buzzing with anticipation regarding the potential approval of a Bitcoin exchange-traded fund (ETF) and its potential impact on BTC prices. Enthusiasts believe that such approval would ignite mainstream institutional adoption of Bitcoin, leading to increased liquidity, market participation, and potentially driving the world's leading cryptocurrency to new heights.

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In discussing the possible price impact of a Bitcoin ETF approval, renowned crypto market trader Ash Crypto analyzed the historical example of gold prices after the first gold ETF received the green light in the US back in 2004. In a Twitter post on July 12, Ash Crypto shared a chart depicting the trajectory of gold prices before and after the US lawmakers approved the first ETF for the precious metal almost two decades ago. Notably, gold experienced a staggering 346% surge between 2004 and 2011, climbing from around $450 to over $1,820 in August 2011 (figure 1).

Figure 1. Gold and Bitcoin prices.

Highlighting this remarkable increase, the market expert suggested that if a spot Bitcoin is approved by US authorities, mimicking this 346% surge would propel the largest crypto asset to an astounding $138,000. It's worth noting that if approved, this would mark the first-ever spot Bitcoin ETF available to US investors, distinct from a Bitcoin futures ETF.

Final Thoughts

ETFs have become a popular investment choice for individual and institutional investors. While a spot Bitcoin ETF approval has been elusive, recent progress in trading volumes, custodial services, and compliance measures offer hope.

The filing by BlackRock and other funds for a Bitcoin ETF could mark a crucial milestone in the institutional acceptance of bitcoin. BlackRock's move to apply for a Bitcoin ETF implies that major institutional players have a positive outlook on the long-term prospects of digital assets. Although the recognition of ETFs by the SEC is an encouraging indicator of bitcoin's legitimacy in the broader market, there remains a possibility of the application being rejected.

Throughout history, the approval of an ETF, for assets similar to Bitcoin, has exerted a positive influence on its price. It remains to be seen whether this trend will persist for Bitcoin. At Path, we firmly believe that the introduction of a spot ETF will not only enhance the credibility of the digital asset industry but also serve as a catalyst for its growth. Time will reveal the true impact.

References

“Global Cryptocurrency Market Charts.” CoinMarketCap, https://coinmarketcap.com/charts/. Accessed 17 August 2023.