Tech
Bitcoin: Crypto fans can now invest in exchange-traded funds, but what are they?
- By Joe Tidy
- Cyber correspondent
January 10, 2024
Image source, Getty Images
The United States has made the long-awaited decision to allow Bitcoin to be part of the major investment funds.
It has approved so-called Bitcoin spot exchange-traded funds (ETFs), which can be bought by anyone from pension funds to ordinary investors.
THE announcement from the head of the Securities and Exchange Commission was accompanied by a stern warning about the risks associated with the asset.
But cryptocurrency fans reacted with joy and memes about getting rich.
The US financial regulator had repeatedly rejected previous requests for approval, citing concerns about possible fraud and manipulation.
But a US court last year said his justification was inadequate.
The green light comes after a false start on Tuesday, when the regulator he had to retreat quickly an “unauthorized” post announcing the decision in advance.
SEC Chairman Gary Gensler said on Wednesday that investors should not confuse the new approvals with a cryptocurrency approval.
“Bitcoin is primarily a speculative and volatile asset that is also used for illicit activities including ransomware, money laundering, sanctions evasion and terrorist financing,” he said.
“Investors should remain cautious regarding the myriad risks associated with bitcoin and products whose value is tied to cryptocurrencies.”
But what is an ETF?
ETFs are portfolios that allow investors to bet on multiple assets, without having to purchase any of them.
Traded on stock exchanges like stocks, their value depends on the performance of the overall portfolio in real time.
An ETF might include a mix of gold and silver bullion, for example, or a mix of shares of major technology and insurance companies.
Some ETFs already hold Bitcoin indirectly, but a spot Bitcoin ETF will buy the cryptocurrency directly, “on the spot”, at its current price, during the day.
Why so much excitement?
About a dozen investment firms, including Blackrock and Fidelity, have been waiting for months for the U.S. Securities and Exchange Commission (SEC) to give them the green light to start buying Bitcoin for their ETFs.
And after weeks of discussions on the formulation, the first ones have now been given the green light.
This means that a new group of investors can now enter the speculative world of Bitcoin, without having to worry about getting digital wallets or navigating cryptocurrency exchanges.
Billions of dollars are expected to pour into the Bitcoin market as these financial firms begin purchasing the digital currency.
A minority of analysts say the cryptocurrency’s price will be little affected, as spot Bitcoin ETFs are already established in other countries.
But with the entry of US giants into the market, most people expect the value of bitcoin to increase with demand.
However, the price is notoriously volatile.
It rose to almost $70,000 (£55,000) a coin in 2021, before falling to $16,000 in 2022 as scandals rocked the sector.
But in 2023, it has risen steadily, partly due to the hype around the approval of the Bitcoin ETF, and is now at $44,000.
Based on an idea published online in 2008, by someone calling himself Satoshi Nakamoto, Bitcoin was the first cryptocurrency and remains the most valuable and famous.
Its price is often seen as a barometer for the entire industry compared to thousands of other coins, tokens and products based on the same blockchain technology.
And with the influx of new money into the ecosystem, many expect an increase in interest in cryptocurrency technology in general.
How will the decision affect cryptocurrency adoption?
Some argue that this historic decision shows that the establishment is finally taking Bitcoin seriously, at least as a speculative asset.
For those who consider Bitcoin legitimate “digital gold,” what better proof could there be than the largest asset management institutions flocking to buy, overseen by regulators?
Others argue that cryptocurrency means rejecting traditional financial systems in favor of a decentralized, people-powered alternative. And investment bankers buying Bitcoin just to get rich with US dollars is not what Satoshi Nakamoto had in mind.
But judging by the excitement on social media, the prevailing sentiment is hope that the liquidity injection will make current Bitcoin investors rich.
What are the risks for future investors?
The price of Bitcoin can change rapidly and often without warning or explanation.
Therefore, investors will need to consider this aspect when opting for digital currency-linked ETFs.
But ETFs are still often sold as high-risk, high-reward products.
Another potential risk is cybercrime.
Bitcoin and other cryptocurrencies have been the subject of huge and costly attacks that have seen crypto firms drained sometimes hundreds of millions of dollars overnight.
And if companies like Blackrock become major holders of Bitcoin, their cybersecurity will be tested in ways they are not accustomed to.
Another disadvantage is the cost to the environment.
Bitcoin relies on a huge number of powerful computers around the world to process transactions and create coins.
The use of renewable energy is growing, but it remains to be seen how investment firms can address Bitcoin’s potential environmental cost with buyers concerned about environmental, social and corporate governance (ESG) compliance.