Why is the Approval of the Bitcoin Spot ETF So Important?

Beyond anyone’s expectations, Bitcoin has grown from a basic peer-to-peer payment system to a worldwide sensation in the last ten years. Its market value has surpassed $1 trillion, making it the first cryptocurrency and triggering the emergence of a new class of assets. The introduction of 11 spot BTC ETFs in January 2024 helped traditional investors enter the Bitcoin market. This development increased their options in this field, giving them a simple approach to exploring Bitcoin investments.

The Concept

Exchange-traded funds named Bitcoin Spot ETFs track the price of Bitcoin at any given time. The value of a spot Bitcoin ETF is closely correlated with the amount of Bitcoin that backs each share that is sold. The Bitcoins in these ETFs are safely held by custodians in digital wallets; high-security offline storage is provided by “cold storage” or air-gapped vaults. By using this technique, internet access to the Bitcoin keys is blocked.

Spot Bitcoin ETFs provide an affordable option for investors who want to participate in the value of Bitcoin without actually holding the cryptocurrency. Additionally, they give investors a simpler option to add Bitcoin to their retirement accounts without having to worry about running a self-directed IRA dedicated to the cryptocurrency.

Do Spot Bitcoin ETFs Affect the Price?

Spot Bitcoin ETFs can affect the price of Bitcoin indirectly through a number of different ways. Changes in investor behaviour, market dynamics, and the structure of financial products are the causes of these consequences.

A spot BTC ETF has a great chance of drawing in regular investors. People who want to add Bitcoin to their brokerage accounts are likely to be interested in such an ETF, which could result in an increase in demand. The higher demand for Bitcoin has the potential to attract new capital and investors, hence augmenting the cryptocurrency’s market value.

Market-Wide Implications

The approval and introduction of a spot Bitcoin ETF would validate Bitcoin in the eyes of the conventional financial community. This might build trust in Bitcoin and lead to a price gain as mainstream finance continues to acknowledge its credibility.

For speculators, hedge funds, and day traders, among other market participants, the introduction of a spot Bitcoin ETF may open up new trading avenues. This might cause trade volumes to rise and market volatility to rise, which would impact Bitcoin’s price dynamics.

The effect of a spot Bitcoin ETF on institutional investors’ premiums for Bitcoin through trusts and private funds is a topic of discussion. Some contend that the introduction of such an ETF may lower these premiums, which might put downward pressure on the price of Bitcoin. However, this effect is only anticipated to be slight.

Insights on ETFs and Their Investment Significance

IBIT and FBTC stand out among the several Bitcoin ETFs that are available because of their combination of cheap costs and strong liquidity. IBIT, run by the well-known investment company BlackRock Inc., is attractive to individuals who are cost-conscious because it has an unusually low expense ratio of 0.12%.

As an alternative, investors seeking a balance between affordability and performance may consider the Fidelity Wise Origin Bitcoin Fund (FBTC), which is managed by Fidelity Exchange Traded Products GmbH and has a higher expense ratio of 0.75% but a competitive fee structure of 0.25%.

Because Bitcoin does not provide income of its own, Spot Bitcoin ETFs are unique. These ETFs’ value varies in tandem with the price of Bitcoin on the market, highlighting their function in helping investors profit from any future price increases in Bitcoin. This feature sets spot Bitcoin ETFs apart from conventional income-producing assets and focuses investors’ attention on possible capital gains resulting from changes in the price of Bitcoin. Given that spot Bitcoin ETFs do not provide dividend payouts as a component of investment returns, investors are advised to match their strategies with the objective of obtaining profits through price movements.

Conclusion

Spot Bitcoin ETFs can improve price discovery, increase liquidity, and attract more investors, and all of these processes might stabilise and speed up the acceptance of Bitcoin. However, concerns about the currency’s overvaluation may also stem from the positive ripple effects of speculative trading and rising demand.