The Securities and Exchange Commission’s (SEC) approval of spot Bitcoin exchange-traded funds (ETFs) on January 10, 2024, “marked a significant milestone in the landscape of crypto investment in the United States.” This, according to insights from Chainalysis.
Bitcoin ETFs provide a scalable bridge “from traditional finance to crypto — a pivotal integration point.”
Brett Tejpaul, the head of Coinbase Institutional, speaking on a panel discussing the impact of the Bitcoin ETF at Chainalysis Links NYC 2024 said:
“This is the moment that crypto’s gone mainstream,”
A popular vehicle of investment for assets like gold, Bitcoin ETFs mark “the entrance of a brand new asset class under the ETF wrapper, allowing investors to gain exposure to Bitcoin without having to navigate purchasing and holding the cryptocurrency directly and bypassing the potential complexities of the crypto ecosystem.”
Chainalysis further explained in a blog post that this model “mirrors traditional investment structures, fitting neatly into the portfolios of mainstream investors and potentially broadening Bitcoin’s investor base among both retail and institutional investors.”
In the wake of the spot Bitcoin ETF approval and launch, “daily ETF volumes have surged, approaching nearly $10 billion in daily volume in March and consistently trading in the billions.”
Chanalysis further noted in its blog post that BTC ETF flows are also outpacing “that of the first net gold ETF (inflation-adjusted) from its 2005 launch.”
With billions of dollars in inflows since January 10, 2024, Bitcoin ETFs have “collectively become the most popular ETF of all time.”
Chainalysis explained that Spot Bitcoin ETFs “are financial instruments that track Bitcoin’s price by holding the actual cryptocurrency in reserve and backing each share of the ETF with real Bitcoin.”
As noted in the update from Chainalysis, these ETFs provide investors “with direct exposure to Bitcoin’s price movements without the need to buy, store, or manage Bitcoin themselves.”
They function similarly “to traditional ETFs but focus specifically on BTC as the underlying asset. There are eleven spot Bitcoin ETFs available today in the United States.”
Spot Bitcoin ETFs and Bitcoin futures “offer different approaches to Bitcoin investment. Spot Bitcoin ETFs purchase and hold real Bitcoin in a custodial account, with the ETF shares reflecting the market price of Bitcoin.”
Chainalysis also mentioned that these ETFs operate “within regulated financial markets, ensuring security and compliance with legal standards, and reputable custodians manage Bitcoin storage to mitigate risks like hacking or loss.”
In contrast, Bitcoin futures are “a derivative contract that track Bitcoin futures contracts, which are agreements to buy or sell Bitcoin at a future date for a predetermined price.”
While spot ETFs provide direct exposure to actual Bitcoin, futures ETFs involve rolling over futures contracts, “introducing complexities and additional costs.”
Spot ETFs track the price of Bitcoin “in real-time, whereas futures ETFs track the price of futures contracts, which might differ from the spot price due to market speculation and futures market dynamics.”
Spot Bitcoin ETFs offer several advantages “for both individual investors and institutions. For individual investors, they provide an easy way to gain exposure to Bitcoin without managing crypto wallets or navigating cryptocurrency exchanges, making Bitcoin investments more accessible for some.”
Chainlaysis further noted that for institutions, ETFs offer “a regulated and secure method to include Bitcoin in their portfolios, aiding in diversification and potentially enhancing returns. Institutions can trade these ETFs on traditional stock exchanges, simplifying the incorporation of Bitcoin into their existing investment strategies.”
This creates a pathway for institutional and retail capital “to find its place in the cryptocurrency marketplace.”
Institutions that invest in spot Bitcoin ETFs typically “use brokerage accounts to purchase ETF shares, incorporating these into their diversified portfolios.”
The ETFs provide institutions with “a liquid, tradable asset that aligns with their investment strategies and regulatory compliance requirements.”
Additionally, institutions may benefit from “the oversight and security measures provided by custodians managing the ETFs’ underlying Bitcoin holdings.”
When examining the growth of Bitcoin transaction volume after ETF approval, volumes of transfers that are “larger than $1 million increased the most, with a major peak of institutional volume transfers observed in March.”
This influx of institutional capital not only “highlights significant investor interest but also signals a shift towards larger, more strategic crypto investments.”
The second largest increase was “observed in transfers ranging from $100,000 to $1 million until February, with both professional and retail investors joining the rally shortly thereafter.”
Chainalysis also noted that Retail investors also “use brokerage accounts to invest in spot Bitcoin ETFs.”
They can buy and sell ETF shares “through the market or limit orders, much like trading stocks.”
As explained by Chainalysis, this process is said to be “straightforward and familiar to those accustomed to traditional investments.”
In both retail and institutional use cases, investors benefit “from the liquidity and transparency of ETFs, along with the reduced complexity and enhanced security of regulated financial products.”
The price of Bitcoin began an upward ascent “soon after news of the Bitcoin ETF approval broke on January 10, 2024 and trading commenced soon after, with an unprecedented 11 ETFs trading on day one.”
At the same time, there was a substantial spike “in Bitcoin transfer volumes during the week of the ETF’s approval.”
Spot Bitcoin ETFs enhance accessibility by “allowing investors to buy and sell shares through traditional brokerage accounts, just like stocks or other ETFs.”
This can reduce the complexity of “purchasing and securely storing Bitcoin.”
Regulatory oversight from financial authorities “ensures these ETFs operate within a legal framework, offering a high degree of investor protection and confidence.”
According to Chainalysis’ blog post, this regulatory environment “helps mitigate risks related to fraud and market manipulation, making investments in Bitcoin secure and trustworthy.”
Also available in markets like Hong Kong and Australia, new spot ETFs for Ethereum have begun to trade in the United States.
The approval and launch of Ethereum ETFs “provide investors with another major digital asset option within a regulated framework.”
Like Bitcoin ETFs, these funds track the price of Ethereum — the second most popular cryptocurrency — without “requiring the investor to directly hold the asset. Ether’s wide range of applications like DeFi could make it an attractive ETF option for investors to diversify their crypto holdings beyond Bitcoin.”
Chainalysis concluded that the success and acceptance of Ethereum ETFs might “pave the way for other cryptocurrency ETFs, further expanding the options available to investors.”