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Updated January 11th, 2024 at 12:26 IST

Everything you need to know about new Bitcoin ETFs

The regulatory green light arrived for applications from industry giants like ARK Investments, BlackRock, and Fidelity. Here's a complete breakdown.

Business Desk
Bitcoin
Bitcoin | Image:Unsplash
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Bitcoin spot ETF approved: The US Securities and Exchange Commission (SEC) gave its nod to exchange-traded funds (ETFs) that mirror the performance of Bitcoin on January 10,  marking a pivotal moment for the cryptocurrency sector's longstanding pursuit of such financial products.

Since 2013, numerous asset management firms have sought SEC approval for Bitcoin ETFs, only to face rejection over concerns about susceptibility to market manipulation. However, a court ruling in August challenged the SEC's decision to dismiss Grayscale Investments' Bitcoin ETF application, prompting a reevaluation of its position.

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The regulatory green light arrived for applications from industry giants like ARK Investments, BlackRock, and Fidelity. Here's a breakdown of the operational aspects and significance of this development:

Operational mechanism

These ETFs will be available for trading on all prominent exchanges such as Nasdaq, NYSE, and the CBOE. The underlying assets will consist of actual Bitcoins, acquired from cryptocurrency exchanges and safeguarded by custodians like Coinbase Global.

These products will mirror a Bitcoin benchmark, with some adopting an index curated by CF Benchmarks, an affiliate of the Kraken crypto exchange. In response to the SEC's concerns about market manipulation, Nasdaq and CBOE have instituted a surveillance mechanism in collaboration with Coinbase.

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Fees associated with these ETFs are projected to range between 0.20% and 0.8 per cent, positioning them competitively against the broader ETF market average.

Features

Unlike direct Bitcoin ownership, investing in a spot Bitcoin ETF alleviates investors from complexities and vulnerabilities associated with digital asset storage and exchange platforms. These platforms have faced challenges such as security breaches and regulatory scrutiny, as evidenced by instances involving FTX and Binance.

ETFs provide a regulated investment avenue accessible through conventional brokerage accounts, appealing to both retail and institutional investors constrained from direct exposure to alternative assets.

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While the SEC approved Bitcoin futures ETFs in 2021, these instruments do not precisely track Bitcoin's price movements. Additionally, the expenses associated with renewing futures contracts can erode returns, reducing their attractiveness to certain investors.

Although spot Bitcoin ETFs exist in Canada and Europe, the U.S. market's sheer size and influence amplify the significance of this regulatory milestone.

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Market potential

While projections on initial trading volumes and long-term assets under management remain speculative, the inaugural Bitcoin futures ETF saw approximately $1 billion in trading activity on its debut. Some analysts anticipate that a spot Bitcoin ETF could generate threefold that amount initially and potentially accumulate assets worth $55 billion over a five-year period.

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Beyond financial metrics, the approval of a spot Bitcoin ETF boosts the cryptocurrency industry's credibility and integration into mainstream finance. This development unfolds against a backdrop of escalating regulatory scrutiny from the SEC, positioning the industry in a favourable light within this particular regulatory battle.

(With Reuters inputs)

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Published January 11th, 2024 at 12:19 IST

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