Are Bitcoin ETFs the key to the mass adoption of crypto?

The impact of Bitcoin ETFs approval

A Bitcoin ETF presents an important investment venue that allows a wide variety of investors access to the price moves of Bitcoin in their regular brokerage accounts. A spot Bitcoin ETF invests directly in Bitcoins as its underlying asset. 

To gain more insight into Bitcoin exchange-traded funds (ETFs), we suggest reading this article: ‘Bitcoin spot ETFs are here. How do I buy Bitcoin ETFs?’. 

Back in January 2024, Bitcoin spot ETFs were finally approved by the Securities and Exchange Commission in the United States. Since the first application for such an exchange-traded fund dates back ten years ago, it has been a long wait for investors interested in spot Bitcoin ETFs.

When the SEC granted approval for 11 spot Bitcoin ETFs, the wait was finally over. In this article we are going to examine whether this event could have a significant impact on the cryptocurrency market as well as how a spot Bitcoin ETF presents a bridge between mainstream finance and the burgeoning world of crypto assets.

Spot bitcoin ETFs offer a regulated and accessible way for mainstream investors to invest in the digital currency and ignite a new flow of crypto adoption. A Bitcoin ETF could lead to the recalibration of market dynamics, aligning digital assets closer to traditional financial markets and the global financial ecosystem, yet retaining distinctive features of the crypto sector.

To truly understand why Bitcoin exchange-traded funds are a big deal for the crypto community, it helps to know the difference between Bitcoin futures ETFs, which have been available in the U.S. since 2021, and a Bitcoin spot ETF. 

Bitcoin futures ETFs are derivative financial instruments; simply put, they don’t include owning the coins yet tracking the price of the underlying assets through futures contracts. Derivative instruments can be complex for many retail investors, along with the fact that the price of the futures contracts can be influenced by different factors aside from Bitcoin’s spot price. 

On the other hand, a spot Bitcoin ETF owns the cryptocurrency and provides investors with direct exposure to the cryptocurrency without the need to purchase or custody these coins. Therefore, Bitcoin spot ETFs are more accessible and straightforward to divergent types of investors. 

Over the years, Bitcoin had its share of interesting moments. If you want to know more, we suggest reading this article: 'Bitcoin's most dramatic moments'.

Is the approval of spot Bitcoin ETFs a significant milestone for crypto adoption?

The spot Bitcoin ETF launch is set to widen the institutional adoption of crypto as well as providing access to a diversified range of investors. The wealth hidden behind ordinary U.S. households and crypto sceptics can now find a direct path to cryptocurrencies. The ETF approval should simplify access to Bitcoin through traditional investment channels.

Spot Bitcoin ETFs have been available in other jurisdictions outside the U.S. such as Canada and Germany. The interest has been respectable yet not massive. This is not unusual taking into account that these are much smaller markets than the U.S. market.

Industry experts believe that spot ETFs have the potential to ignite further innovation and growth, along with extending the size and scope of the crypto market. The approval of Bitcoin ETFs is significant because it enhances the adoption by investors and marks a significant milestone for the crypto industry as a whole. 

In fact, it creates a positive cycle – the appearance of ETFs in investors’ portfolios has the potential to inspire novel financial products linked to the crypto ecosystem such as derivatives and lending. 

The introduction of spot Bitcoin ETFs may lead to a few positive changes in the way crypto companies operate, specifically Bitcoin-first companies. Bitcoin ETFs may transform the perception of Bitcoin from a speculative investment to a verified financial asset. Expanding the user base from tech-savvy people and early adopters to all kinds of retail customers and institutional investors may increase the addressable market for Bitcoin products.

Why is institutional adoption significant?

As explained already, the introduction of Bitcoin spot ETFs is expected to majorly impact the adoption of cryptocurrencies by institutional investors and financial institutions. As Bitcoin continues to make moves into mainstream finance, it is not only reshaping the investment landscape but also challenging traditional finance and asset management.

As opposed to the longstanding position of traditional finance, the crypto industry faced a lot of scepticism along the way. For many people who are interested in crypto assets, the process of purchasing cryptocurrencies from a crypto exchange seemed daunting.  

Negative headlines about major collapses such as FTX and Binance, the largest cryptocurrency exchanges, didn’t help crypto’s case as they minimised investor confidence. The concept of crypto ETFs came as a silver lining and gained significant popularity in a short amount of time. Let’s check out why.

Democratised access to the crypto sector

ETF approvals present an important step towards mass adoption of crypto assets. Due to their similarity to traditional investment vehicles, ETFs are expected to be more easily adopted, along with enabling asset managers to take positions in Bitcoin. 

Even though the listing of Bitcoin in public markets doesn’t necessarily imply solutions for regulatory challenges, it enhances Bitcoin’s legitimacy as an asset class.  

More than $1.2 billion was invested in Bitcoin ETFs within just a few hours of live trading which serves as evidence of an immense interest. Public listings play a significant role because they enable financial advisors to guide clients through their investment portfolios which could also pave the way for informed decision decision-making within the crypto industry.

The snowball effect and the rising interest in crypto

You may have heard about the snowball effect in psychology and economics. The term describes how initially small efforts can lead to bigger actions and important changes. In the light of investment, the snowball effect refers to the tendency for rising asset prices to build momentum that leads to further increases. 

Bitcoin is a good example of the snowball effect. Even before the ETF launch, Bitcoin became the most popular crypto asset worldwide. However, other crypto assets appear to be gaining a snowball effect through Bitcoin’s fame. 

Profits of launching a successful Bitcoin ETF are high – the crypto industry could continue to gain exposure through marketing campaigns, institutional interest and live debates which may increase the overall visibility of the digital asset ecosystem and serve as a bridge to the mainstream adoption of the cryptocurrency industry. Industry experts believe that this is a watershed moment for Bitcoin which could bring the cryptocurrency exposure to a more diverse set of investors and customers.

Other popular theories can be applied within the crypto environment. To learn more, check out this article: 'How do popular theories in economics shape crypto?'.

Increased transparency

The decentralised nature of crypto includes the removal of any intermediary. However, Bitcoin ETFs are subject to SEC reporting protocols and regulations. This feature is a double-edged sword – while it could bring to the table centralisation risks, it also addresses concerns regarding market manipulation and investor protection. Both of these have been barriers to institutional adoption. 

Low barriers to entry and accessibility

Bitcoin ETFs refer to a familiar way for traditional investors to enter the crypto market. Without the need to obtain immediate technical knowledge regarding custody options and tax implications, Bitcoin ETFs could attract a new wave of investors, specifically those tied to traditional stock market trading. 

Thereby, Bitcoin ETFs lower the entry barriers for all investors who have been hesitant about directly investing in crypto assets due to their lack of technical knowledge, regulatory issues or security concerns.

Potential disadvantages of Bitcoin ETFs

Similar to other investment vehicles, the Bitcoin spot ETF is not without risks.

Security risks

Taking into account that spot Bitcoin ETFs would have to hold a broad amount of cryptocurrency, malicious actors could be incentivised to act. ETFs typically rely on multilayered security protections such as encryption and cold storage which is a good thing, but most systems are penetrable. 

A successful security breach could result in the theft of millions worth of coins. Although such cyber thefts are rare, such an incident would severely damage fund stability and investor confidence. 

For example, a series of fake tweets from the Securities and Exchange Commission's X account caused nearly $90 million worth of Bitcoin long and short-term positions to be liquidated.

Potential management fees

While investing in spot Bitcoin ETFs could save you time and costs of securing and exchanging crypto assets yourself, you have to be aware of management fees and expense ratios to cover operational costs. 

Investing in a crypto ETF is likely to be a bit more expensive than buying digital assets directly. When you buy crypto, you need to make a one-time payment to the exchange, yet when investing in a crypto ETF, you need to pay brokerage trading fees and the fund’s expense ratio.

What if it doesn't work out?

Considering that ETFs combined have approximately $21 billion in assets, and could gain as much as $100 billion in one year from institutional and retail investors, some market analysts stated that it could cause a potential disruption to global finance. Basically, if widely adopted, crypto products could pose risks to other parts of the financial system during times of market fluctuations. 

On the other hand, we have another issue – what if Bitcoin ETFs fail to obtain enough traction? At the moment, the possibility of that happening is almost zero. The logic behind this notion is that major asset managers would not have put the effort into creating Bitcoin ETFs if there wasn’t a broad demand from customers as well as institutional demand.

Additionally, industry experts claim that crypto ETFs are just a quick fix. What does this mean? We mentioned above in the text that crypto ETFs may be more expensive than crypto exchanges. One of the major advantages of the Bitcoin network is its costless storage which doesn’t align with the nature of EFTs. 

However, the latest round of ETF issuers have introduced initial discount fees to obtain increasing interest from investors. The demand comes from customers, and that is driving the emergence of crypto ETFs, yet ETF providers need to make moves to keep their clients.

The notion that nobody comes is not likely to happen, especially taking into account that many investors were ready to dive back into crypto after the past years' bankruptcies, scandals, and the notorious crypto winter.

But what if it does?

The Bitcoin ETF approval presents a shift in market perception from niche to mainstream. It mirrors the ‘Crossing the Chasm’ theory by Geoffrey Moore – Bitcoin is on the move from early adopters to the early majority in its life cycle. While crypto enthusiasts have never doubted the value of Bitcoin, the approval of spot Bitcoin ETFs has boosted crypto's legitimacy among the general population and market participants.

The future price movements may be influenced by capital inflows and market sentiment, determining whether Bitcoin prices shall continue to decline or rise. Potential investors should keep an eye on the post-ETF approval market reaction and the flow of funds to be able to make informed and responsible decisions. 

Nevertheless, this presents a watershed moment for the whole crypto industry since a regulated crypto financial product in a large economy could create a broad influx of capital into the crypto market, and bring advantages to other sectors based on blockchain technology such as decentralised finance (DeFi), digital asset custody and Bitcoin ordinals. 

This move, aligned with the chasm theory and snowball effect, marks a transition to broader market acceptance as well as a potential wave of new investments.