The Dawn of a New Era: The Potential Impact of US Bitcoin ETFs on the Crypto Market
My first 3 articles in Janet’s ‘Money Matters Newsletter’ were a basic introduction to Bitcoin and the crypto landscape. That was back in March 2022. In the world of crypto, that was light-years ago!
To say a lot has happened since then is a massive understatement.
The crypto world has been picked up, turned upside down, and shaken all about. Prices crashed and reached a bottom, and are now sailing back up the other side.
There have been several very well-known companies and key figures go bust, and even jailed in that time.
The investment world, and particularly those favourable to crypto, have seen this as a ‘deep cleanse’ much needed in this fledging space, often viewed as the Wild West of investing.
Why this is favourable is that bad actors have finally been flushed out. These are the very ones who have given this space a bad name and have thankfully mostly come unstuck over the past 1-1/2 years.
This has ushered in a new perspective and hope for the industry, and none more apt than the world’s largest asset managers (with combined assets under management of close to NZD$28 Trillion!) weighing in on how they plan to invest in the relatively young asset class that is crypto.
For now, this will be Bitcoin and Ethereum, but this is sure to spread.
How are these asset managers planning to invest?
By creating managed funds backed by Bitcoin and Ethereum (and a cash component too) – Or ETFs as they are known (Exchange Traded Funds). These will be accessible funds through well-known platforms. They are intended to make it easier/legal/compliant for the everyday investor, institutional investor, and sovereign wealth to invest.
This means these investors won’t have to custody/hold the crypto themselves, be bothered with ‘wallets’, or keeping ‘seed phrases’ safe etc.
For a small fee, these asset managers can take out all of the hassle, the unknowns, and the lack of security from the investor’s hands.
For years, the cryptocurrency landscape has been dominated by retail investors, with institutional involvement remaining relatively limited.
However, the recent resurgence of interest in Bitcoin from major financial institutions like BlackRock, Fidelity, and Ark Invest suggests a significant shift in the dynamics of the crypto market. At the heart of this growing institutional interest lies the potential approval of a spot Bitcoin ETF in the United States.
In other words, a fund that is backed by the current market value of Bitcoin (or Ethereum depending on which ETF is invested into).
Understanding the Significance of US Bitcoin ETFs
Exchange-traded funds (ETFs) have gained immense popularity among investors due to their ease of access, transparency, and diversification benefits. The introduction of a spot Bitcoin ETF would revolutionise the way investors can gain exposure to Bitcoin, offering a familiar and regulated investment vehicle for institutional and retail investors alike.
A Gateway for Institutional Capital
- The approval of a spot Bitcoin ETF would open the floodgates for institutional capital to enter the Bitcoin space. Currently, many institutional investors are hesitant to directly invest in Bitcoin due to regulatory concerns and a lack of familiarity with the asset class. However, an ETF would provide a familiar and regulated investment vehicle, enabling institutions to allocate a portion of their portfolios to Bitcoin without compromising their risk management frameworks.
Potential Financial Injection into the Bitcoin Space
The potential financial injection into the Bitcoin space from institutional investors could be substantial. Estimates suggest that even a small allocation of just 1% of the funds under management (FUM) of major asset managers like BlackRock, Fidelity, and Ark Invest could translate into billions of dollars flowing into Bitcoin.
This influx of capital would undoubtedly have a profound impact on the Bitcoin market, potentially driving up prices and increasing liquidity.
Benefits for the Broader Crypto Market
The approval of a spot Bitcoin ETF would not only benefit Bitcoin but also the broader crypto market.
As Bitcoin gains wider recognition and acceptance, it could attract more institutional investors to other cryptocurrencies, leading to a broader adoption of the asset class.
Perceived Impact on the Crypto Market
The potential approval of a spot Bitcoin ETF is widely anticipated to have a positive impact on the crypto market. Increased institutional involvement could lead to greater stability, reduced volatility, and enhanced price discovery.
Additionally, the ETF could serve as a benchmark for the crypto space, providing a more transparent and regulated way to track the performance of Bitcoin.
Financial Adviser’s Perspective
As a financial adviser, I believe that the approval of a spot Bitcoin ETF could be a significant milestone for the cryptocurrency industry. It would not only provide investors with a new and accessible way to gain exposure to Bitcoin but also signal a growing acceptance and maturity of the asset class.
This is a very new space not only for New Zealand-based Financial Advisers, but the world over, and will be a very interesting one to watch slowly evolve. Expect to hear more and more about it.
Considerations for Retail Investors
While the potential benefits of US Bitcoin ETFs are substantial, retail investors need to exercise caution and conduct thorough research before investing. Bitcoin remains a volatile asset class, and investors should carefully consider their risk tolerance and investment objectives before making any decisions.
As mentioned, it is largely agreed out there that only 1-3% of wealth should currently be directed to crypto. Put another way: Only invest what you are willing to lose (I think with Bitcoin and Ethereum, that is a VERY small likelihood, but it pays to be cautious nonetheless).
The potential approval of a spot Bitcoin ETF represents a turning point in the evolution of the cryptocurrency industry. It has the potential to attract new investors, enhance liquidity, and increase the overall stability of the crypto market. While investors should exercise caution, the long-term implications of this development could be transformative.
In those first articles early in 2022, I mentioned that it is still very early days in the crypto space. You are definitely not too late to look to enter this market as a potential investment opportunity. If asset managers with $28 Trillion under management are looking to get in, you might want to consider this space too!
Go forth and conquer!
Daniel Carney
Financial Adviser
Goodlife Financial Advice