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Impact of Bitcoin ETFs: ‘Revolutionary change’ or colossal ‘dud’?

As the dust settles on a momentous week for the crypto industry, what will be the lasting aftereffects?



Source: Cointelegraph

After pushing for more than a decade, the cryptoverse finally got what it wanted: Bitcoin 

BTC $40,554 for sale and trading on major United States stock exchanges — albeit in the form of an exchange-traded fund (ETF).

But be careful what you wish for. No sooner had the U.S. Securities and Exchange Commission (SEC) handed the crypto sector a belated Christmas gift 10 years in the making than Bitcoin’s 

BTC $40,554 price pulled downward again.

Many predicted that this drawback would happen, and it’s probably just a hiccup, but it raises questions about the aftereffects.

Will the SEC approval of 11 spot Bitcoin ETFs on Jan. 10 have long-term reputational consequences for Bitcoin, offering further validation that crypto has moved into the economic mainstream?

Will the ETFs really bring back customers who were burned during the crypto winter? Are individual investors ready to dive back into Bitcoin after the past years’ bankruptcies, scandals and price gyrations?

What if major asset managers like BlackRock and Fidelity build their Bitcoin ETFs and nobody comes? What is the probability that the new ETFs — appearing for the first time on the New York Stock Exchange, the Nasdaq and the Chicago Board Options Exchange on Jan. 11 — will fail to gain traction with investors?

Reputationally enhanced?

Regarding enhancements of the so-called Bitcoin brand, “I believe SEC approval will cement Bitcoin’s reputation,” John Nahas, senior vice president of business development at Ava Labs, told Cointelegraph.

Bitcoin was already in the economic mainstream before the approval, in his view, but the new U.S. ETFs “will only reinforce the early adopters, further solidify its many supporters and begin to convert the remaining skeptics,” explained Nahas. It will no longer be seen as a fringe or exotic asset but as one embraced by traditional financial players.

Chris Brodersen, managing director at business advisory and accounting firm EisnerAmper, was more measured, suggesting that what really matters still lies ahead. SEC approval is just that — “approval of a non-security commodity” — not an endorsement, he told Cointelegraph. “However, the result of the approval will be an expansion in the discussion of Bitcoin, its underlying technologies and ultimately its value in a diversified portfolio.”

The real importance of the increased investment into cryptocurrencies that may come from the ETFs is that it will potentially “serve as a catalyst for innovation and adoption,” said Brodersen, adding:

“Looking beyond the ETFs, the question still remains: How will the crypto ecosystem engage with the broader financial ecosystem?” 

Shayne Higdon, co-founder and CEO of the HBAR Foundation, told Cointelegraph something similar, emphasizing the importance of the underlying technology, which now gets a closer look from the public at large: “While many investors and crypto advocates view Bitcoin as digital gold, the underlying value of blockchain technology is often overlooked.”

In the meantime, Bitcoin itself still has some ways to go. “Mass adoption and price appreciation are needed before Bitcoin can earn this ‘precious commodity’ status, and true validation will only occur if asset managers, private wealth management advisers, and similar entities invest in Bitcoin over the coming year,” said Higdon.

Will a spot market Bitcoin ETF attract retail investors in any significant way? Are individual investors ready to dive back into crypto after the past years’ bankruptcies, scandals and price gyrations after the so-called crypto winter?

There are reasons to think that last week’s events can make a difference on this score. Nahas said that ETF approval gives new assurances and security at the governmental level and institutional level, further explaining:

“These [asset managers] are longstanding, deeply entrenched financial institutions that perform extensive due diligence. They would not support any asset unless they had thoroughly vetted it and there was substantial demand.”

Established firms like BlackRock and Fidelity are supplying a needed function for small investors. Cryptocurrencies demand a certain level of technical and self-custody know-how that lies beyond the realm of many rank-and-file investors. 

Generally speaking, mass market consumers aren’t ready for cryptocurrency exchanges or noncustodial wallets, according to Nahas.

Regarding the continued effects of the so-called crypto winter on potential retail investors: “Despite the recent challenges related to volatility caused by scandals and bankruptcies owing to things like Terra, FTX and Celsius, there remains a significant interest in the opportunity of owning cryptocurrency by retail investors,” opined Brodersen.

An “investable commodity — like any other”

It’s still perhaps too early for most consumers to appreciate the difference that crypto ETFs can make. Individual investors now have the ability to hold BTC — and perhaps ETH too soon — alongside their stocks, bonds and other tradable assets, said Nahas, adding:

“Most people are not comprehending the enormity of the barrier that has been lifted, making the ETF an easily investable commodity like any other.” 

Others say what retail investors do or do not understand could be beside the point. “Whether the average person is ready for Bitcoin may not be all that important right now because their advisers will bring them in anyway,” said Henry Robinson, founder of the Decimal Digital Group, a cryptocurrency mining, infrastructure and technology company.

In the increasingly competitive race to surpass investment benchmarks, “wealth managers will not be able to afford to ignore Bitcoin because they risk losing to their peers,” said Robinson. They will “have to take some exposure.”

What if no one comes?

But what if Bitcoin ETFs fail to gain much traction with retail investors? What happens then?

“The probability of this is almost zero,” Higdon told Cointelegraph. “Large asset managers would not have put forth the effort to file and create an ETF if there wasn’t significant demand from their clients.” Those issuers, such as BlackRock, Fidelity, Franklin Templeton, et al., simply want to provide a regulated means for their clients.

“If ETFs are a dud, we may see capitulation from buyers over the last six months who intended to front run higher prices than were realized,” said Robinson. The result could be another extended bear market.

BTC price briefly spiked and then dropped following the ETF approvals. Source: Cointelegraph

Crypto ETFs are really just a temporary fix anyway. “Over time, we expect ETF holdings to peak and then dwindle in BTC terms,” said Robinson. “There’s no reason to hold BTC in a wrapper for a maintenance fee.”

One of Bitcoin’s major advantages as a store of value is its costless storage, which doesn’t really jibe with ETFs, even though the latest round of ETF issuers have gone to lengths to discount fees, at least initially. “[ETFs] role in greater [BTC] adoption can’t be understated, but they are also temporary,” said Robinson.

The notion that “nobody comes” is not likely, Brodersen added. “Once the initial excitement wears off, we’re likely to witness a relatively slow but increasing interest by retail investors.”

Meanwhile, the potential upside is enormous. Even 1–2% allocations, if done at scale, “could have an outsized impact on the overall market capitalization of the cryptocurrency market,” said Brodersen.

Nahas, too, was confident that the new ETF issuers had already effectively scoped out customer demand. “BlackRock and their peers would not be in business if they speculated on what assets would have demand or not,” he said, adding:

“Demand comes from clients. That is what’s driving this ETF. Many of these issuers were not inclined to support any digital assets, and now they are issuing a Bitcoin ETF.”

A watershed moment?

Will people one day look back on last week’s events as a historic milestone in the journey of the world’s first and largest cryptocurrency?

“We do believe this is a watershed moment for Bitcoin,” said Robinson, though there may be a BTC availability shortage soon, he added:

“Bitcoin taken off the market by ETFs is setting up a supply squeeze. The new capital will catapult the industry to a manyfold greater integration with global finance.” 

Gauging historical “tipping” points can be tricky, of course, and a matter of endless debate. “The true watershed moment for Bitcoin was the release of its white paper and the mining of its genesis block,” said Brodersen. Satoshi Nakamoto’s Bitcoin white paper was published in October 2008, and the first Bitcoin was mined in January 2009. 

“Ultimately, this is a positive step toward increased adoption and investment in the digital asset space,” acknowledged Brodersen, but mass adoption will require more than the “synthetic exposure to the price of Bitcoin.”

It will also require better regulatory frameworks, as well as a deeper understanding, generally, of the costs and benefits of decentralized ledger technologies — “and, most importantly, the demand for such alternatives.”

Higdon was more sure of last week’s significance. “We will look back on this day as the catalyst that sparked revolutionary change in the finance and banking world. While the exact extent of this change is yet to be known, we cannot overstate the significance of this approval.”

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