Bitcoin ETFs, or exchange-traded funds that track the price of Bitcoin, have been a long-awaited and highly anticipated product in the crypto space. For years, investors have hoped that the U.S. Securities and Exchange Commission (SEC) would approve a Bitcoin ETF, as it would provide a convenient and regulated way to gain exposure to the leading cryptocurrency.

However, after several rejections and delays, the SEC has yet to approve a spot Bitcoin ETF, which would hold actual Bitcoin in custody. Instead, the SEC has only approved Bitcoin futures ETFs, which track the price of Bitcoin futures contracts traded on regulated exchanges. These ETFs have their own drawbacks, such as high fees, tracking errors, and rollover risks.

Moreover, the demand for Bitcoin ETFs has been declining, as investors have found other ways to access Bitcoin, such as through crypto exchanges, wallets, apps, and platforms. These alternatives offer more flexibility, security, and control over one’s Bitcoin holdings, as well as lower costs and better performance.

Declining Demand for Bitcoin ETFs

One of the main reasons why the approval of a spot Bitcoin ETF is not important any more is that the demand for Bitcoin ETFs has been declining as investors have found other ways to access Bitcoin.

Based on a report, there were $1.9 billion of inflows from Bitcoin ETF last year. This represents 87% of the total inflows. This is a relatively small amount compared to the total market capitalization of Bitcoin, which was nearly $900 billion as of January 5, 2024, according to statistics from CoinMarketCap.

According to Forbes Advisors, the largest Bitcoin ETF, the ProShares Bitcoin Strategy ETF (BITO), had an AUM of around $904 million, followed by the ProShares Short Bitcoin ETF (BITI), which had an AUM of $69 million and VanEck Bitcoin Strategy ETF (XBTF) with $45 million. The other ETFs had less than $25 million each in AUM.

The low AUM of Bitcoin ETFs indicates that investors are not very interested in these products, as they have other options to access Bitcoin. For example, investors can buy and sell Bitcoin directly on crypto exchanges, such as Coinbase, eToro and Robinhood. These exchanges offer a variety of features, such as low fees, high liquidity, advanced trading tools, and custodial services.

Investors can also store and manage their Bitcoin in crypto wallets, such as Ledger, Trezor, and MetaMask. These wallets allow users to have full control over their private keys, which are the passwords that grant access to their Bitcoin. Users can also send and receive Bitcoin to and from anyone in the world, without intermediaries or restrictions. Investors can also access Bitcoin through crypto apps and platforms, such as Square, PayPal, and Bakkt. These apps and platforms enable users to buy, sell, and spend Bitcoin with ease and convenience, as well as integrate Bitcoin with other financial services, such as payments, lending, and rewards.

These alternatives to Bitcoin ETFs offer more flexibility, security, and control over one’s Bitcoin holdings, as well as lower costs and better performance. For instance, the expense ratio of Bitcoin ETFs ranges from 0.65% to 1.20%, which means that investors have to pay an annual fee of $6.50 to $12 for every $1,000 invested. On the other hand, the fees for buying and selling Bitcoin on crypto exchanges are much lower, typically ranging from 0% to 0.6%, depending on the volume and type of transaction.

Moreover, the performance of Bitcoin ETFs may not match the performance of Bitcoin itself, due to factors such as tracking errors, premiums and discounts, and rollover risks. Tracking errors occur when the price of the ETF deviates from the price of the underlying asset, due to market inefficiencies, liquidity issues, or technical glitches.

Premiums and discounts occur when the market price of the ETF differs from its net asset value (NAV), which is the value of its underlying assets. Rollover risks occur when the ETF has to sell its expiring futures contracts and buy new ones, which may incur losses or gains depending on the price difference.

These factors can result in Bitcoin ETFs underperforming or outperforming Bitcoin, depending on the market conditions. For example, take the reference point from January 1, 2023 to December 19, 2023.

ProShares Bitcoin Strategy ETF (BITO) price on January 1, 2023, was $14.54. On December 19, 2023, the price was $20.87. This represents a return on investment (ROI) of approximately 43.6% for this period. The Bitcoin spot price on January 1, 2023, was $16,540.69. On December 19, 2023, the closing price was $42,270.53. This represents an ROI of approximately 155.2% for this period. This means that BITO underperformed Bitcoin by 111.6%.

Therefore, the demand for Bitcoin ETFs has been declining, as investors have found other ways to access Bitcoin, which offer more flexibility, security, and control over one’s Bitcoin holdings, as well as lower costs and better performance.

Reasons Why the SEC Has Not Approved a Bitcoin ETF

Another reason why the approval of a spot Bitcoin ETF is not important any more is that the SEC has not approved Bitcoin ETF, despite the numerous applications and the growing maturity of the Bitcoin market.

The SEC has been very cautious and conservative in approving Bitcoin ETFs, as it has raised several concerns, such as market manipulation, investor protection, custody, valuation, and liquidity. The SEC has also been very slow and inconsistent in reviewing and deciding on the Bitcoin ETF applications that have been filed over the years.

One of the main concerns that the SEC has expressed is the risk of market manipulation, as Bitcoin is traded on unregulated and fragmented markets, which may be subject to fraud, hacking, or price distortion. The SEC has also questioned the reliability and accuracy of the Bitcoin price indices that are used by the Bitcoin ETFs to track the performance of Bitcoin.

Another concern that has been raised is investor protection, as Bitcoin ETFs may expose investors to high volatility, operational risks, and cybersecurity threats. The SEC has also emphasized the need for adequate disclosure and education for investors, as Bitcoin ETFs may involve complex and unfamiliar concepts and technologies.

A third concern that was cited is custody, as Bitcoin ETFs would have to hold actual Bitcoin in a secure and compliant manner, which may pose technical and legal challenges. The SEC has also stressed the importance of having qualified custodians and auditors for Bitcoin ETFs, as well as contingency plans for potential loss or theft of Bitcoin.

A fourth concern that the SEC has mentioned is the valuation, as Bitcoin ETFs would have to determine the fair value of Bitcoin on a daily basis, which may be difficult due to the lack of standardization and transparency in the Bitcoin market. The SEC has also highlighted the potential for discrepancies and conflicts between the NAV and the market price of Bitcoin ETFs, which may result in premiums or discounts.

A fifth concern that the SEC has pointed out is liquidity, as Bitcoin ETFs would have to meet the liquidity requirements and standards of the SEC, which may be challenging due to the limited availability and trading volume of Bitcoin. The SEC has also warned about the potential for market disruptions and price swings in the Bitcoin market, which may affect the liquidity and stability of Bitcoin ETFs.

These are some of the reasons in my opinion why the SEC has not approved Bitcoin ETF, despite the numerous applications and the growing maturity of the Bitcoin market.

The Delay and its Consequences

The final reason why the approval of a spot Bitcoin ETF is not important any more is that the delay in the SEC’s decision has not made much difference for the Bitcoin market or the adoption of Bitcoin.

Some analysts have speculated that the delay in the SEC’s approval of a spot Bitcoin ETF is due to the change in leadership and priorities of the SEC, as well as the ongoing regulatory and legal developments in the crypto space. For example, the SEC chairman, Gary Gensler, is known for his expertise and interest in cryptocurrencies, but also for his strict and rigorous approach to regulation. The SEC has also been involved in several lawsuits and investigations against crypto companies, such as Ripple and Coinbase.

However, the delay in the SEC’s approval of a spot Bitcoin ETF has not made much difference for the Bitcoin market or the adoption of Bitcoin, as Bitcoin has continued to grow and thrive without the need for a spot Bitcoin ETF. Bitcoin has exhibited a remarkable performance in 2023, reaching new highs and attracting more investors and users. Bitcoin has also gained more recognition and acceptance from governments, central banks, and financial institutions around the world.

Moreover, the delay in the SEC’s approval of a spot Bitcoin ETF has not deterred the innovation and competition in the crypto space, as more fund providers and issuers have launched and applied for different types of Bitcoin ETFs, such as futures ETFs, inverse ETFs, leveraged ETFs, and actively managed ETFs. These ETFs offer various strategies and features to cater to different investor preferences and risk appetites. However, these ETFs also have their own limitations and challenges, as discussed earlier.

Therefore, the delay in the SEC’s approval of a spot Bitcoin ETF has not made much difference for the Bitcoin market or the adoption of Bitcoin, as Bitcoin has continued to grow and thrive without the need for a spot Bitcoin ETF. Of course, I could be wrong too.

Still Important?

In conclusion, the approval of a spot Bitcoin ETF is not important any more, as it would not have a significant impact on the Bitcoin market or the adoption of Bitcoin. The demand for Bitcoin ETFs has been declining, as investors have found other ways to access Bitcoin, which offer more flexibility, security, and control over one’s Bitcoin holdings, as well as lower costs and better performance. Bitcoin is already a highly liquid and legitimate asset, with a global and decentralized network of users, miners, developers, and exchanges.

Bitcoin ETFs may still have some challenges and opportunities in the future, depending on the regulatory and market developments. However, they are not likely to be the catalyst or the driver for the growth and innovation of Bitcoin. Bitcoin ETFs are rather a reflection and a result of the evolution and maturation of Bitcoin, as it becomes more mainstream and accepted by the world.

 

Source: https://www.blockhead.co/2024/01/09/why-bitcoin-etf-approval-is-not-important-any-more/