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The SEC’s Approval of Spot Ethereum ETFs: Why It Matters

The SEC’s Approval of Spot Ethereum ETFs: Why It Matters

On May 23, 2024, the United States Securities and Exchange Commission (SEC) approved the first spot Ethereum (ETH) exchange-traded funds (ETFs), a landmark decision that has sent ripples throughout the financial and cryptocurrencies worlds.

This development marks a significant milestone not just for Ethereum but for the broader cryptocurrency market, as it opens the floodgates for institutional investors to inject billions into the space.

I will comment on the implications of this approval, exploring its potential impact on Ethereum and the wider financial ecosystem, and consider the broader regulatory context and market dynamics.

Key Takeaways

  • The SEC’s approval of spot Ethereum ETFs marks a significant step towards the acceptance of cryptocurrencies within traditional financial markets.
  • The decision opens the door for institutional investors, such as pension funds and endowments, to invest in Ethereum, potentially injecting billions into the cryptocurrency market and driving significant price appreciation.
  • Ethereum’s shift to Proof of Stake and its expanding ecosystem, including DeFi and NFTs, positions it as a robust platform, further enhanced by the anticipated influx of institutional capital.
  • However, the SEC’s approval invites increased scrutiny and potential centralization, which could affect the decentralized nature of the Ethereum network.

The Significance of Spot Ether ETFs

The approval of spot Ether ETFs by the SEC is monumental for several reasons. Firstly, it signifies a growing acceptance and legitimization of cryptocurrencies within traditional financial markets. Unlike futures-based ETFs, which derive their value from derivative contracts, spot ETFs are directly backed by the underlying asset—in this case, Ether.

This means that investors in these ETFs are exposed to the actual price movements of Ether, providing a more straightforward and perhaps less speculative investment vehicle.

For institutional investors, the availability of spot Ether ETFs eliminates many of the barriers to entry that have historically impeded large-scale investment in cryptocurrencies. Regulatory uncertainty, custodial challenges, and concerns about market manipulation have all been significant deterrents.

With the SEC’s approval, these concerns are somewhat alleviated, paving the way for pension funds, endowments, and other large institutional players to allocate capital to Ether.

Market Reactions and Predictions

The immediate market reaction to the SEC’s decision was mixed, with both Bitcoin and Ether experiencing price declines shortly after the announcement. This counterintuitive response can be attributed to several factors, including profit-taking by investors who had anticipated the approval and market adjustments to the new influx of institutional interest.

However, in the medium to long term, the introduction of spot Ether ETFs is expected to have a profoundly positive impact on Ethereum’s price and market capitalization. Historical data from the approval of Bitcoin ETFs suggests a similar trajectory.

When the first Bitcoin futures ETFs were approve, Bitcoin’s price surged to an all-time high shortly thereafter. While the current market dynamics are different, the precedent suggests that increased institutional participation could drive significant price appreciation for Ether.

Ethereum’s Technological and Ecosystem Developments

Ethereum, the second-largest cryptocurrency by market capitalization, has undergone significant technological advancements in recent years. The transition from Proof of Work (PoW) to Proof of Stake (PoS) with the Ethereum 2.0 upgrade was a critical milestone. This upgrade drastically reduced Ethereum’s energy consumption by over 99%, addressing one of the major criticisms levied against cryptocurrencies.

Ethereum’s robust ecosystem, which includes decentralized finance (DeFi) platforms, non-fungible tokens (NFTs), and a multitude of decentralized applications (dApps) continues to expand. The total value locked (TVL) in DeFi protocols on Ethereum surpassed $115 billion, underscoring the platform’s growing utility and adoption.

Institutional Investment: A Double-Edged Sword

While the influx of institutional capital is generally seen as a positive development for Ethereum, it is not without potential drawbacks. One concern is the increased centralization of ETH holdings. As institutional investors accumulate large positions, the risk of centralization grows, potentially undermining the decentralized ethos of the Ethereum network.

Additionally, the involvement of large financial institutions could lead to increased regulatory scrutiny. While the SEC’s approval of spot Ether ETFs is a step toward regulatory clarity, it also opens the door for more stringent oversight. This could manifest in various forms, including more rigorous Know Your Customer (KYC) and anti-money laundering (AML) requirements for exchanges and custodians.

The Broader Regulatory Landscape

The SEC’s decision comes at a time when global regulatory attitudes toward cryptocurrencies are evolving. In the United States, the Biden administration has taken a more proactive approach to cryptocurrency regulation, focusing on consumer protection, financial stability, and national security. The approval of spot Ether ETFs aligns with this approach, providing a regulated investment vehicle that mitigates some of the risks associated with direct cryptocurrency ownership.

Internationally, the regulatory environment is similarly dynamic. The European Union’s Markets in Crypto-Assets (MiCA) regulation, set to come into effect in 2024, aims to create a comprehensive regulatory framework for digital assets.

In Asia, countries like Singapore, South Korea and Japan are also moving toward clearer regulatory guidelines, recognizing the growing importance of cryptocurrencies in the global financial system.

Economic Implications and Future Outlook

The approval of spot Ether ETFs could have far-reaching economic implications. For one, it is likely to catalyze further innovation and development within the Ethereum ecosystem. Increased capital inflows can fund new projects, enhance existing protocols, and attract more developers to the network. This virtuous cycle of investment and innovation could accelerate Ethereum’s growth and solidify its position as the leading smart contract platform.

Furthermore, the broader cryptocurrency market stands to benefit from the increased legitimacy and institutional adoption of Ether. Bitcoin, often seen as a gateway to the crypto market, could experience renewed interest as investors diversify their portfolios to include other major cryptocurrencies. This could lead to a more mature and stable market, characterized by reduced volatility and increased liquidity.

Perspectives on Potential Risks

Despite the optimistic outlook, it is crucial to acknowledge the potential risks associated with the SEC’s approval of spot Ether ETFs. Market volatility remains a significant concern, as the cryptocurrency market is still relatively nascent and susceptible to rapid price swings. Additionally, the speculative nature of the market means that prices can be influenced by factors that are difficult to predict or control.

There is also the risk of regulatory changes. While the current regulatory environment is favorable, future administrations or shifts in policy could introduce new challenges. For instance, stricter regulations on cryptocurrency exchanges or changes in tax policy could impact the attractiveness of Ether as an investment.

Maybe another question to look at is “Is staking allowed?” And there are other teething issues too if I want to dig further from a regulatory standpoint.

The Bottom Line

The SEC’s approval of the first spot Ether ETFs represents a transformative moment for Ethereum and the broader cryptocurrency market. By providing a regulated and accessible investment vehicle, this decision has the potential to unlock significant institutional capital, driving further growth and adoption of Ethereum. It is essential to remain cognizant of the associated risks and challenges, including market volatility, regulatory changes, and the potential for increased centralization.

As Ethereum continues to evolve and its ecosystem expands, new technological advancements, regulatory developments, and market dynamics will shape its future trajectory.

For investors, developers, and policymakers alike, the approval of spot Ether ETFs is a pivotal event that underscores the growing importance of cryptocurrencies in the global financial landscape. Whether this will ultimately lead to a more stable and mature market or introduce new complexities and risks remains to be seen.

However, one thing is clear: Ethereum’s journey is far from over, and the next chapter promises to be both exciting and transformative.

 

Source: https://www.techopedia.com/sec-approval-of-spot-ethereum-etfs-why-it-matters

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

www.anndy.com
j j j

Bitcoin ETFs: Which Region Is Next To See Approvals And Poise As A Hub? Australia? Hong Kong?

Bitcoin ETFs: Which Region Is Next To See Approvals And Poise As A Hub? Australia? Hong Kong?

Bitcoin ETFs are live, changing the investing game everywhere. With the US joining the ranks of other approved countries, the big question is which region is next to see approvals and poise as a hub for Bitcoin ETFs. I will share my views who are the most likely candidates for the next wave of Bitcoin ETF launches, based on their market size, regulatory environment, investor demand, and innovation potential. I will also discuss the analyst sentiment on bringing more liquidity into Bitcoin products through ETF launches, and when the public can expect approval in specific regions.

Why Australia’s main stock market (ASX) makes sense for the next BTC ETF launch

Australia is one of the most developed and sophisticated financial markets in the Asia-Pacific region, with a strong and stable economy, a robust and transparent regulatory framework, and a high level of investor protection and education. The Australian Securities Exchange (ASX) is the primary stock exchange in Australia, and one of the largest in the Asia-Pacific region, with over 2,300 listed companies and a total value of over $2.3 trillion as of February 2024. The ASX also offers a diverse range of products and services, including equities, derivatives, commodities, fixed income, and exchange-traded products (ETPs), such as ETFs and leveraged and inverse products (L&I Products).

Australia is also a leading country in terms of cryptocurrency adoption and innovation, with a supportive and progressive attitude towards digital assets. According to a report, 17% of Australians own some form of cryptocurrency, making it the top most ready crypto-friendly country in the world, in front of U.S., Brazil and UAE. I was talking to an association in Australia and was told that there are over 300 crypto businesses, 40 crypto exchanges, and 20 crypto funds operating in the country. Although, I do not have the exact numbers but I do believe there are more. Additionally, Australia has a clear and comprehensive regulatory framework for crypto assets, which covers aspects such as taxation, anti-money laundering, consumer protection, and licensing. The Australian Securities and Investments Commission (ASIC) is the main regulator for crypto assets in Australia, and has issued several guidelines and statements on how crypto assets are treated under the existing laws and regulations. You can refer to ASIC’s Information Sheet 225, Crypto-assets (INFO 225) as a guide for the community and industry understand when financial services laws may apply to crypto-assets.

Given these factors, it makes sense for Australia’s main stock market, the ASX, to be the next destination for Bitcoin ETF launches. In fact, Australia already has access to physically backed Bitcoin ETFs since May 2022, via the 21shares Bitcoin ETF (EBTC) listed on Cboe Australia, a secondary exchange that operates under the ASX’s license. However, the ASX itself has not yet approved any Bitcoin ETFs, despite receiving several applications from various providers, such as BetaShares, VanEck, and Fidelity. The main reason for the delay is the ASX’s cautious and conservative approach towards crypto assets, which reflects its high standards and expectations for product quality, investor suitability, and market integrity. The ASX has stated that it is closely monitoring the developments and innovations in the crypto space, and that it is open to considering Bitcoin ETFs, as long as they meet its rigorous requirements and address its concerns8.

Some of the key issues that the ASX is likely to consider before approving Bitcoin ETFs are:

  • The liquidity and volatility of the underlying Bitcoin market, and the potential impact on the ETF’s price discovery, trading, and redemption.
  • The security and reliability of the Bitcoin custodian, and the measures taken to prevent hacking, theft, or loss of the Bitcoin holdings.
  • The valuation and accounting methods used to determine the net asset value (NAV) of the ETF, and the frequency and accuracy of the NAV calculation and dissemination.
  • The risk management and compliance policies and procedures of the ETF provider, and the adequacy of the disclosure and reporting to the investors and the regulators.
  • The suitability and education of the investors, and the availability of sufficient information and guidance on the risks and benefits of investing in Bitcoin ETFs.

I believe that these issues are not insurmountable, and that the ASX will eventually approve Bitcoin ETFs, as long as the applicants can demonstrate that they have addressed them satisfactorily, and that they have the necessary expertise, experience, and resources to offer a high-quality and safe product. I also believe that the ASX will benefit from approving Bitcoin ETFs, as it will enhance its reputation as a leading and innovative exchange, attract more investors and capital to its market, and diversify its product offering and revenue streams. Therefore, I expect that the ASX will approve Bitcoin ETFs in the second half of 2024, following the example of other major exchanges around the world.

Analyst sentiment on bringing more liquidity into Bitcoin products through ETF launches

One of the main benefits of Bitcoin ETFs is that they bring more liquidity into Bitcoin products, by increasing the supply and demand of Bitcoin, and by facilitating the trading and arbitrage of Bitcoin across different platforms and markets. Liquidity is a measure of how easily and quickly an asset can be bought or sold without affecting its price, and it is an important factor for the efficiency, stability, and growth of any market. Higher liquidity means lower transaction costs, faster execution, better price discovery, lower volatility, and higher investor confidence.

Analysts generally have a positive sentiment on bringing more liquidity into Bitcoin products through ETF launches, as they believe that it will improve the overall performance and attractiveness of Bitcoin as an asset class, and that it will create more opportunities and value for investors, traders, and the crypto industry. Some of the main arguments that analysts make in favor of Bitcoin ETFs are:

  • Bitcoin ETFs increase the demand for Bitcoin, as they attract more investors, especially institutional and retail investors, who may otherwise be reluctant or unable to invest in Bitcoin directly, due to technical, regulatory, or operational barriers. Bitcoin ETFs also increase the supply of Bitcoin, as they require the ETF providers to buy and hold Bitcoin to back their ETF shares, creating a positive feedback loop that drives up the price and the adoption of Bitcoin.
  • Bitcoin ETFs facilitate the trading and arbitrage of Bitcoin, as they allow investors to buy and sell Bitcoin on regulated exchanges and platforms, with lower fees, higher liquidity, and better security, than on unregulated or offshore crypto exchanges. Bitcoin ETFs also allow investors to exploit price differences and inefficiencies between the spot and the futures markets, and between different regions and jurisdictions, creating a more integrated and efficient global market for Bitcoin.
  • Bitcoin ETFs improve the price discovery and the volatility of Bitcoin, as they reflect the true and fair value of Bitcoin, based on the supply and demand of the market, rather than the speculation or manipulation of the market. Bitcoin ETFs also reduce the volatility of Bitcoin, as they smooth out the price fluctuations and the shocks caused by external events, such as hacks, bans, or news, by providing more liquidity and stability
  • Bitcoin ETFs enhance the reputation and the legitimacy of Bitcoin, as they bring Bitcoin into the mainstream financial system, by making it available on regulated exchanges and platforms, and by attracting institutional and retail investors who may otherwise be skeptical or hostile towards Bitcoin. Bitcoin ETFs also foster a more positive and constructive relationship between the crypto industry and the regulators, as they demonstrate the willingness and the ability of the crypto industry to comply with the existing laws and regulations, and to cooperate with the regulators to address their concerns and expectations.

When the public can expect approval in specific regions

The approval and the launch of Bitcoin ETFs in different regions depend on various factors, such as the market size, the regulatory environment, the investor demand, and the innovation potential of each region. Therefore, it is difficult to predict with certainty when the public can expect approval in specific regions, as each region has its own challenges and opportunities, and as the crypto space is constantly evolving and changing. However, based on the current trends and developments, I will provide some estimates and expectations for the approval and the launch of Bitcoin ETFs in some of the major regions in the world.

  • Europe: Europe is one of the most advanced and progressive regions in terms of cryptocurrency regulation and innovation, with several countries, such as Germany, Switzerland, and Sweden, already having approved and launched Bitcoin ETFs, and with others, such as France, Italy, and Spain, showing interest and openness towards crypto assets. Europe also has a high level of crypto adoption and awareness, with 15% of Europeans owning some form of cryptocurrency, making it the fourth most crypto-friendly region in the world, behind Africa, Asia, and Oceania. Therefore, I expect that Europe will continue to approve and launch Bitcoin ETFs in the near future, and that it will become one of the leading hubs for Bitcoin ETFs in the world.
  • Latin America: Latin America is one of the most emerging and promising regions in terms of cryptocurrency adoption and innovation, with several countries, such as Brazil, Argentina, Mexico, and Colombia, being among the top adopters and users of crypto assets in the world. Latin America also has a challenging and uncertain regulatory environment for crypto assets, with different countries having different levels and degrees of regulation, supervision, and enforcement of crypto assets, and with some countries facing political and economic instability and turmoil. Therefore, I expect that Latin America will have a slow and gradual outlook for the approval and the launch of Bitcoin ETFs in the near future, with some countries, such as Brazil, being more advanced and ready to approve and launch Bitcoin ETFs, and others, such as Venezuela, being more behind and unprepared to do so.
  • Asia: Asia is one of the most dynamic and diverse regions in terms of cryptocurrency adoption and innovation, with several countries, such as China, Japan, South Korea, and Singapore, being among the top players and influencers in the global crypto market. Asia also has a high level of crypto adoption and enthusiasm. However, Asia also has a complex and inconsistent regulatory environment for crypto assets, with different countries having different views and approaches towards crypto assets, ranging from supportive and progressive, to restrictive and hostile. Therefore, I expect that Asia will have a mixed and varied outlook for the approval and the launch of Bitcoin ETFs in the near future, with some countries, such as Hong Kong, Singapore, and Japan, being more likely to approve and launch Bitcoin ETFs, and others, such as China, India, and Indonesia, being less likely to do so.

Hong Kong is another potential hub for Bitcoin ETFs in the Asia-Pacific region

Hong Kong is one of the world’s leading financial centers and is also a gateway to mainland China, which despite its crackdown on crypto activities, remains a major player and influencer in the global crypto market. Hong Kong is also a prominent country in terms of cryptocurrency adoption and innovation, with a vibrant and growing crypto ecosystem.

According to a report, 18% of Hong Kong residents are active investors of cryptocurrency, while 13% are more passive, making it the most crypto-friendly country in the world. Hong Kong also has a supportive and progressive attitude towards digital assets, with a vision to become a leading fintech and crypto hub in the region. Hong Kong’s regulatory environment for crypto assets has been somewhat unclear and inconsistent in the past, with different regulators having different views and approaches towards crypto assets. The main regulator for crypto assets in Hong Kong is the Securities and Futures Commission (SFC), which oversees the securities and futures markets in the country. The SFC has issued several guidelines and statements on how crypto assets are treated under the existing laws and regulations. However, the SFC’s jurisdiction only covers crypto assets that fall under the definition of “securities” or “futures contracts”, which excludes most of the cryptocurrencies, such as Bitcoin, that are not backed by any physical assets, rights, or obligations. Therefore, the SFC has adopted a voluntary and opt-in regulatory framework for crypto exchanges and funds that deal with non-security crypto assets, which means that they can choose to apply for a license and comply with the SFC’s rules and standards, or they can operate outside the SFC’s purview, as long as they do not offer any security crypto assets to the public.

This regulatory framework has created some challenges and uncertainties for the crypto industry and the investors in Hong Kong, as it limits the scope and the quality of the crypto products and services that are available and accessible in the country, and as it exposes them to higher risks and lower protections. However, in recent months, there have been some significant changes and developments that are pushing for a change in the regulatory relation between the SFC and the crypto industry in Hong Kong, and that are creating more favorable conditions for the approval and the launch of Bitcoin ETFs in the country. Some of these changes and developments are:

  • The pressure and the competition from the US and other approved countries, which have approved and launched Bitcoin ETFs, and which have attracted a huge amount of capital and interest from investors and traders around the world. The SFC may feel the need and the urge to catch up with the global trend and to maintain its competitiveness and relevance as a leading financial center and a crypto hub in the region.
  • The feedback and the demand from the crypto industry and the investors in Hong Kong, who have expressed their desire and their expectation for more clarity and consistency in the regulation of crypto assets, and for more access and exposure to Bitcoin and other non-security crypto assets, especially through regulated and reputable products and platforms, such as Bitcoin ETFs.
  • The innovation and the improvement in the crypto space, which have addressed some of the SFC’s concerns and issues regarding the liquidity, the volatility, the security, and the reliability of Bitcoin and other non-security crypto assets, and which have demonstrated the feasibility and the viability of Bitcoin ETFs, as evidenced by the successful performance and the popularity of Bitcoin ETFs in other markets.
  • The cooperation and the communication between the crypto industry and the regulators in Hong Kong, which have increased and enhanced in recent times, and which have fostered a more positive and constructive relationship and dialogue between the two parties, with the aim of finding a common ground and a mutual understanding on the regulation and the development of crypto assets in the country.

I believe that these changes and developments are indicative of a warming regulatory relation in Hong Kong, and that they will pave the way for the approval and the launch of Bitcoin ETFs in the country. I also believe that Hong Kong will benefit from approving Bitcoin ETFs, as it will boost its reputation and its attractiveness as a fintech and a crypto hub, attract more investors and capital to its market, and diversify its product offering and revenue streams. Therefore, I expect that Hong Kong will approve Bitcoin ETFs as early as end of the first quarter of 2024.

Conclusion

Bitcoin ETFs are more than just another investment product. They are a catalyst and a conduit for the transformation and the evolution of the global financial system, and for the adoption and the integration of Bitcoin and other crypto assets into the mainstream economy and society. Bitcoin ETFs offer a simple, convenient, and secure way for investors to access and benefit from the potential and the value of Bitcoin, without having to deal with the technical, regulatory, or operational challenges and risks of investing in Bitcoin directly. Bitcoin ETFs also bring more liquidity, efficiency, stability, and legitimacy to the Bitcoin market, by increasing the supply and demand of Bitcoin, by facilitating the trading and arbitrage of Bitcoin across different platforms and markets, by improving the price discovery and the volatility of Bitcoin, and by enhancing the reputation and the relationship of Bitcoin with the regulators and the public.

With the US joining the ranks of other approved countries, such as Canada, Germany, Switzerland, and Sweden, the big question is which region is next to see approvals and poise as a hub for Bitcoin ETFs. In this article, I have argued that Australia and Hong Kong are the most likely candidates for the next wave of Bitcoin ETF launches, based on their market size, regulatory environment, investor demand, and innovation potential. I have also provided some estimates and expectations for the approval and the launch of Bitcoin ETFs in other major regions, such as Europe, Latin America, and Asia. However, these are not the only factors that will determine the future and the fate of Bitcoin ETFs.

The crypto space is constantly changing and evolving, and new developments and innovations may emerge and disrupt the status quo and the expectations of the market and the regulators. Therefore, it is important to keep an eye on the trends and the signals that indicate the direction and the pace of the Bitcoin ETF movement, and to be prepared and adaptable to the opportunities and the challenges that it may bring. Bitcoin ETFs are not the end goal, but the means to an end.

The end goal is to create a more open, inclusive, and sustainable financial system, and to empower people with more choice, freedom, and value. Bitcoin ETFs are one of the ways to achieve that goal, and I believe that they will play a significant and positive role in the future of finance and society.

 

 

Source: https://www.securities.io/bitcoin-etfs-which-region-is-next-to-see-approvals-and-poise-as-a-hub-australia-hong-kong/

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

www.anndy.com
j j j

Why Bitcoin ETFs May Outperform Gold ETFs in the Long Run

Why Bitcoin ETFs May Outperform Gold ETFs in the Long Run

Gold and bitcoin are often compared as alternative assets that can hedge against inflation, currency devaluation, and geopolitical risks. Both have limited supply, global demand, and no central authority. Both have also attracted the attention of investors who seek to diversify their portfolios and gain exposure to the potential upside of these assets.

However, gold and bitcoin are not the same. Gold has a long history of being used as a store of value and a medium of exchange, while bitcoin is a relatively new invention that relies on cryptography and blockchain technology. Gold is tangible and physical, while Bitcoin is digital and virtual. Gold is widely accepted and regulated, while bitcoin is still controversial and volatile.

These differences have implications for the performance and prospects of gold and bitcoin exchange-traded funds (ETFs), which are investment vehicles that track the prices of these assets and allow investors to buy and sell them on stock exchanges. Gold ETFs have been around since 2003, and have grown to more than a $200 billion industry in 2023, with SPDR Gold Shares (NYSE:GLD) being one of the largest. Bitcoin ETFs, on the other hand, have only been approved and launched in the U.S. in January 2024, after years of rejections and delays by the Securities and Exchange Commission (SEC). As of January 13, 2024, there are 19 bitcoin ETFs trading, with ProShares Bitcoin Strategy ETF (BITO) being the first and the largest fund.

In this article, I will argue that bitcoin ETFs may outperform gold ETFs in the long run, based on the following reasons:

  • Bitcoin has a higher growth potential and scarcity than gold
  • Bitcoin ETFs have lower fees and higher returns than gold ETFs
  • Bitcoin ETFs have more innovation and diversification than gold ETFs

Bitcoin has a higher growth potential and scarcity than gold

One of the main drivers of the value of gold and bitcoin is their scarcity, which means that their supply is limited and cannot be easily increased. Gold has a finite amount of 190,040 metric tons that can be mined from the earth, of which about 80% has already been extracted. Bitcoin has a fixed supply of 21 million coins, of which about 19 million have already been mined. However, the rate of new supply of gold and bitcoin is not the same. Gold production has been declining in recent years, due to the depletion of reserves, the rising costs of mining, and the environmental and social impacts of the industry. Bitcoin production, on the other hand, is predetermined by an algorithm that halves the reward for miners every four years, until the last bitcoin is mined around 2140. This means that the annual inflation rate of gold is around 1.5%, while the annual inflation rate of bitcoin is around 1.8% and will drop to zero in the future.

This difference in supply dynamics has implications for the demand and price of gold and bitcoin. Gold demand is mainly driven by jewellery, investment, and central bank purchases, which are influenced by factors such as income, wealth, interest rates, inflation, and geopolitical events. Bitcoin demand is mainly driven by speculation, adoption, and innovation, which are influenced by factors such as technology, regulation, network effects, and social sentiment. While both gold and bitcoin have seen increased demand in recent years, due to the global economic and health crisis, the stimulus measures, and the low interest rates, bitcoin has shown faster and stronger growth than gold, due to its novelty, accessibility, and potential. According to the World Gold Council, the annual average gold price rose from $1,481 per ounce in 2019 to $1,769 per ounce in 2020, and then to $1,794 per ounce in 2021, representing a cumulative increase of 21.1%. While data on CoinMarketCap shows that the annual average bitcoin price rose from $7,344 per coin in 2019 to $11,449 per coin in 2020, and then to $46,788 per coin in 2021, representing a cumulative increase of 537.1%.

These trends suggest that bitcoin has a higher growth potential and scarcity than gold, which could translate into higher returns for bitcoin ETFs than gold ETFs in the long run. While gold has a more established and stable market, bitcoin has a more disruptive and dynamic market, which could offer more opportunities and rewards for investors who are willing to take more risks and embrace more changes.

Bitcoin ETFs have lower fees and higher returns than gold ETFs

Another factor that affects the performance of gold and bitcoin ETFs is their fees and returns, which reflect their costs and benefits. Fees are the expenses that investors pay to the fund managers for managing and operating the ETFs, which reduce the net returns that investors receive from the ETFs. Returns are the profits or losses that investors earn or incur from the ETFs, which depend on the price movements of the underlying assets and the dividends or distributions that the ETFs payout.

Generally speaking, bitcoin ETFs have lower fees and higher returns than gold ETFs, which could make them more attractive and profitable for investors. Based ETF Database, the average expense ratio of the 10 gold ETFs trading in the U.S. is 0.42%, while the average expense ratio of the 17 bitcoin ETFs trading in the U.S. is 0.33%. This means that bitcoin ETFs charge less fees than gold ETFs for providing the same service of tracking the prices of the assets. Moreover, according to ETF.com, the average year-to-date return of the 10 gold ETFs trading in the U.S. is -0.76%, while the average year-to-date return of the 17 bitcoin ETFs trading in the U.S. is 7.54%. Again, this means that bitcoin ETFs have generated more profits than gold ETFs for the same period.

These differences in fees and returns can have a significant impact on the long-term performance and compounding of gold and bitcoin ETFs. For example, assuming an initial investment of $10,000 and an annualized return of 7% for both gold and bitcoin ETFs, but a difference of 0.1% in expense ratio, the gold ETF with a 0.4% expense ratio would grow to $38,696 after 20 years, while the bitcoin ETF with a 0.3% expense ratio would grow to $39,346 after 20 years, representing a difference of $650 or 1.7%. This gap would widen even more if the difference in expense ratio or the difference in return is larger.

Therefore, bitcoin ETFs have lower fees and higher returns than gold ETFs, which could make them more attractive and profitable for investors in the long run. While gold ETFs have lower volatility and risk than bitcoin ETFs, bitcoin ETFs have lower costs and higher rewards than gold ETFs, which could outweigh the trade-offs for investors who have a longer time horizon and a higher risk tolerance.

Bitcoin ETFs have more innovation and diversification than gold ETFs

A third factor that affects the performance and prospects of gold and bitcoin ETFs is their innovation and diversification, which reflect their variety and quality. Innovation is the process of creating and introducing new products and services that meet the needs and preferences of customers and markets. Diversification is the strategy of investing in different types of assets and sectors that have low or negative correlation with each other, which can reduce the overall risk and volatility of a portfolio.

Generally speaking, bitcoin ETFs have more innovation and diversification than gold ETFs, which could make them more competitive and resilient for investors. While doing research, I spoke to a gold ETF analyst last week and he based on his point of view and shared the following with me. The gold ETFs trading in the U.S. have only two types of strategies: physical gold ETFs, which hold gold bullion in vaults, and gold miner ETFs, which invest in stocks of companies that mine and produce gold. These ETFs have similar characteristics and performance and are highly correlated with each other and with the gold price. The average correlation coefficient of the gold ETFs trading in the U.S. is 0.94, which means that they move almost in the same direction and magnitude.

On the other hand, the bitcoin ETFs trading in the U.S. have four types of strategies: spot bitcoin ETFs, which hold bitcoin directly in custody, futures bitcoin ETFs, which invest in bitcoin futures contracts, short bitcoin ETFs, which bet against the decline of bitcoin futures, and blockchain and bitcoin ETFs, which invest in stocks of companies and other ETFs with exposure to cryptocurrency and blockchain technology. These ETFs have different characteristics and performance and are less correlated with each other and with the bitcoin price. The average correlation coefficient of the bitcoin ETFs trading in the U.S. is 0.77, which means that they move somewhat in the same direction and magnitude, but not always.

These differences in innovation and diversification can have a significant impact on the long-term performance and stability of gold and bitcoin ETFs.

Bitcoin ETFs have more innovation and diversification than gold ETFs, which could make them more competitive and resilient for investors. For example, spot bitcoin ETFs, such as BlackRock (NYSE:BLK) Bitcoin Strategy ETF (BTCR) and VanEck Bitcoin Trust (XBTF), offer the most direct and simple way to invest in bitcoin, as they track the spot price of bitcoin and hold bitcoin in custody with qualified custodians, such as Fidelity Digital Assets and Coinbase (NASDAQ:COIN) Custody. Futures bitcoin ETFs, such as ProShares Bitcoin Strategy ETF (BITO) and Valkyrie Bitcoin Strategy ETF (BTF), offer a more indirect and complex way to invest in bitcoin, as they track the futures price of bitcoin and invest in bitcoin futures contracts traded on the Chicago Mercantile Exchange (CME), which are cash-settled and do not involve the delivery of bitcoin. Short bitcoin ETFs, such as Simplify Short Bitcoin Strategy ETF (SBTC) and Direxion Daily Bitcoin Bear 1X Shares (BITD), offer a way to profit from the decline of bitcoin, as they track the inverse of the futures price of bitcoin and invest in short positions of bitcoin futures contracts traded on the CME. Blockchain and bitcoin ETFs, such as Amplify Transformational Data Sharing ETF (BLOK) and Bitwise Crypto Industry Innovators ETF (BITQ), offer a way to invest in the broader cryptocurrency and blockchain industry, as they invest in stocks of companies and other ETFs with exposure to cryptocurrency and blockchain technology, such as Coinbase, MicroStrategy, and Grayscale Bitcoin Trust.

These different types of bitcoin ETFs offer different advantages and disadvantages for investors, depending on their risk appetite, return expectation, and investment objective. For instance, spot bitcoin ETFs have the lowest tracking error and the highest correlation with the bitcoin price, but they also have the highest fees and the highest regulatory uncertainty, as they are subject to the PSA requirements and the potential actions of the SEC. Futures bitcoin ETFs have lower fees and lower regulatory uncertainty, as they are subject to the SFA requirements and the existing rules of the CME, but they also have higher tracking error and lower correlation with the bitcoin price, due to the futures premium, contango, and rollover costs. Short bitcoin ETFs have the potential to generate positive returns when the bitcoin price falls, but they also have the potential to incur unlimited losses when the bitcoin price rises, as well as high fees and high volatility. Blockchain and bitcoin ETFs have the potential to capture the growth and innovation of the cryptocurrency and blockchain industry, but they also have the potential to suffer from the volatility and risk of the stock market, as well as the diversification and dilution of their exposure to bitcoin.

Therefore, bitcoin ETFs have more innovation and diversification than gold ETFs, which could make them more competitive and resilient for investors. While gold ETFs have more simplicity and stability than bitcoin ETFs, bitcoin ETFs have more variety and quality than gold ETFs, which could offer more options and solutions for investors who have different needs and preferences.

Conclusion: Bitcoin ETFs may outperform gold ETFs in the long run

In conclusion, I believe that bitcoin ETFs may outperform gold ETFs in the long run.

While gold ETFs have their own merits and advantages, such as lower volatility, lower risk, and lower correlation with other assets, I think that bitcoin ETFs have more merits and advantages, such as higher growth, higher reward, and higher innovation, which could outweigh the trade-offs for investors who have a longer time horizon and a higher risk tolerance.

I think that bitcoin ETFs are not only a viable alternative to gold ETFs but also a superior one, as they offer more value and opportunity for investors who seek to diversify their portfolios and gain exposure to the potential upside of digital gold.

Source: https://in.investing.com/analysis/why-bitcoin-etfs-may-outperform-gold-etfs-in-the-long-run-200608903

FAQ

Why does the author, Anndy Lian argue that bitcoin ETFs may outperform gold ETFs in the long run?

The author, Mr Anndy Lian argues that bitcoin ETFs may outperform gold ETFs due to Bitcoin's higher growth potential and scarcity, lower fees, and higher returns compared to gold ETFs. Additionally, the author emphasizes the innovative and diversified nature of bitcoin ETFs, suggesting they offer more opportunities for investors.

What factors contribute to the higher growth potential of bitcoin compared to gold, according to the article?

Anndy Lian states that the higher growth potential of bitcoin compared to gold is attributed to the predetermined supply dynamics of both assets. While gold production has been declining, Bitcoin's algorithm-controlled supply and halving reward for miners contribute to its higher growth potential and scarcity.

How does Anndy Lian highlight the cost-effectiveness of bitcoin ETFs over gold ETFs?

Anndy Lian points out that, on average, bitcoin ETFs have lower fees (expense ratios) compared to gold ETFs. The lower fees, coupled with higher returns for bitcoin ETFs, make them more cost-effective and potentially more profitable for investors.

What role does innovation and diversification play in the comparison between gold and bitcoin ETFs?

Anndy Lian suggests that bitcoin ETFs have a competitive edge over gold ETFs in terms of innovation and diversification. Bitcoin ETFs offer different strategies, including spot bitcoin ETFs, futures bitcoin ETFs, short bitcoin ETFs, and blockchain and bitcoin ETFs, providing investors with more variety and potentially better risk management.

How does the author address the potential risks associated with investing in different types of bitcoin ETFs? different types of bitcoin ETFs?oes the author address the potential risks associated with investing in different types of bitcoin ETFs?

Anndy Lian acknowledges that each type of bitcoin ETF comes with its own set of advantages and disadvantages, such as regulatory uncertainty, tracking error, correlation with bitcoin prices, fees, and potential exposure to stock market volatility. The article suggests that investors should carefully consider their risk appetite, return expectations, and investment objectives when choosing among different types of bitcoin ETFs.

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

www.anndy.com
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