Could we soon see a Bitcoin ETF? That’s the $30 trillion question
In the UK, we generally don’t care for ETFs – or Exchange Traded Funds, to give them their full name. In the US they make up an incredible 29% of the investment market, whereas in Europe they represent just 13%. They are even less popular here, with some studies putting them at just 6% of investor portfolios – even below cryptocurrency, which has 11% market share.
However, talk of a Bitcoin-linked ETF has a lot of people excited. Why? Because some analysts have estimated that it could unlock $30 trillion of wealth to Bitcoin. That’s quite a lot of cash – it’s about what the USA owes the rest of us – so it would make a serious difference to the crypto market. At the time of writing, Bitcoin’s entire market cap was $590 billion – just under 2% of that figure.
So, what is an ETF? In its most basic terms, an ETF tracks a commodity, fund, or stock a bit like a mutual fund; but, it can be traded on a regular exchange like any company stock. There has been a lot of talk about the Securities and Exchange Commission (SEC) authorising Bitcoin ETFs for some time, but the regulator has so far resolutely refused to allow them – for spot trading, anyway.
Typically, an ETF is a basket of securities traded on public exchanges. The ETF’s share price fluctuates all day as it is bought and sold. ETFs offer low expense ratios and fewer broker commissions than buying each of the stocks individually. In Bitcoin’s case, there would be underlying holdings of Bitcoin.
In essence, this is why people are excited about the prospects of a Bitcoin ETF. If the SEC allowed them, that would be an imprimatur and declare open season for institutions and money controlled by financial advisers to invest in Bitcoin through ETFs.
But that’s also the rub. Does the SEC actually want to authorise anything that has ‘crypto’ in its DNA? It is still trying to get to grips with what crypto really is and, although the biggest money managers seem to be gunning for them – as we have recently seen with BlackRock CEO Larry Fink’s change of heart – I would be surprised if they are authorised any time soon.
In all truth, if the decision were up to me, I would want all the safeguarding regulations in place before any such authorisation.
The other drawback is the sheer volatility of crypto. One of the points about ETFs is that, in general, they represent a basket of stocks or other underlying assets. Hence, they trade with relatively little volatility.
There are lots of different ETFs you can invest in, related to different assets, strategies and themes – whether it is sustainable food or the growth of the battery supply chain. But one thing they all have in common is they rely on a number of different investments. A thematic ETF might have dozens of stocks within, aimed at making it less volatile.
If the ETF is spot Bitcoin, there is no spread. It will be directly linked to the price of a single asset. So quite apart from the sheer crypto element, I would think the SEC has concerns about an ETF only being linked to one underlying investment.
All that said, Blackrock, with around $10 trillion under management, has put its weight behind a Bitcoin ETF, pushing the chances of it happening from 0% to 50% according to some commentators. In my view, that is a bit high – but it certainly means the prospect is no longer completely out of the question.
One of the great tropes that people perpetuate in any business is: “If we only get 1% of the market, we will make a fortune.” Just 1% of $30 trillion is a massive $300 Billion – that’s more than 50% of Bitcoin’s current market cap. But, if we could only get 1% of the market for a Bitcoin ETF…
Temple Melville, CEO of The Scotcoin Project Community Interest Company (CIC)