SEC approval to boost bitcoin as investment option

Move builds case for wider use of digital currencies in the future

By Suneeti Ahuja-Kohli

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Published: Mon 15 Jan 2024, 6:58 PM

Last updated: Mon 15 Jan 2024, 6:59 PM

Bitcoin turned 15 on January 9 this year. The next day, on January 10, the Securities and Exchange Commission approved Bitcoin ETFs for its markets. It is a great gift to investors who have been keen to trade in the cryptocurrency but were dithered by a variety of reasons, including volatility and lack of regulatory checks.

Now, even though none of the concerns are likely to be assuaged completely by the regulatory nod, the SEC’s latest decision is still monumental and gives a fleeting sense of comfort.

The approval of a Bitcoin ETF marks a significant milestone in the crypto market’s journey towards mainstream acceptance. This development could potentially open the floodgates for a wave of a new investment in Bitcoin and other cryptocurrencies.

Calling it a ‘game-changer’, Sonam Srivastava, Founder & CEO, Wright Research, noted: “It offers regulated and potentially more accessible avenues to invest in Bitcoin without the complexities of managing cryptocurrency wallets or navigating the nuances of the crypto exchanges. This could lead to broader acceptance and integration of Bitcoin into mainstream investment portfolios, potentially enhancing its legitimacy and stability.”

It was in 2013 when the first application for bitcoin ETF was filed in the US. Subsequently, in February 2021, the world’s first spot Bitcoin ETF was launched in Canada. A few months later, in October, the US SEC approved Bitcoin futures ETF for US bourses, and finally now in 2024, Bitcoin spot ETF has been launched.

A spot Bitcoin ETF will invest directly in Bitcoin and closely track its price. The appeal of such products is their direct exposure to the asset without the hassle of cryptocurrency exchanges and blockchain wallets. Investors can buy shares of a spot Bitcoin ETF through brokerage accounts.

On the bright side, the fierce competition for new bitcoin fund assets means that trading the cryptocurrency just got a lot cheaper. As of now, 21 Bitcoin ETFs in spot and future trading are up and running with Grayscale’s Spot Bitcoin Trust having the highest market cap of $26.71 billion. While Grayscale charges a fee of 1.50 per cent, other fund managers including BlackRock, Fidelity, Franklin Templeton, and others charge 0.25 per cent, as per data on Blockworks.co.

What do financial advisers say?

It’s a unanimous yes for investing in these instruments by a lot of financial advisors. “It is recommended that investors consider allocating a percentage of their portfolio to a US Bitcoin ETF, with the exact percentage contingent on individual risk tolerance and investment goals,” advises Vijay Valecha, Chief Investment Officer, Century Financial.

Vikas Lakhwani, Chief Revenue Officer, CPT Markets, agrees and explains: “The SEC’s approval of Bitcoin ETFs sparks a vital discussion regarding accessibility and risk. Although it presents opportunities for investors, we emphasise the need for caution. Given Bitcoin’s inherent volatility, a thoughtful and strategic approach is necessary. We suggest allocating a modest portion, around 5-10 per cent, of a diversified portfolio to Bitcoin for those comfortable with its dynamic nature.”

Case for wider use of digital currencies in the future

Considering the rapid growth and mainstream popularity of cryptocurrencies, it is plausible to anticipate a broader use case for digital currencies in the near future. Cryptocurrencies, led by Bitcoin, have evolved from niche digital assets to trillion-dollar technologies. They are increasingly utilised as investments and accepted as a means of payment for various goods and services. “The decentralised nature of cryptocurrencies enables quick and anonymous cross-border transactions without the need for traditional banks. While challenges such as regulatory concerns, market volatility, and environmental issues persist, ongoing developments such as the approval of Bitcoin ETFs and the exploration of central bank digital currencies (CBDCs), suggest a bright future for digital currencies in the global financial system,” notes Valecha.

Lakhwani, too, agrees, and said he envisions a future where digital currencies go beyond speculation and become widely used tools. Some of the factors contribute to this vision could be:

Institutional support: The increasing participation of major financial institutions lends credibility and provides the necessary infrastructure for digital currencies.

Central Bank Digital Currencies (CBDCs): Government-backed digital currencies have the potential to bridge the gap between digital and traditional finance, addressing regulatory concerns.

Practical applications: The possibilities extend beyond trading. Blockchain technology and digital currencies can simplify supply chains, enable seamless cross-border payments, and empower even the smallest financial participants.

Food for thought

Governments across the world are working on digital currencies that are backed by central banks. A clash could be underway between cryptocurrency and central bank digital currencies (CBDCs), reckons Valecha, as both aim to revolutionise monetary interactions.

“Cryptocurrency, a decentralised alternative to fiat currencies, operates on blockchain technology, raising concerns for governments about tax evasion and market volatility but remaining attractive to investors. In contrast, CBDCs, responding to crypto’s rise, explore digital versions of national currencies under centralised control. This debate hinges on decentralisation versus centralisation, impacting governance and privacy. Having said that, the future of money remains uncertain as both compete for dominance, with factors like technological advancements and regulations shaping the outcome. Regardless of the winner, the emergence of crypto and CBDCs signifies a paradigm shift in finance, offering the potential for a more efficient, inclusive, and secure financial future.”

In his statement on January 10, US SEC Chair Gary Gensler made it clear that the regulator does not endorse bitcoin: “Importantly, today’s Commission action is cabined to ETPs (exchange traded products) holding one non-security commodity, bitcoin. It should in no way signal the Commission’s willingness to approve listing standards for crypto asset securities. Nor does the approval signal anything about the Commission’s views as to the status of other crypto assets under the federal securities laws or about the current state of non-compliance of certain crypto asset market participants with the federal securities laws.

“As I’ve said in the past, and without prejudging any one crypto asset, the vast majority of crypto assets are investment contracts and thus subject to the federal securities laws. Since 2004, this agency has had experience overseeing spot non-security commodity ETPs, such as those holding certain precious metals. That experience will be valuable in our oversight of spot bitcoin ETP trading. Though we’re merit neutral, I’d note that the underlying assets in the metals ETPs have consumer and industrial uses, while in contrast bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing. While we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.”

Retail investors looking to trade in Bitcoin ETF should remember that cryptocurrency is a young, volatile, and risky asset class. Bitcoin has been volatile. While it has given huge returns to early investors, it has also eroded capital for many others. Financial advisers suggest investing no more than five to 10 per cent of your portfolio to the newly introduced ETF.

Suneeti Ahuja-Kohli is an independent journalist based in Dubai, UAE. She can be reached at suneetiahujakohli@gmail.com


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