In the Bitcoin and wider crypto communities, one topic has been dominating the conversation over the last 12 months: Bitcoin ETFs. As of now, a lineup of 11 different ETFs eagerly awaits the green light from the SEC. This isn't a new conversation, but it's taken on a fresh and electrifying energy lately riding on the backs of heavyweights like Blackrock and Fidelity, among others, who have been championing this cause.
Their involvement has brought us tantalizingly close to what many see as a watershed moment in the crypto sphere. But what could a Bitcoin ETF really mean for Bitcoin and those dedicated builders in the ecosystem?
First Off, What is an ETF?
First, it's important to note that the ETF that is pending approval is a spot Bitcoin ETF.
The key distinction between regular ETFs and spot ETFs lies in their approach to underlying assets. While both are exchange-traded funds, a spot ETF directly holds the physical assets it tracks. Regular ETFs, on the other hand, may not necessarily possess the physical assets. Instead, they use financial instruments like futures contracts or derivatives to replicate the performance of the underlying assets.
All 11 Bitcoin ETFs pending approval are spot Bitcoin ETFs. Essentially, they are large funds that own and store physical bitcoin with a custodian like Coinbase and allow individuals or institutions to purchase shares in this fund on an exchange like the Nasdaq.
How is this different from GBTC or futures?
While there are already financial products out there that give exposure to the price of bitcoin, they are very different from a Bitcoin ETF. Historically, the most popular Bitcoin product has been the Grayscale Bitcoin Trust (GBTC). As indicated in its name, GBTC is a trust, meaning it holds actual bitcoin, and investors buy shares of the trust. However, it is not traded on a traditional exchange. Instead, these shares are traded OTC (over-the-counter) which has resulted in the trust trading at a steep discount to the underlying BTC backing it. At its peak this discount was almost 49%, but now it is currently trading at around an 8% discount.
In regards to futures products like those offered by CME or CBOE, these products do not buy physical bitcoin. Instead, their products are designed to closely track the price of Bitcoin on spot exchanges. Generally speaking, futures contracts are used for speculative trading.
What Impact Could a Bitcoin ETF Have on Bitcoin?
The launch of a Bitcoin ETF represents a significant milestone for a diverse group of investors, encompassing everyone from individual retail investors to major institutions such as pension funds. Anticipation is already building, even before these ETFs officially go live. Market dynamics suggest substantial buying pressure as issuers begin to seed their ETFs. A notable example is the Bitwise ETF, which is being primed with an impressive seed investment of $200 million.
Investors in the market have varied investment profiles. Traditionally, retail investors often seek short-term gains, while pension funds are in it for the long haul. If pension funds invest in a Bitcoin ETF, those bitcoins are likely to be held out of circulation for extended periods, potentially reducing market liquidity.
It is also important to note that the vast majority of retail Bitcoin holders are in it for the long haul as well. Looking at the HODL Wave indicator, we can see the dynamics of Bitcoin holders. For example, over 70% of the total supply of Bitcoin has not moved in the last year, and over 30% of Bitcoin has not moved in the last 5 years.
In the context of market comparisons, Bitcoin is often touted as 'digital gold.' This analogy becomes particularly interesting when we look at the gains: in 2023, while gold saw an increase of about 11 percent in value, Bitcoin skyrocketed with a 169 percent gain. Such a stark contrast in performance can't be ignored by investors. Consequently, it's plausible that a portion of the capital currently invested in the gold market, valued at approximately $13.9 trillion, might shift towards Bitcoin, which stands at a relatively modest $881 billion in comparison.
But What Does This Mean for Bitcoin Builders?
Of course, there has also been speculation about the impact a spot Bitcoin ETF (or multiple spot Bitcoin ETFs, even) could have on the ecosystem itself. Many believe that the advent of a Bitcoin ETF would be a significant step towards legitimizing Bitcoin. Adam Blumberg from Interaxis, for example, recently posted on X that “..the most significant impact of the approval of a spot Bitcoin ETF will be the shift in regulatory attitudes.” For those who've been on the sidelines, curious but cautious, the introduction of a Bitcoin ETF could serve as a welcoming gateway into crypto.
For existing developers in the Bitcoin ecosystem, this could mark an era of new opportunities. The enhanced "brand value," so to speak, and attention brought by the ETF could make it easier for developers to attract fresh capital. If this is the case, we could, perhaps expect a further uptick in innovation – newer protocols that will draw even more users to the Bitcoin blockchain.
That being said, there is also the real potential for a spot Bitcoin ETF to hinder innovation on Bitcoin rather than help it. The approval of a spot Bitcoin ETF, as we mentioned, does mean that more BTC would be locked in custody instead of circulating in open markets. This could jeopardize the fee market and, in turn, the longevity of Bitcoin. In the last year, builders have experimented with NFTs, DeFi protocols and more. But if BTC is locked from being "usable," this might mean that many decentralized technologies could regress to other chains.
At the end of the day, it's clear that we stand at the threshold of a transformative era for crypto. The introduction of a spot Bitcoin ETF would be a beacon of legitimacy for Bitcoin, captivating the attention of both new and seasoned players. The potential shift in capital from traditional markets like gold, where Bitcoin has shown remarkable outperformance as of late, to the burgeoning crypto market, signals a significant realignment in investment strategies and perceptions.
For builders and developers within the Bitcoin ecosystem, the potential outcome of a spot Bitcoin ETF is a more complicated point of discussion. While it could open doors to unprecedented opportunities by bringing more awareness to Bitcoin, in practice, it could also hinder innovation on the world's oldest blockchain. Enhanced credibility and visibility could very well ease the process of attracting capital for focused development, but the introduction of a spot ETF will likely create additional barriers when it comes to experimenting on Bitcoin. This experimentation has been key to building additional use cases on Bitcoin and growing the network as a whole.
But there's no denying one thing: the approval of a spot Bitcoin ETF would still be a key event not just in Bitcoin's history, but in the history of the crypto ecosystem as a whole.