In recent months there's been a lot of noise on Twitter about Bitcoin ETFs and how their approval could pump crypto prices sky high. In this post we'll cover what an ETF is, how it could be applied to crypto, and what kind of impact their approval might have on Bitcoin and the markets.
What is an ETF?
ETFs (Exchange Traded Funds) are shares issued by a financial institution that represent an underlying asset such stocks, bonds, or commodities.
For example, there are investors who want to own gold, without actually holding the physical metal themselves. An ETF allows a financial institution to hold the gold (custody it), issue shares representing it, and sell those shares to an investor. The investor can then trade "paper gold" with other investors.
Similar to gold, there are investors who want exposure to Bitcoin, without actually holding it themselves (they don't want to manage their own wallet and seed phrase). For that reason, there have been several attempts over recent years to launch a Bitcoin ETF in the United States.
All new ETFs must be approved by a regulator before reaching the market, and in the case of the United States, that regulator is called the SEC (Securities and Exchange Commission). Large financial institutions such as Blackrock and Fidelity have already requested approval from the SEC for their Bitcoin ETFs.
For years the SEC has been delaying their decision on Bitcoin ETFs (futures ETFs aside), however we are fast approaching January 2024 when they will have to make a decision whether to approve or reject them.
Therefore there's been a lot of speculation in the market recently, that the price of Bitcoin (and crypto) will increase dramatically if the ETFs are approved, as institutional demand for Bitcoin will rise.
However, there's been a twist in the story.
In recent days the SEC had a conference call with all the Bitcoin ETF applicants to discuss new requirements of the funds.
Originally, the ETFs were advertised to be "in kind", meaning that investors could, at any time, redeem their paper Bitcoin shares for real Bitcoin. The SEC wants to change the ETF from "in kind" to "cash-in cash-out", ostensibly to prevent money laundering.
This means that investors in the Bitcoin ETF would only be able to redeem their shares for US dollars, and wouldn't be able to convert them directly to real Bitcoin.
That being the case, big institutions would accumulate more and more Bitcoin without ever having to hand it over to investors. Over time, this would centralize the supply of Bitcoin among these institutions.
This change from the SEC comes right around the same time that US Senator Warren is pushing legislation to make Bitcoin self-custody illegal, so there is speculation that this is a coordinated play to attack Bitcoin's original purpose - individual empowerment.
How will this impact Bitcoin?
We must consider that the US government only has lawful jurisdiction in America, and continue to lose power internationally. While this drama unfolds in the US, countries like El Salvador and Hong Kong are opening up to Bitcoin (and other crypto) ETFs that will compete with the US market.
Considering the number of delays we've had already, I think this time the "cash-in cash-out" ETF will be approved, leading to a spike in Bitcoin's price. That said, more attempts will be made to ban self-custody and censor the Bitcoin network, with limited success.
Zooming out and looking at the bigger picture, it is impossible for any government to apply this strategy to all of the hundreds of other censorship-resistant blockchains that have spawned over the past several years, which will continue to grow exponentially.
Closing thoughts
Do you think the ETF will be approved and if so, what impact will it have on Bitcoin's future?
If you feel more informed after reading this post, be sure to follow me here on Hive and InLeo to learn more about finance and crypto on the daily.
Resources: