Institutional Adoption and the Rise of Crypto ETFs
Learn about the new wave of Bitcoin EFTs applications and how institutions are embracing crypto more than ever.
With the recent Bitcoin ETF filing by BlackRock, it looks like we are closer than ever to seeing a spot Bitcoin ETF list on a US securities exchange. Not only did the news of the filing spark a rally in the price of Bitcoin, it also led other asset managers to file for Bitcoin ETFs in the hope that the SEC will finally approve them.
Read on to learn more about the institutional adoption of Bitcoin and what role crypto ETFs could play in that.
Understanding Bitcoin ETFs: The Basics
An exchange-traded fund (ETF) is an investment vehicle that tracks the price of an underlying asset or a basket of assets. A Bitcoin ETF is an exchange-traded fund that tracks the price of bitcoin (BTC), either by holding BTC or BTC futures as the underlying asset.
ETFs allow investors to diversify their portfolios by accessing a range of asset classes without actually holding them. The price of a share of the ETF will fluctuate with the price of the underlying asset(s).
Therefore, Bitcoin ETFs let investors add some BTC exposure to their portfolios without the risk of actually owning it. Since ETFs are existing financial products in TradFi (traditional finance), investors are more at ease dealing with regulated investment vehicles they are more familiar with. Moreover, it simplifies the buying process for them, and they don’t have to worry about losing their private keys after storing their BTC in a secure Bitcoin wallet.
Like stocks and derivatives, Bitcoin ETFs are traded on securities exchanges. As such, they are regulated by the Securities and Exchange Commission in the US. Because of the regulator’s hesitance to approve Bitcoin ETFs, there are currently no spot ETFs that directly track BTC’s price.
Instead, investors can only access price exposure through Bitcoin Futures ETFs, which track BTC futures contracts. These contracts agree to buy or sell bitcoin sometime in the future at a pre-determined price and are backed by derivatives.
A few Bitcoin spot ETFs exist outside the US, but the SEC is yet to approve any within its jurisdiction. Although there have previously been several applications for spot ETFs, the regulator has rejected them all, citing several reasons, including concerns over market manipulation.
In June 2023, asset management giant BlackRock became the latest financial institution to file a Bitcoin ETF application. For many people, this move is pivotal to the cryptocurrency industry and, if approved, will be a significant driving factor for adoption.
Still, it’s worth mentioning that you won’t own BTC directly, even through a spot Bitcoin ETF.
If you’d like to buy, sell, store, or swap BTC directly, you can use a secure wallet like Trust Wallet. As a non-custodial wallet, Trust Wallet gives you complete control over your assets, which you can access from your browser through the Trust Wallet Browser Extension or on your smartphone using the Trust Wallet app.
BlackRock's Spot Bitcoin ETF Application: A Trendsetter
BlackRock is the world’s largest asset manager, with about $9 trillion assets under management. Of these, about 1,300 are ETFs, accounting for a third of the ETF market in the US.
It’s, therefore, no surprise that an announcement from a Wall Street behemoth would cause ripples in the global cryptocurrency industry. And given BlackRock’s track record of having its ETF requests approved, many are hoping this time will be no different.
BlackRock’s application for a Bitcoin ETF is the asset manager’s stamp of approval for the budding industry. It’s especially interesting, seeing as the company’s CEO seems to have changed his stance after referring to Bitcoin as an ‘index of money laundering’ in 2017.
More investment companies are likely to now follow in the trendsetter's footsteps and add Bitcoin assets into their portfolios. This mainstream adoption could increase bitcoin buying pressure, causing its price to potentially rally significantly.
BlackRock’s spot ETF would be the first investment vehicle allowing US investors to leverage bitcoin’s price directly. As a spot ETF, it would enable BlackRock to trade BTC at the close of each trading day, depending on its current price. The existing futures ETFs often result in deviations as they rely on derivatives, not the underlying asset, for pricing. As such, they are often inaccurate in tracing the price of bitcoin.
To counter the SEC’s concerns over market manipulation, BlackRock is partnering with Nasdaq on a surveillance-sharing agreement. The exchange will oversee the asset’s price data, which informs the price in the spot market.
Regardless of the SEC’s response, the decision will significantly affect the global crypto industry. If approved, BlackRock will provide a framework for other companies seeking SEC’s approval, hopefully leading to more Bitcoin spot ETFs. On the contrary, another rejection could result in a bitcoin price drop. It could also take some time before SEC rubber-stamps another spot ETF.
The SEC has till February 23, 2024 to give its final response. However, many reckon that a positive answer would be unlikely if it’s not yet received by the first deadline, in mid-August.
BlackRock’s timing has also raised some eyebrows, seeing as the SEC recently filed charges against another of its partners, Coinbase. The two companies signed a deal in August 2022, and according to the ETF application, Coinbase will be the custodian of the fund’s bitcoin.
The application also comes when other jurisdictions are getting interested in the cryptocurrency industry and taking steps to adopt digital currencies. Europe recently released its MiCA regulatory framework, while other countries such as the UAE and UK have announced plans for the same.
The Rising Wave of ETF Applications
BlackRock’s application for a spot ETF seems to have renewed some hope for other investment firms. Since the asset fund manager submitted its filings, numerous other asset management companies have done the same.
Wisdom Tree and Invesco, for example, have previously filed unsuccessful applications for a Bitcoin spot ETF with the SEC. The move from BlackRock seems to have provided some much-needed optimism.
Let’s have a look at the investment firms and their journeys with the SEC. WisdomTree Based in New York, WisdomTree is an ETF provider with about $93 billion in assets under management. The investment firm filed its application less than a week after BlackRock’s. WisdomTree previously first attempted to get a spot Bitcoin ETF approved in December 2021. However, the SEC rejected the lodge since it had no surveillance-sharing agreements and the usual market manipulation concerns. The second trial in October 2022 was
According to the new filing, the WisdomTree ETF will follow BTC’s price through the value of CF Bitcoin US Settlement Price shares. The shares will be listed on the Cboe BZX Exchange. Invesco Invesco is a large investment management company in Atlanta and accounts for about $1.49 trillion in assets as of May 2023. The firm also filed its application for an Invesco ETF days after BlackRock.
Invesco partnered with Galaxy to make its first application for a Bitcoin ETF in 2021, which is what they want to reintroduce with the new filing. The management company points out that an approval would help protect US investors, who opt for riskier options in search of exposure to crypto assets.
As the crypto industry keeps growing by the day, so does the demand for regulated crypto assets for investment vehicles. Going by the surge in the number of Bitcoin ETF applications, asset management firms recognize and attempt to fill this demand through spot ETFs.
Should the SEC approve all three applications, we can expect a surge in institutional adoption. Besides having an example of what to do, more investment firms will be more confident in venturing into Bitcoin investments to meet the efflux in demand.
US investors who have been looking for crypto exposure to their portfolios would then have several SEC-regulated options to choose from. Investors may rush to invest into these ETFs in light of bitcoin’s historical price performance, which could result in a rally that could kick start the next Bitcoin bull market.
Institutional Adoption and Its Impact on Bitcoin's Dominance
Bitcoin dominance is the ratio of Bitcoin’s market capitalization to that of the total market capitalization of the global cryptocurrency market.
For several years after it was created, Bitcoin maintained a large market dominance of close to 100%. However, this figure dropped significantly as more cryptocurrencies were introduced into the market. Until June 2023, Bitcoin’s dominance remained below half until it surged to a little over 50% following BlackRock’s application. At the time of writing, BTC’s dominance stands at 51.89%
The recent events are evidence of how much impact institutional adoption has on Bitcoin’s dominance. By declaring its interest in a Bitcoin spot ETF, BlackRock drove investors to the asset. As a result, BTC’s price and dominance over the market increased over the next few days.
Moreover, it has become evident that US regulators are differentiating between Bitcoin and other crypto assets, which may end up becoming classified as securities. Bitcoin, on the other hand, has much lower regulatory risk than other cryptocurrencies because it has been classified as a commodity. This contributes to institutional investor interest in Bitcoin as opposed to other digital assets, which, in turn, is also boosting Bitcoin dominance.
Although the cryptocurrency industry is still young, it has proven to be a potentially lucrative option for investors interested in the industry. As more investment firms and other institutions adopt Bitcoin, investor confidence in the asset grows, increasing its dominance.
Besides, institutional investors will frequently invest large sums of money into the asset, which can help stabilize its price.
Looking Ahead: The Future of Bitcoin and Crypto ETFs
The rise in applications for Bitcoin spot ETFs and the subsequent increase in Bitcoin’s dominance are good indicators for Bitcoin adoption among traditional investors. Institutional adoption has, for a while, been considered a significant driver for global adoption.
SEC’s response to the current filings will be crucial to determining what direction the industry takes from here on. An approval would be a key event for Bitcoin and the crypto market in its entirety. The surge in new investors could even be one of the factors kickstarting Bitcoin’s ascent to a new all-time high.
Besides, perhaps SEC’s approval would help provide a foundation for the regulatory guidelines for crypto assets.
Whichever the case, be sure to always do your research before putting your money into any investment vehicle. And if you’d like to own and manage your BTC directly, download the Trust Wallet Web Browser extension and trade, store, and swap your BTC all from your wallet.
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