The Bitcoin ETF has been approved! Now what?
It's a historic day. The U.S. authorities have given their approval for the Spot Bitcoin ETF. Exactly 15 years after Hal Finney, one of the earliest developers of the Bitcoin network, sent a tweet into the air with the text 'Running Bitcoin'. Bitcoin, originally arising as a counter voice in the financial crisis of 2008, has now gained a right to exist as institutions on Wall Street can now also step into Bitcoin. This opens the doors for the entire crypto market, but why? Why is the ETF so important for Bitcoin?
Basically, you could say, Bitcoin doesn't need an ETF at all. Bitcoin is decentralized, independent of governments, and can continue to function, but when you want to apply Bitcoin in today's society, regulations and an instrument like an ETF are indeed necessary. The decentralized nature of the technology behind Bitcoin changes nothing about that. You will still need computers to solve the puzzles and thereby acquire new Bitcoin. There will still be a maximum of 21 million Bitcoins made, and nothing changes that either.
The change that is there can be found in the character of institutional investors. Before we go further, we will first explain the definition of an Exchange Traded Fund (ETF). What is that?
An Exchange Traded Fund, also known as an ETF, is a tracker or derivative of an underlying commodity, index, bond, or stock. In this case, it's a tracker of Bitcoin, and has Spot Bitcoin as collateral. How does that work?
Suppose an ETF is accepted, then this means that this product will be tradable on regular exchanges. In the crypto market, you see Bitcoin being traded on an exchange like Binance or ByBit, while an ETF is a fully regulated product that can be traded on regular exchanges like Nasdaq or AEX. However, the prices will differ significantly from the price of Bitcoin. This is because the product is a derivative and actually 'follows' the price of Bitcoin, hence the name 'tracker'.
There have been eleven parties that have submitted an application for an ETF, and all have been approved. Subsequently, these ETFs can be traded via regular exchanges, but you will see completely different numbers than the price of Bitcoin. Nowadays, a Bitcoin is traded for $47,000, while an ETF may have a price of, for example, $22. I will explain why this is the case.
An ETF is actually a kind of fund. At the beginning, the party indicates how large this ETF will be, which can be, for example, $100 million. Then it is indicated how many shares will be issued. Let's say this is 10 million shares. The price of a Bitcoin ETF will then be priced at $10 per ETF at the start. That's different from the price of Bitcoin, but it's also a completely different instrument and that's where the nuance lies.
Bitcoin is still a relatively unregulated product, which means institutional investors cannot hold Bitcoin itself in their portfolio. Anti-money laundering practices, terrorism financing, and more of these terms are all reasons why it can't yet, but also because Bitcoin simply has not yet been classified as a financial instrument.
An ETF does fall within the frameworks of regulation, so large institutional parties can include an ETF in their portfolio and in this way still participate in the underlying market. This is often also used in the commodities market, or when you want to put together a basket of stocks and invest in it all at once.
Now we have discussed why it is significant that an ETF is coming and that large institutional investors can finally enter the crypto and Bitcoin market, but how does this work? Let's assume that the price of 1 ETF is $10 and that it starts with $100 million. This start is often determined by the interest of the clients at such a party. What does it mean if the price of such an ETF starts to rise?
First of all, that means there is a lot of positivity and interest in the market for this product and that is generally a good sign. In addition, the ETF consists of Spot Bitcoins. This means that the issuer of this ETF must have Bitcoins as collateral to guarantee that the ETF is exchangeable for Bitcoins. Simply put: if there is $100 million in the ETF and it is tradable, then there must also be $100 million in Bitcoin against it.
When it turns out that there is a lot of interest in the market from the large institutional investors, then you will see that the value of the ETF will start to increase. Expectations are that there is $200 billion worth of interest is coming into the markets from institutional investors and this can have a major impact on the price of Bitcoin. Suppose an ETF rises in price from $10 to $15, that means that the ETF is now worth $150 million. That automatically means that the issuer of the ETF must buy more Bitcoin to ensure that there is enough collateral for the product they offer.
Then the question remains, why is this so important for Bitcoin and crypto? It means that the 'mature economy' is actually embracing Bitcoin as a full asset. This means that there will be much more focus on education, regulation, politics, and finance regarding Bitcoin, which will promote the growth of the network. It's as if Bitcoin is finally maturing and taking its first steps. It also seems more likely that the chance of Bitcoin disappearing has become virtually nil, making many more people and parties interested in adopting the 'digital gold' in their portfolios.
The conclusion is that this has a positive effect for everyone in the crypto market. Not only for developers, miners, but also for investors. The chances of creating multiple 'baskets' with groups of coins in an ETF are very high, and the likelihood of Ethereum getting a similar ETF is also very present after this approval.
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