The US Securities and Exchange Commission has approved the first spot bitcoin exchange traded funds in a watershed moment that cryptocurrency enthusiasts are betting will draw new retail and institutional investors into the market.
The top American securities regulator granted permission on Wednesday to ETF sponsors ranging from established players such as BlackRock, Invesco and Fidelity to digitally focused newcomers including Grayscale and Ark Invest.
The first funds — which hold assets such as mutual funds but trade on exchanges like stocks and enjoy special tax treatment in the US — are expected to start trading as soon as Thursday morning.
The approval comes after months of anticipation and a bitter legal battle. It also caps a wild 24 hours that saw hackers briefly seize control of the SEC’s account on the social media site X and falsely claim that the applications had already been approved, prompting sharp swings in bitcoin’s price.
After the approvals, bitcoin was trading at about $45,000, well below the $69,000 peak it hit in November 2021 but nearly three times the $16,000 trough it hit in December 2022 after the collapse of the now notorious crypto exchange FTX.
While spot bitcoin ETFs have been available in other markets, the US approvals are expected to usher in a new era for the most popular and liquid crypto token. US institutional and retail investors will now be able to gain direct exposure to the coin through a regulated product, without the risks of buying from unregulated exchanges or the higher costs associated with ETFs that invest in bitcoin futures.
“It’s a huge milestone, it’s recognition of bitcoin being a large-scale traditional investment,” said Jad Comair, chief executive of Melanion Capital, the first company to launch a bitcoin thematic ETF in the EU. “We’re opening the doors to Wall Street.”
The decision also marks a U-turn by the SEC. The regulator resisted spot bitcoin ETFs for nearly a decade on the grounds that cryptocurrencies were susceptible to manipulation and fraud. But last year, Grayscale successfully challenged the watchdog’s rejection of an earlier spot bitcoin application. A federal appeals court ruled in August that the decision was “arbitrary and capricious”, putting pressure on the SEC to change its stance.
Some crypto enthusiasts are betting that the ETFs will substantially boost demand for digital assets, though some ETF observers are sceptical that massive sums will flood into the products. When ProShares launched the first bitcoin futures ETF in 2021, it pulled in $1bn in two days.
But consumer protection and investor groups have warned that making the product available via an ETF would encourage retail investors to move money into a sector known for repeated scandals and massive price fluctuations.
Dennis Kelleher, president of Better Markets, said the approval “is an historic mistake that will not only unleash crypto predators on tens of millions of investors and retirees but will also likely undermine financial stability”.
SEC Chair Gary Gensler tried to split the difference in a statement. “While we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse bitcoin,” he said, telling investors to “remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto”.
The false message posted to the SEC’s X account on Tuesday sent the bitcoin price up to a 1.5 per cent daily gain before falling as much as 3.4 per cent after the regulator set the record straight.
The aspiring ETFs are similar in that they all invest in bitcoin directly. All aim to launch organically except for Grayscale, which seeks to convert its $29bn bitcoin trust into an ETF, and Hashdex, which plans to convert a bitcoin futures fund into a spot one.
A price war has already broken out among the new ETF providers. BlackRock, Fidelity and others updated their paperwork earlier this week to announce fees less than 0.5 per cent, with several promising to waive charges altogether in the early months of trading.
Grayscale chief executive Michael Sonnenshein told the Financial Times that his firm had dropped its fee from 2 per cent to 1.5 per cent but did not plan further cuts. As a conversion from an existing product, GBTC “is coming to market in a very differentiated way from other ETF issuers that are starting from zero and are just getting their product launched”, he said.
Ark’s Cathie Wood — whose firm will not impose its 0.21 per cent fee until six months after launch or until its ETF reaches $1bn — characterised bitcoin as a “public good” and said she was comfortable using the product as a loss leader.
“We want to make sure that we provide access and make it as accessible as possible,” Wood told the FT. “We are not looking to maximise profits on this. We’ve got other actively managed products that will help us.”
In a departure from normal ETF practice, the funds will use cash to create and redeem new shares rather than in-kind transactions involving their underlying assets — bitcoin, in this case.
The SEC held out against a spot bitcoin ETF for nearly a decade, but in late 2021 it allowed ProShares to launch the first of several ETFs that hold bitcoin futures.
After Grayscale filed its lawsuit, well-known ETF providers began filing their own applications and the SEC started working with them to fine tune their proposals. In recent months, the issuers have spelt out how they will protect investors from market manipulation, identified some of the financial institutions that will create and redeem shares and shifted to the cash-based method of creation.
The SEC has been “one of the most sceptical regulators in the world and has gotten to the finish line and approved it”, Wood said. “And you know there’s been a lot of battle testing going on around this.”
