Why many say the approval of spot bitcoin ETFs would be a big deal

Such products could spur a flood of TradFi investor money that would improve market transparency and liquidity, Fineqia analyst says.

Many in the crypto world who previously knew nothing about ETFs are becoming more familiar with such investment vehicles. 

Others still may not quite totally grasp what spot bitcoin ETFs are — even as the Securities and Exchange Commission is expected to soon rule on them — or what impact they could actually have.

The amount of assets controlled by investment professionals potentially interested in crypto — but currently sitting on the sidelines — is one way to quantify the potential demand for such funds. 

What is a bitcoin ETF?

ETFs are essentially a basket of securities that, unlike mutual funds, can be traded on an exchange. Some hold stocks. Others hold bonds. Some even hold bitcoin futures contracts, as of October 2021. 

The SEC, however, has never allowed a US ETF to hold bitcoin directly.

So why would approval of these types of funds be a big deal?

There are roughly 2,000 US ETFs with combined assets of about $6.4 trillion, according to ETF.com. 

Individuals can readily buy and sell ETFs via traditional brokerage accounts. A June survey by the Journal of Financial Planning and the Financial Planning Association found that more than 90% of financial advisers use or recommend ETFs.

Why would a bitcoin ETF approval be a big deal?

“The introduction of ETFs could usher in new investor cohorts from traditional finance, significantly improving market transparency and liquidity and bringing long term capital inflow in the digital assets market,” Fineqia research analyst Matteo Greco said in a Friday statement. 

Assets managed by registered investment advisers (RIAs), brokers-dealers and banks total roughly $48 trillion, according to an October report by Galaxy Digital research associate Charles Yu. 

But many such investors are walled off. About 80% of financial advisers surveyed by Bitwise and VettaFi said they were either unable to buy crypto for clients, or unsure whether they could. Nearly 90% of advisers interested in buying BTC are waiting until after the SEC approves a spot bitcoin ETF, the survey found.

Yu said he expects bitcoin ETFs could see $14.4 billion of inflows in their first year of trading. These funds’ shares would be physically backed by bitcoin, meaning buying pressure could increase the asset’s price by 74% in that span, Yu noted in the report.

VanEck analysts wrote last month they estimate inflows into spot bitcoin ETFs will amount to roughly $1 billion in the first few days and $2.4 billion within the first three months. 

Over the longer-term, Bitwise Chief Investment Officer Matt Hougan said in an August webinar a US spot bitcoin ETF could attract $55 billion in net flows in its first five years on the market.

Both VanEck and Bitwise are among more than a dozen issuers that look to launch such a fund.

Matthew Sigel, VanEck’s head of digital assets research, said during a Friday Twitter space that VanEck has been meeting with financial advisers to talk about the proposed spot bitcoin ETFs.  

“We still think these products are going to offer a much more cost-effective way for retail [investors], and [for] advisers to buy bitcoin for clients,” Sigel noted. “On the VanEck side, we’re obviously positioning ourselves to be the bridge between TradFi and crypto.”

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