Despite their growing interest in Bitcoin, regulatory uncertainty has made many North American institutional asset managers, who oversee around half of all global assets under management, hesitant to directly incorporate the cryptocurrency into their portfolios.
Expectations are mounting, however, that the United States Securities and Exchange Commission (SEC) will soon approve at least one spot Bitcoin exchange-traded fund (ETF), potentially unlocking significant American institutional investment into the digital asset.
How ETFs Work
An ETF is a type of investment fund traded on equity exchanges. Investors can purchase shares in the fund, akin to buying shares in a company. ETFs track the price performance of assets such as commodities, bonds, shares in companies operating in specific sectors, or gold. This structure allows investors to gain or reduce exposure to an ETF’s underlying assets as conveniently as they buy or sell traditional shares.
SEC Stance on Bitcoin ETFs May Change Soon
The SEC has determined that Bitcoin is not a security but rather a commodity under the jurisdiction of the Commodity Futures Trading Commission (CFTC). However, the SEC has ruled that some other cryptocurrencies like Ripple are indeed securities. Various observers have criticised the SEC for failing to take a clear position on digital assets, such as defining what attributes classify a given cryptocurrency as a security versus a commodity.
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In 2021, the SEC approved an ETF tracking Bitcoin futures contracts, namely the ProShares’ Bitcoin Strategy ETF. According to Bloomberg, the trading volume amounted to a record-setting $1.2 billion in its first two days.
Conversely, the SEC has thus far rejected at least seven high-profile applications for ETFs tracking Bitcoin’s spot price, i.e. the real-time market price of the digital asset. However, at least eight more applications, including one from the world’s largest asset manager, BlackRock, are under consideration. Analysts anticipate that this significant interest and attention could prompt the SEC to alter its regulatory approach.
New US Spot ETF Could Drive Up Bitcoin Price
Currently, institutional investors can gain exposure to Bitcoin in various ways, primarily by holding shares in non-US Bitcoin ETFs or so-called “Bitcoin proxy” companies. These companies have substantial exposure to Bitcoin by, for example, holding it on their balance sheets or providing related services. For instance, publicly listed MicroStrategy (MSTR) has over $5 billion worth of Bitcoin on its books.
The SEC’s approval of a spot ETF could provide many of the world’s largest investors with the confidence — or ability in line with their investment policies — to finally make Bitcoin allocations they have been contemplating for some time.
By technological design, the maximum amount of Bitcoins that will ever exist is capped at 21 million. Bullish analysts predict that increased demand from institutional investors, who have been on the sidelines, could result in more money chasing a limited supply, potentially driving up the price of Bitcoin.
