After 10 years of refusals, US regulators for the first time approved the launch of exchange-traded funds (ETFs) that directly invest in Bitcoin. The new funds, backed by fund managers such as BlackRock and Fidelity Investments, are expected to attract more investors (both retail and institutional) to Bitcoin, and the need to purchase Bitcoin as an underlying asset for fund shares will provide a significant influx of capital for the crypto market. In many ways, Bitcoin ETFs are similar to gold ETFs, which first emerged in the early 2000s and have become a popular way to invest in the precious metal. Instead of purchasing physical gold bullion, investors can purchase shares of such a fund through their broker in the same way they buy any securities or other assets. Likewise, new Bitcoin spot ETFs should make it easier to invest in the cryptocurrency. There is no need to deal with wallets, remember keys, or create an account on a cryptocurrency exchange – you can simply use the same brokerage account.
The term “spot” means that the fund actually holds Bitcoin, and not some kind of derivative instrument tied to its rate. The ETF’s share price should rise and fall in line with the price fluctuations of Bitcoin in the cryptocurrency markets. In 2021, the US Securities and Exchange Commission (SEC) approved several ETFs that allow investing in Bitcoin futures, but for years refused to allow the launch of spot ETFs. The agency took the position that the Bitcoin spot market is highly susceptible to market manipulation. The situation changed after Grayscale, one of the future issuers, sued the SEC in 2022, challenging the refusal to launch Bitcoin spot funds while approving futures funds and won in court in August 2023, which then forced the SEC to allow spot funds Bitcoin ETF.
Essentially, spot Bitcoin ETFs are trusts that manage Bitcoin reserves and issue shares. Market-making firms constantly buy and sell shares of these ETFs, picking up on tiny discrepancies between the current share price and what its price should be based on the value of Bitcoin. By doing so, these market makers help the ETF track the market price of Bitcoin. Some of these market makers also act as so-called “authorized participants” – companies that help ensure that the number of shares available expands and contracts in accordance with investor demand. Banks can also play such a role. The list of authorized participants in the new Bitcoin ETFs includes financial market heavyweights Jane Street Capital and Virtu Financial, as well as the US brokerage arm of JPMorgan Chase.
If a group of investors buys shares of an ETF after noticing an increase in demand, authorized participants contribute funds to the fund (trust). In response, the fund issues new baskets of shares and delivers them to authorized participants. This expands the supply of ETF shares. At the same time, the fund replenishes its bitcoin reserves, so that its pool of bitcoins under management grows as new investors join it. When investors, on the other hand, dump Bitcoin ETF shares, the reverse process occurs. Authorized participants bring shares to the trust to redeem them for cash, thereby reducing the supply of those shares. And the fund reduces the number of bitcoins in its reserves.
Many of the new ETFs are forced to rely on third parties to handle the actual purchases or sales of Bitcoin as needed. As a rule, these are trading firms that specialize in buying and selling large quantities of cryptocurrencies. It should be noted that initially, Bitcoin fund managers insisted on a different model for working with Bitcoin. Under this model, authorized participants would contribute bitcoins to the fund when shares were created or be paid in bitcoins when shares were redeemed. ETF managers believed that this model was simpler and more efficient than the model that was eventually adopted, in which the creation and redemption of shares were carried out in cash. However, the in-kind buyback model has become a source of concern for regulators and a sticking point in negotiations between issuers and the SEC in late 2023. Concerns were related to the fact that authorized participants are registered broker-dealers in the US stock market, and laws do not allow broker-dealers to deal in cryptocurrencies.
By December, all management companies that planned to launch spot Bitcoin ETFs were forced to switch to a monetary model in which authorized participants do not need to touch Bitcoin. The beneficiaries of this decision are highly regulated Wall Street firms (such as banks), which are now more likely to act as authorized participants for Bitcoin spot funds. In addition, BlackRock has had over-the-counter (OTC) cryptocurrency purchase channels since August 2022 and its own private trust in partnership with the Coinbase exchange. Fidelity also has similar resources: the company has had its own OTC desk and cryptocurrency platform Fidelity Crypto for several years.
As we wrote above, companies attract potential investors by the amount of commissions they will charge for their services. The commission from BlackRock, Fidelity and VanEck will be 0.25%. Invesco, which has filed to create a Bitcoin ETF with Mike Novogratz’s Galaxy Digital, said it intends to waive the 0.59% fee for the first six months of the fund’s operation. The fund from Valkyrie will have a slightly higher commission – 0.8%. Among others, Grayscale’s ETF stands out, which charges a commission of 1.5%, which is noticeably higher than other participants.
The documentation for each of the Bitcoin spot ETFs lists the possibility of security breaches as one of the potential risks of the fund’s operating process. To ensure the safety of assets, issuing companies rely on third-party custodians, which is standard practice in the ETF market. For example, gold exchange-traded funds typically partner with banks that have vaults to store the physical metal. Most new Bitcoin funds have chosen the cryptocurrency storage service from the largest crypto exchange in the United States, Coinbase, as a custodian. When one of these funds purchases bitcoins, the coins are sent to a special wallet controlled by Coinbase. Custodians typically store keys to crypto assets in so-called cold storage, an offline infrastructure not connected to the Internet, to ensure their security. It’s the digital equivalent of a gold vault.
Meanwhile, at the current time, issuers of spot Bitcoin ETFs have managed 3.07% of the 21 million Bitcoins ever available for issue. According to the latest data posted on the websites of companies that have launched new Bitcoin exchange-traded funds, the firms manage more than 645 thousand BTC. Spot Bitcoin ETF issuers have managed 3.07% of the 21 million Bitcoins ever available for issue. According to the latest data posted on the websites of companies that have launched new Bitcoin exchange-traded funds, the firms manage more than 645 thousand BTC. Let us remind you that Grayscale Bitcoin Trust is the largest holder of BTC, according to Bitcointreasuries.net. The 617 thousand bitcoins at the fund’s disposal account for 2.9% of the entire emission of the first cryptocurrency. The largest private owner of bitcoins at the moment remains the software developer Microstrategy. Michael Saylor’s firm owns approximately 189 thousand BTC worth about $8.09 billion at the January 16 exchange rate of $42.8 thousand.
Is another Bitcoin (BTC) price correction visible on the horizon? According to a recent Barchart report, Bitcoin (BTC) has fallen below its 50-day moving average. This development raises questions about the possibility of a future price correction. The 50-day moving average is a critical indicator in cryptocurrency trading, acting as a barometer of Bitcoin’s short- and medium-term trend. Typically, when Bitcoin trades above this level, it signals strong market confidence and a bullish outlook. Conversely, a fall below this average is often perceived as a bearish signal, reflecting investor uncertainty and potential downward pressure on prices.
Bitcoin is currently priced at $42,703.32, with a 24-hour trading range of $42,219.42 to $43,312.75. Despite falling from recent highs, Bitcoin maintains a significant market capitalization of $836.98 billion and a 24-hour trading volume of $17.33 billion. The data adds another layer to the description of the correction. A divergence in market behavior can be noted, with a positive Korea premium alongside a negative Coinbase premium. This situation indicates that while South Korean retail investors are buying Bitcoin with increased enthusiasm, driving up the price in their market (the Korean premium), US investors are showing signs of leaving, as evidenced by the negative Coinbase premium. Historically, this pattern has often preceded short-term Bitcoin price corrections. A rise in the Korean premium above 3% coupled with a negative Coinbase premium suggests a disparity in regional market sentiment.
This shows a scenario where optimistic buying in one region is countered by cautious selling in another, potentially leading to increased volatility and a price correction. In this situation, a good alternative to simply storing cryptocurrency is investing in a real, growing sector of the economy – the Advanced Waste Recycling (ARRT Token) Project. The project itself is still at the stage of the initial sale of tokens to finance further work to promote real products for a real and fast-growing sector of the economy – recycling waste and obtaining useful products from them. You still have the opportunity to become an investor in the project. Details about the project on our website https://arrt.pro
