Why Crypto ETFs Matter

Cryptocurrency exchange-traded funds (ETFs) emerged as a focal point of discussion in the latter half of 2023, instigating a surge in both Bitcoin (BTC) and altcoins prices. Anticipation within the crypto community and among experts is high for the potential approval of the initial BTC ETFs by the Securities and Exchange Commission (SEC) in early 2024. This approval could potentially propel BTC prices upward and evoke a bullish sentiment across the entire crypto market. But the question lingers: do crypto ETFs really matter? To answer this question, let's dig deeper into the essence of crypto ETFs.

The crypto market weathered its most prolonged bearish phase, witnessing the downfall of market leaders, cyber breaches, fraudulent activities by industry players, all against a backdrop of an adverse macro environment and escalated scrutiny from financial regulators. Now, it appears that the worst may have passed, setting the stage for an impending bull market. One of the key catalysts for the next growth cycle is the highly anticipated arrival of crypto ETFs. Financial giants like BlackRock have prioritized the approval of BTC ETFs as a paramount objective and are poised to inject substantial capital into the crypto industry. The potential endorsement of BTC ETFs signifies a pivotal milestone that could solidify institutional engagement in crypto and act as a conduit for merging the crypto market with traditional finance.

ETF is a highly regulated financial product that gives the investors exposure to various asset classes such as stocks, commodities, etc. In the case of BTC and ETH ETFs, it will open the door to the investment in the very liquid assets that outperform traditional investment instruments such as Gold and popular stock indices.

Institutional and retail investors will have an opportunity to use regulated financial products to invest in digital assets without concerns about legal issues. This fact became significantly important given the recent attention of financial authorities to the crypto industry. ETFs will diminish regulatory issues as investment in digital assets via such products will be approved and controlled by the financial regulator.

Another big deal with crypto ETFs is security. Purchasing BTC or other crypto assets now is a rather complicated task. Users should register on Centralized Exchanges or create a decentralized wallet to buy crypto. But both ways possess security risk: CEXs often operate without proper regulation, while decentralized exchanges are vulnerable to hacks. Binance's case demonstrated that even prominent industry leaders fail to comply with regulation and violate financial laws. Approval of ETFs will open the door to the simpler and much more secure way to invest in digital assets. 

Introduction of ETFs will also increase competition in the crypto industry. Users may prefer to invest in crypto purchasing ETFs rather than directly buying assets on exchanges. Trading spot Bitcoin ETF will cost around 0.01% (average fee for ETF trading), while trading costs on exchanges now is up to 0.6%. Such difference matters for institutional investors with millions of dollars AUM.

Impact on BTC and Altcoins' Prices

The historical introduction of ETFs has significantly bolstered assets, enabling the "democratization" of asset investment and widening access for new market entrants. The unveiling of the first gold ETF in November 2004 exemplifies its impact on the asset's price performance. Following the launch of the ETF, the price of gold soared by almost 400%. Additionally, post-launch, the gold ETF swiftly attained $1 billion in assets, marking the fastest accumulation to reach this milestone in history.

Gold Market Performance, 1 Month

With institutional and retail investors showing significant interest in BTC ETFs, the introduction of these products could ignite substantial buying pressure, leading to a surge in the asset's price. This rally in Bitcoin is anticipated to stimulate the upward momentum of major altcoins throughout 2024.

Drawbacks of BTC ETFs Approval

Although there is optimistic sentiment surrounding the impending BTC ETFs, it is worth noting certain adverse aspects associated with this event. The approval of ETFs for BTC could trigger unforeseen reactions in its price. Institutional investors, capitalizing on the 2023 surge, might opt to close their positions, benefiting from the current upward trend of BTC. This potential action could create significant selling pressure on the asset. Additionally, there is a risk of a potential scarcity of Bitcoin, as ETF providers may face difficulties acquiring the required amount of BTC due to the rapidly growing demand from investors.

Additionally, it is important to consider that the approval of spot BTC ETFs could potentially alter its position as the first decentralized cryptocurrency. BTC might transition into just another state-controlled and regulated asset, characterized by reduced volatility. Institutional players are anticipated to accumulate the bulk of BTC, while retail investors may opt for BTC ETFs instead of holding the real BTC. This shift might disrupt the inherent nature of Bitcoin, potentially leading to a decrease in the number of transactions conducted on the Bitcoin network.

The approval of crypto ETFs stands as a pivotal moment for the industry, driving institutional adoption and ushering in a new wave of investors into digital assets. The launch of the initial BTC spot ETFs might fuel further growth of BTC and altcoins, enticing substantial capital inflows into the crypto market. Yet, it is essential to consider that ETFs may harbor undisclosed risks for Bitcoin and other cryptocurrencies.

SimpleSwap reminds you that this article is provided for informational purposes only and does not provide investment advice. All purchases and cryptocurrency investments are your own responsibility.