In a historic move, the U.S. Securities and Exchange Commission (SEC) approved a new bitcoin exchange-traded fund (ETF) in January 2024. ETFs make bitcoin, the largest cryptocurrency in the world, accessible to more investors than ever before.
Cryptocurrency is a digital exchange medium (often called tokens or coins) that uses secure online ledgers enabled by blockchain technology. Examples include Bitcoin, Ethereum, and Tether. Crypto has a fluctuating price, which makes it less desirable than fiat money (e.g., dollars, yens, and euros) that are backed by governments. It also does not have a stable value or portability.
What is an ETF?
Exchange-traded funds (ETFs) are similar to mutual funds in that they invest in a pool of assets. The difference is that the assets in the fund duplicate a stock market index such as the Standard and Poor’s 500, the Dow Jones Industrials, or the Russell 2000, or they can imitate an index tracking an industry such as biotech or banking. In this case, a bitcoin ETF tracks the price of bitcoin.
ETFs, which are registered with the SEC, are traded on stock exchanges. The SEC has approved bitcoin ETF applications for several financial services companies, including BlackRock, Fidelity, and Valkyrie.
What this means for investors
Some officials and financial experts warn financial services companies and investors that bitcoin ETFs are risky because cryptocurrencies are volatile. Initially, the SEC was largely skeptical of bitcoin ETFs, citing investor protection concerns and fears the markets would be easily manipulated.
Though the commission reversed its position in light of a federal appeals court ruling, the SEC is loud and clear that it does not endorse bitcoin and believes it is speculative, volatile, and vulnerable. However, some finance experts say the approval of bitcoin ETFs will make it very challenging for the SEC to ban cryptocurrencies in the future because it further institutionalizes the exchange medium.
Despite pushback, financial experts say this is a major milestone for both the ETF industry and crypto markets. This approval introduces necessary regulatory safeguards and lowers barriers to entry for investors in the crypto market. Investors are able to engage with the crypto market without directly holding bitcoin. Many traditional investors who have not engaged in trading on crypto exchanges may feel bitcoin ETFs are safer and more attractive than investing directly in bitcoin.
Crypto markets have had their fair share of crashes and scandals, but the applications by financial institutions to offer bitcoin ETFs signal greater acceptance of this digital exchange medium. Some analysts estimate bitcoin ETFs could attract nearly $100 billion in 2024 alone. Some believe bitcoin ETFs could even threaten the gold market in the long run. Only time will tell if more innovative crypto products will follow.
In the Classroom
This article can be used to discuss currency and exchange-traded funds (Chapter 15: Money and the Financial System).
- What are the limitations of cryptocurrency?
- What is an exchange-traded fund?
- Describe the pros and cons of investing in a bitcoin ETF.
This article was developed with the support of Kelsey Reddick for and under the direction of O.C. Ferrell, Linda Ferrell, and Geoff Hirt.
Avik Roy, "The SEC’s Bitcoin ETF Approvals Have Forever Altered The Global Monetary System," Forbes, January 24, 2024, https://www.forbes.com/sites/theapothecary/2024/01/24/the-secs-bitcoin-etf-approvals-have-forever-altered-the-global-monetary-system/?sh=123ba5ee64b1
David Yaffe-Bellany, "Regulators Approve New Type of Bitcoin Fund, in Boon for Crypto Industry," The New York Times, January 10, 2024, https://www.nytimes.com/2024/01/10/technology/sec-bitcoin-approval-exchange-traded-funds.html
Hannah Lang and Suzanne McGee, "US SEC Approves Bitcoin ETFs in Watershed for Crypto Market," Reuters, January 11, 2024, https://www.reuters.com/technology/bitcoin-etf-hopefuls-still-expect-sec-approval-despite-social-media-hack-2024-01-10/1
Jurica Dujmovic, "Opinion: Bitcoin at $1 Million. A Rival to Gold, Bonds and the Fed. Bitcoin ETFs Have Turned These Crypto Analysts Wildly Bullish," MarketWatch, January 19, 2024, https://www.marketwatch.com/story/bitcoin-at-1-million-a-rival-to-gold-bonds-and-the-fed-bitcoin-etfs-have-turned-these-crypto-analysts-wildly-bullish-489f37f4