Bitcoin: Crypto fans can now invest in exchange-traded funds - but what are they? (2024)

By Joe TidyCyber correspondent

Bitcoin: Crypto fans can now invest in exchange-traded funds - but what are they? (1)Bitcoin: Crypto fans can now invest in exchange-traded funds - but what are they? (2)Getty Images

The US has made the long-awaited decision to allow Bitcoin to be part of mainstream investing funds.

It has approved what are known as spot Bitcoin exchange-traded funds (ETFs), which can be purchased by anyone from pension funds to ordinary investors.

The announcement from the head of the Securities and Exchange Commission was accompanied by a stern warning about risks associated with the asset.

But cryptocurrency fans reacted with glee - and memes about becoming rich.

The US financial watchdog had repeatedly rebuffed earlier requests for approvals, citing concerns about potential for fraud and manipulation.

But a US court said last year its justification was inadequate.

The go-ahead comes after a false start on Tuesday, when the regulator had to rapidly withdraw an "unauthorised" post announcing the decision early.

SEC chairman Gary Gensler said on Wednesday that investors should not mistake the new approvals for an endorsem*nt of the cryptocurrency.

"Bitcoin is primarily a speculative, volatile asset that's also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing," he said.

"Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto."

But what is an ETF?

ETFs are portfolios that allow investors to bet on multiple assets, without having to buy any themselves.

Traded on stock exchanges like shares, their value depends on how the overall portfolio performs in real time.

An ETF could comprise a combination of gold and silver bullion, for example, or a mixture of shares in both top technology and insurance companies.

Some ETFs already contain Bitcoin indirectly - but a spot Bitcoin ETF will buy the cryptocurrency directly, "on the spot", at its current price, throughout the day.

Why is there such excitement?

About a dozen investment companies, including Blackrock and Fidelity, have been waiting for months for the US Securities and Exchange Commission (SEC) to give them the green light to start buying Bitcoin for their own ETFs.

And after weeks of wrangling over wording, the first have now been given the nod.

This means a new group of investors can now enter the speculative world of Bitcoin, without having to worry about getting digital wallets or navigating crypto exchanges.

Billions of dollars are expected to pour into the Bitcoin market, as these financial companies start buying the digital coin.

A minority of analysts say the cryptocurrency's price will be little affected, as spot Bitcoin ETFs are already established in other countries.

But with the US giants entering the market, most people are expecting the value of bitcoins to rise with demand.

The price is notoriously volatile, however.

It rose to nearly $70,000 (£55,000) a coin in 2021, before falling to $16,000 in 2022 as scandals shook the industry.

But in 2023, it rose steadily, partly due to the hype around the Bitcoin ETF approval, and is now at $44,000.

Based on an idea published online in 2008, by someone calling themselves Satoshi Nakamoto, Bitcoin was the first cryptocurrency and remains the most valuable and famous.

Its price is often seen as a barometer for the whole industry of thousands of other coins, tokens and products built on the same blockchain technology.

And with an influx of new money into the ecosystem, many expect a surge in interest in cryptocurrency technology in general.

How will the decision affect cryptocurrency adoption?

Some say this landmark decision shows the establishment is finally taking Bitcoin seriously, at least as a speculative asset.

For those who consider Bitcoin legitimate "digital gold", what better proof could there be than the biggest wealth-management institutions flocking to buy, overseen by regulators?

Others say cryptocurrency is about rejecting traditional financial systems in favour of a decentralised, people-powered alternative. And investment bankers buying Bitcoin just to get rich on US dollars is not what Satoshi Nakamoto had in mind.

But judging from the excitement on social media, the prevailing sentiment is hope the cash injection will make existing Bitcoin investors rich.

What are the risks to future investors?

The price of Bitcoin can change rapidly and often without warning or explanation.

So investors will have to weigh that up when they opt for ETFs linked to the digital coin.

But ETFs are often sold as high-risk, high-reward products anyway.

Another potential risk is cyber-crime.

Bitcoin and other cryptocurrencies have been subject to huge and costly attacks that have seen crypto companies drained of sometimes hundreds of millions of dollars overnight.

And if the likes of Blackrock become major holders of Bitcoin, their cyber-security will be tested in ways to which they are unaccustomed.

Another downside is the cost to the environment.

Bitcoin relies on a huge number of powerful computers around the world, to process transactions and create coins.

Renewable energy use is growing - but it remains to be seen how investment companies can square the potential environmental cost of Bitcoin with buyers worried about environmental, social, and corporate governance (ESG) compliance.

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I'm an enthusiast with extensive knowledge in the field of cryptocurrency and blockchain technology. I've been closely following developments, trends, and regulatory changes in the crypto space, making me well-versed in the intricacies of this dynamic and evolving industry.

Now, let's delve into the concepts mentioned in the article about the US allowing Bitcoin to be part of mainstream investing funds through spot Bitcoin exchange-traded funds (ETFs).

  1. Spot Bitcoin Exchange-Traded Funds (ETFs):

    • These are investment funds traded on stock exchanges that directly purchase Bitcoin "on the spot" at its current market price throughout the day.
    • Previously, the US Securities and Exchange Commission (SEC) had rejected such approvals due to concerns about fraud and manipulation.
  2. SEC Chairman's Warning:

    • SEC Chairman Gary Gensler cautioned investors not to mistake the approval for an endorsem*nt, emphasizing that Bitcoin is a speculative and volatile asset.
    • He highlighted the association of Bitcoin with illicit activities such as ransomware, money laundering, sanction evasion, and terrorist financing.
  3. Exchange-Traded Funds (ETFs) in General:

    • ETFs are portfolios that enable investors to invest in multiple assets without directly owning them.
    • They are traded on stock exchanges like shares, and their value depends on the real-time performance of the overall portfolio.
  4. Bitcoin Price Volatility:

    • The article discusses the notorious volatility of Bitcoin's price, citing examples of its rise to nearly $70,000 in 2021, followed by a fall to $16,000 in 2022, and a subsequent rise to $44,000 in 2023.
    • The hype around Bitcoin ETF approval in 2023 contributed to its steady rise.
  5. Influx of Institutional Investors:

    • Investment companies, including Blackrock and Fidelity, are now approved to start buying Bitcoin for their ETFs.
    • This is expected to attract billions of dollars into the Bitcoin market, potentially impacting its value.
  6. Cryptocurrency Adoption and Sentiment:

    • The approval is seen by some as a sign that the establishment is taking Bitcoin seriously, particularly as a speculative asset.
    • There is debate about whether the move aligns with the original decentralized vision of cryptocurrencies.
  7. Risks to Investors:

    • Rapid and unpredictable changes in Bitcoin's price are highlighted as a risk for investors in ETFs linked to the digital coin.
    • Cyber-crime risks, especially with major institutional holders like Blackrock, are mentioned, along with potential environmental concerns related to Bitcoin's energy consumption.

Understanding these concepts provides a comprehensive overview of the implications of the US decision to allow spot Bitcoin ETFs, the associated risks, and the potential impact on cryptocurrency adoption.

Bitcoin: Crypto fans can now invest in exchange-traded funds - but what are they? (2024)

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