Will Cryptocurrencies Leap into Traditional Financial Markets? Yes, They Will! (Update)

Editor’s note: This is an update of an earlier article published in December 2023 that defined the pros and cons of cryptocurrencies leaping into traditional financial markets.

After a 10-year battle with the cryptocurrency industry, the U.S. Securities and Exchange Commission (SEC) finally approved the establishment of the legal basis for the use of what is known as a Bitcoin exchange-traded fund, or ETF, on Wednesday, January 10th.

Numerous new investors who were unwilling to go through the extra procedures necessary to buy actual Bitcoin will now have access to cryptocurrencies thanks to the approval of ETFs for cryptocurrency in the U.S. - a landmark decision for both traditional finance and digital currency markets.

Approved but still doubted

Despite its positive decision, the SEC voiced doubt regarding cryptocurrencies and stated that its ruling did not imply that it supports or condones Bitcoin. Its chairman, Gary Gensler, advised investors to be aware of the numerous risks linked with Bitcoin as well as with products the value of which is linked to it.

How has Bitcoin’s price has been impacted by SEC’s decision?

Back in November 2023, when FTX went bankrupt, Bitcoin’s price fell to US$16,000. However, in just a few hours following the SEC’s decision, the price rose to US$46,303.

“The SEC’s approval of spot Bitcoin ETFs should add further confidence to the digital asset ecosystem and could pave the way for Wall Street to move deeper into cryptocurrencies as an asset class,” commented Justin Arzadon, Head of Digital Assets at BetaShares, one of the top Australian providers of exchange-traded funds.

According to some experts, in 2024 ETFs may attract between US$50bn to US$100bn which may lead to a spike in Bitcoin’s price, resulting in a whopping US$100,000. At the same time, other experts are less optimistic, expressing more doubt and concern regarding the wide usage of crypto ETFs. They believe Americans' retirement funds may be overly exposed to risk and volatility if they invest in crypto ETFs because the price of Bitcoin has witnessed serious fluctuations which occurred without any prior warning.

What was previously known?

There was much excitement in the cryptocurrency and financial sectors because a significant change was expected to happen.

Traders, investors, businesses, and ordinary individuals were awaiting the decision that the U.S. Securities and Exchange Commission (SEC) had to make by January 10, 2024. This regulatory step will merge the worlds of traditional finance and digital currencies, such as Bitcoin, and establish the legal basis for the use of what is known as a Bitcoin exchange-traded fund, or ETF.

What is the key goal behind the Bitcoin ETF?

Simply put, the primary objective of a Bitcoin ETF is to streamline and regulate investor access to the cryptocurrency market. An ETF will suit standard market players by offering an organized investment instrument that allows exposure to Bitcoin while eliminating the hassle of navigating the complexities of digital wallets and cryptocurrency exchanges.

Many businesses had been vying for Bitcoin ETF approval. Crypto enthusiasts believe that the regulations on ETFs will facilitate the entry of “traditional” investors into the cryptocurrency market, with many stating that this step could increase Bitcoin's influence in the financial industry.

The euphoria surrounding the move by the SEC had led to a rise in the pricing of smaller digital currencies. According to some analysts, this is a strong indication of the end of a long period of price falls for cryptocurrencies.

The year 2023 has been especially exciting for crypto in view of the involvement of Wall Street giants such as BlackRock, Invesco, and Fidelity. Supporters of cryptocurrencies contended that opening the door for ETFs could facilitate the integration of digital assets into traditional finance by making it easier for money managers to purchase crypto assets on behalf of their customers.

Cryptocurrencies have benefited greatly from this news with Bitcoin more than tripling in value this year to trade above US$40,000. According to Bloomberg, the approval of the Spot Bitcoin ETF may propel the value to a figure above US$100 billion and attract significant financial participants.

The main issue that has been discussed by the SEC was how Bitcoin ETFs would enable investors to get their money back in cash or Bitcoin. All in all, this step is viewed as a significant advance for Bitcoin and has the potential to attract more conventional investors to the realm of digital money.

Pros and Cons of Bitcoin ETF Investment

There are both benefits and drawbacks to the US Securities and Exchange Commission approval of a physically-backed Bitcoin exchange-traded fund. Let’s analyze some of these:

Pros for investing in Bitcoin ETF

• Simplicity of use. Investors will find it easy to use because a Bitcoin ETF will be similar to traditional stock markets.
• No crypto wallet is required. Investors will not need to set up and maintain a cryptocurrency wallet, which can be difficult for people who are not familiar with digital assets.
• Investor protection. ETFs are regulated financial instruments. The approval and supervision of the SEC add an additional degree of investor protection.
• Market legitimization. The approval of a Bitcoin ETF by influential regulatory organizations like the SEC would be a major boost for the cryptocurrency and could result in its broader acceptance.
• Investment portfolio diversification. With cryptocurrencies at their disposal, investors can diversify their portfolios with a type of asset that behaves differently to typical stocks and bonds.

Cons of investing in Bitcoin ETF

• Management fees. Bitcoin decentralization means there are no intermediaries and thus no fees, whereas with ETFs, Bitcoin fund issuers will reportedly charge a management fee.
• Price volatility. Over brief periods, the price of cryptocurrencies can fluctuate significantly, potentially resulting in gains or losses.
• Risks associated with regulations. The performance and market conditions of Bitcoin ETFs can be influenced by regulatory decisions.
• Higher technological risks. Problems with how the ETF operates, such as tech malfunctions, could affect how well the fund performs, in addition to potential cybersecurity attacks.
• Limited access to markets. When an investor buys Bitcoin, they gain instant access to the cryptocurrency market. With the changes, investors could be influenced by the market’s opening hours or other delays related to ETF transactions.
• Environmental concerns. Since mining bitcoin requires a lot of electricity, its potential growth caused by an ETF could result in environmental issues.

Conclusion:

The decision to set a framework for a Bitcoin ETF means that the ‘traditional’ financial world will accept an advanced financial product, a unique asset class, while controlling the risks connected to it. At the same time, by opening the door for the adoption of cryptocurrency and enabling its integration into conventional finance, investors could face a number of risks and obstacles that both they and the relevant authorities should evaluate carefully.