On Wednesday, the Securities and Exchange Commission approved 11 spot bitcoin ETFs, ending nearly a decade of uncertainty.
Applications by Fidelity Investments, BlackRock, Grayscale Investments, ARK 21Shares, Franklin Templeton, Bitwise, Invesco/Galaxy Digital Holdings, Valkyrie, VanEck, and WisdomTree were approved and are expected to begin trading on Thursday, setting off a race to gain market share.
Since 2021, the SEC has denied more than 20 spot bitcoin ETF applications. However, in August the SEC lost a lawsuit filed against it by Grayscale, a digital asset manager and one of the world’s largest holders of bitcoin, after the SEC denied its application for a spot bitcoin ETF.
The court ruled that the SEC was acting capricious and arbitrary in its denial of Grayscale’s application because the SEC had said yes to futures bitcoin ETFs but it had said no to the spot ETF. At the time, this decision sparked speculation that a spot bitcoin ETF would soon be approved.
In the SEC’s announcement, Chair Gary Gensler cited the court ruling in its decision-making process to approve these ETFs but stated that this approval was only for “one non-security commodity, bitcoin” and that it should in “no way signal the Commission’s willingness to approve listing standards for crypto asset securities.”
Over the last year, the SEC has cracked down on the crypto industry in a bid to tighten regulation and safeguard investors, in part due to the increase in crypto-related fraud and the collapse of prominent crypto exchanges.
The SEC had until Wednesday to respond to ARK Investment Management and 21Shares’ spot bitcoin ETF joint application, with multiple applications pending decision for later in the year. In a historic move, the SEC approved multiple applications at once.
By approving the multiple applications, the SEC is trying to mitigate one issuer gaining market domination, said Ric Edelman, founder of the Digital Assets Council of Financial Professionals (DACFP) and founder of one the nation’s largest RIAs.
“This is by design,” said Edelman. “Think back to when the first gold ETF came to market. The SEC approved the product based on a first-in-line scenario. Within two weeks, GLD raised over a billion dollars in AUM. Within a month, four other ETFs came on the market, and today they tend to generally have $10 [million] or $20 million in AUM compared to the billions of GLD.”
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The debut of a spot bitcoin ETF is good news for advisors, who trail investors in crypto adoption.
Only about half of advisors allocated client assets to alternative investments, and of those who do, crypto makes up only one-tenth of 1% of the advisors’ allocation, said Daniil Shapiro, associate director at Cerulli Associates, a wealth and asset management research and consulting firm. “Advisors’ allocations to cryptocurrency now is pretty much non-existent,” said Shapiro.
A bitcoin spot ETF solves many issues advisors face with digital assets.
ETFs are the most popular investment vehicle in the world. Cerulli recently reported that ETF assets grew to a new all-time high of $7.6 trillion in November. ETFs are relatively safe, tax-efficient, and liquid.
Additionally, a spot bitcoin ETF allows advisors to manage bitcoin on behalf of clients, which they can’t do when investors own these assets directly.
“We don’t expect financial advisors to dramatically start to use cryptocurrency ETFs for a portion of their portfolio,” said Shapiro. “However, this may be that way for financial advisors to bring that under their own umbrella and give that client the safety of a brand name of venerable asset manager.”
There is also a potential cost savings for investors.
VanEck, one of the approved bitcoin ETF issuers, said that it estimates end clients will save 90 percent in transaction costs compared with the retail experience of owning bitcoin directly on an exchange like Coinbase.
The high competition has caused most issuers to discount prices. Transaction fees currently range from 10 basis points up to 150 basis points, with multiple issuers offering a zero percent fee for six months.
“At this point the fees are just so low,” said Shapiro. “You just want to make sure the investor trusts you as a firm.”
In his announcement, Chair Gensler stated that though the SEC is “merit neutral,” bitcoin, unlike precious metals, is “primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing.”