New Delhi: In a landmark development for the cryptocurrency industry, the US Securities and Exchange Commission (SEC) has greenlit the establishment of Bitcoin exchange-traded funds (ETFs) by investment firms, signalling a potential revival for the world’s largest cryptocurrency token by market capitalization.
This decision allows 11 investment firms, including BlackRock, Fidelity, and Franklin Templeton to list Bitcoin-based ETFs on major US exchanges, including Nasdaq and the New York Stock Exchange, as early as Thursday.
This move is expected to breathe new life into Bitcoin and the wider crypto industry, which has been reeling from declining token prices, failed projects, and the collapse of exchanges since its peak in November 2021.
Following its all-time high of nearly $69,000 in November 2021, Bitcoin experienced a series of downturns, dropping to around $16,000 within a year. Unlike popular expectations though, Bitcoin prices did not surge upon the announcement. Eight hours since the SEC announcement, Bitcoin traded at around $46,300, down $1,000 down from its recent high.
A recent note from analyst Geoff Kendrick, head of digital assets at Standard Chartered, said that the ETFs may attract $100 billion in institutional investments in Bitcoin by the end of this year, and also projected a surge in Bitcoin’s price to $100,000 this year and $200,000 by next year.
Bitcoin ETFs offer a more accessible route for investors to engage with the crypto asset, bypassing the complexities of purchasing Bitcoin directly.
Yet, there are sceptics too. Jamie Dimon, chief executive of US bank JP Morgan, in the lead-up to the ETF announcement said that, “The actual use cases (of Bitcoin) are sex trafficking, tax avoidance, anti-money laundering and terrorism financing…there’s no value to (individuals) buying and selling Bitcoin.”
SEC chair, Gary Gensler, in a statement after the announcement said that the move should not be seen as an endorsement of cryptocurrencies from the US market regulator.
In India, preliminary reactions signal optimism.
Sidharth Sogani, chief executive of cryptocurrency research firm Crebaco Global, said, “Floodgates are now open (for) institutional investments (to) flow in…We anticipate about $5 billion coming in (through ETFs) in the next 45 days. ETFs will bring more stability to the price of Bitcoin, since the liquidity risks will be reduced with time”.
India’s cryptocurrency market was hit significantly by taxation rules passed in the Union Budget 2022, which introduced a 30% income tax on profits and a further 1% tax deducted at source (TDS) on all crypto trades.
Since the tax was introduced, liquidity and daily trades on popular exchanges such as WazirX and CoinDCX have plunged as much as 93%, Mint reported on 10 January. With the ETFs now on offer, local exchanges could well be looking at their best shot at seeing investors return, even if momentarily, driven by expectations of a price surge.
ETFs for long have been seen as the solution to the volatility in the crypto market.
Due to the decentralized nature of Bitcoin, as well as its limited lifetime supply of 21 million tokens in total, institutional investors have remained cautious of venturing into cryptocurrency investment in fear that unrecognized users, who ‘hold’ Bitcoins in large volume across various decentralized wallets, could potentially crash the value of the digital token at any time.
An ETF in this regard, experts have said, could help stabilize the currency to an extent, if large-scale institutional investors hold significant chunks of Bitcoin.
Critics, however, have argued that doing so takes away from the entire point of a ‘decentralized’ currency—by lending power to centralized financial institutions.
ETFs also boost liquidity of an asset since the number of investors that can access the market goes up. They also help shield investors in case of a crash since an ETF is protected by large investor holdings.
Going ahead, the market’s reaction to Bitcoin ETFs remains to be closely observed, both among institutional and retail investors. Furthermore, the upcoming ‘halving’ update for Bitcoin, which reduces the reward for mining, adds another layer of complexity to the future of this digital currency.
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