The impact of Bitcoin ETF: "Revolutionary change" or huge "failure"?

After more than a decade of trying, the crypto world finally got what it wanted: Bitcoin sold and traded on a major U.S. stock exchange — albeit in the form of an exchange-traded fund (ETF).

But be careful what you wish for. As the price of Bitcoin drops again, the U.S. Securities and Exchange Commission (SEC) has given the crypto industry a Christmas gift that was 10 years in the making.

Many people predicted that something bad would happen, and while it might have been a minor issue, it raises questions about the consequences.

Will the approval of 11 spot Bitcoin ETFs by the U.S. Securities and Exchange Commission (SEC) on January 10 have a long-term impact on Bitcoin’s reputation, further proving that cryptocurrencies have entered the economic mainstream?

Can ETFs really win back customers who were left out during the crypto winter? Are individual investors ready to return to Bitcoin after the bankruptcies, scandals, and price volatility of the past few years?

What if major asset managers like BlackRock and Fidelity fail to attract clients when they launch a Bitcoin ETF? What are the chances that the new ETFs that debuted on January 11 on the New York Stock Exchange, Nasdaq and CBOE will fail to attract investors?

Become famous?

Regarding the so-called enhancement of Bitcoin's reputation, "I believe the SEC's approval will increase Bitcoin's reputation," said John Nahas, senior vice president of business development at Ava Labs.

In Nahas’ view, Bitcoin already exists in the economic mainstream, but the new U.S. exchange-traded fund will “only strengthen the early adopters, further solidify its many supporters, and begin to convert the remaining skeptics.” Bitcoin will no longer be seen as a fringe or exotic asset, but will be accepted by traditional financial practitioners.

Chris Brodersen, managing director of business consulting and accounting firm EisnerAmper, was more cautious, arguing that what really matters is still in the future. He said the SEC's approval is just "approval of non-security commodities" and not an endorsement. However, he noted that "the result of the approval will be a broader discussion about Bitcoin, its underlying technology, and ultimately its value in a diversified portfolio."

Brodersen said the real importance of the increased exposure to cryptocurrencies that could come from an ETF is its potential to “act as a catalyst for innovation and adoption.” He added:

“Beyond ETFs, the question remains: How will the crypto ecosystem interact with the broader financial ecosystem?”

Shayne Higdon, co-founder and CEO of HBAR Foundation, expressed similar sentiments, emphasizing the importance of the underlying technology, which is now receiving close attention from the general public: “While many investors and cryptocurrency advocates view Bitcoin as digital gold, the potential value of blockchain technology is often overlooked.”

Meanwhile, bitcoin itself still has a long way to go. "Massive adoption and price appreciation are needed before bitcoin can achieve this 'precious commodity' status, and true validation will only occur if asset managers, private wealth advisors and similar entities invest in bitcoin over the next year," Higdon said.

Would a spot market Bitcoin ETF attract retail investors in any significant way? Are individual investors ready to return to the cryptocurrency space after the past few years of bankruptcies, scandals, and price volatility following the so-called crypto winter?

There is reason to think that last week’s events could have an impact on this point. Nahas said that the approval of the ETF provides new assurance and security at the government level and at the institutional level, further explaining:

“These [asset managers] are long-established, entrenched financial institutions that do extensive due diligence. They won’t back any assets unless they’ve been thoroughly vetted and there’s significant demand for them.”

Established firms such as BlackRock and Fidelity are offering in-demand products for small investors. Cryptocurrencies require a level of technical and self-custody expertise that is beyond the reach of many average investors.

Nahas said that, in general, mass-market consumers are not ready for cryptocurrency exchanges or non-custodial wallets.

Regarding the ongoing impact of the so-called “crypto winter” on potential retail investors, Brodersen said: “Despite recent volatility challenges due to scandals and bankruptcies such as Terra, FTX, and Celsius, retail investors continue to show significant interest in the opportunity to own cryptocurrencies.”

“An investable commodity like any other”

For most consumers, it may be too early to realize the changes that crypto ETFs will bring. Nahas said that individual investors now have the ability to hold BTC (perhaps too early to hold ETH) as well as stocks, bonds and other tradable assets, adding:

“Most people don’t understand the magnitude of the barriers that have been removed, making ETFs a commodity as easy to invest in as any other.”

Others say what retail investors do or don’t know may not be the point. “Whether the average person is ready for Bitcoin may not be that important right now because their advisors will get them in anyway,” said Henry Robinson, founder of Decimal Digital Group, a cryptocurrency mining, infrastructure and technology company.

Amid growing competition to outperform investment benchmarks, “wealth managers are not going to be able to ignore Bitcoin because they risk losing out to their peers,” Robinson said. They will “have to accept some exposure.”

What if no one comes?

But what if a Bitcoin ETF fails to attract retail investors? What happens then?

“The likelihood of that happening is almost zero,” Higdon noted. “If there isn’t a lot of demand from clients, the big asset managers won’t go to the trouble of filing and creating ETFs.” These issuers, such as BlackRock, Fidelity, Franklin Templeton and others, simply want to provide their clients with regulated instruments.

“If the ETF fails, we may see buyers who were looking to buy in at a high price over the past six months exit,” Robinson said.

Bitcoin prices briefly rose, then fell after the ETF was approved. Source: Cointelegraph

Cryptocurrency ETFs are really just a temporary solution. Robinson said: "Over time, we expect the ETF's Bitcoin holdings to peak."

One of Bitcoin’s main advantages as a store of value is its zero-cost storage, which is not really consistent with ETFs , even if the latest round of ETF issuers are offering some discounts on fees, at least initially. “The role of ETFs in the broader adoption of Bitcoin cannot be underestimated, but they are also temporary,” Robinson said.

Brodersen added that the notion that “no one will come” is unlikely. “Once the initial excitement has passed, we may witness a relatively slow but gradual increase in interest from retail investors.”

At the same time, the potential upside is huge. Even a 1-2% allocation, if carried out at scale, Brodersen said “could have a huge impact on the overall market capitalization of the cryptocurrency market.”

Nahas also believes that new ETF issuers have been effective in identifying customer demand. “If BlackRock and their peers were guessing which assets would or would not have demand, they would not be in business,” he said, adding:

“The demand is coming from the customers. That’s what’s driving this ETF. Many of these issuers that were not willing to support any digital asset are now issuing bitcoin ETFs.”

A watershed moment?

Will people one day look back on the events of last week as a historic milestone in the journey of the world’s first and largest cryptocurrency?

“ We do believe this is a watershed moment for Bitcoin,” Robinson said, adding that while Bitcoin may soon experience supply shortages :

“Bitcoin being pulled out of the market by ETFs is creating a supply crunch. New capital will make the industry exponentially more integrated with global finance.”

Of course, measuring “tipping points” in history can be tricky and a matter of endless debate. “The real watershed for Bitcoin was the release of its white paper and the mining of the genesis block,” Brodersen said. Satoshi Nakamoto’s Bitcoin white paper was released in October 2008, and the first Bitcoin was mined in January 2009.

“Ultimately, this is a positive step toward increasing adoption and investment in the digital asset space,” Brodersen acknowledged, but mass adoption will require more than just “synthetic exposure to the price of Bitcoin.”

It also requires better regulatory frameworks and a deeper understanding of the costs and benefits of decentralized ledger technology — and “most importantly, the need for such alternatives.”

Higdon is even more convinced of the significance of last week’s milestone. “We will look back on this day as the catalyst that sparked revolutionary change in the world of finance and banking. While the exact extent of that change is still unknown, we cannot overstate the significance of this approval.”