The finance world is abuzz with the news that the powerful US financial regulator has finally given its stamp of approval for bitcoin exchange-traded funds (ETFs), sending the price of the cryptocurrency soaring and enthusing investors in the nascent asset class.
So what does the move mean for bitcoin, and how will it affect investors in Australia?
What is bitcoin?
Bitcoin and other cryptocurrencies are a type of digital currency that uses blockchain technology to track and process transactions.
It was developed in 2008 by an anonymous person or group of people known only as Satoshi Nakamoto, with the goal of being an electronic version of cash that does not require a central financial institution such as a bank.
Bitcoin transactions are powered by an interlinked web of computers across the globe that are responsible for verifying, cross-referencing and processing transactions on the network.
Every 10 minutes, these transactions are packaged into a “block”, which is linked to the block before it – hence the term “blockchain”.
These blocks are unable to be modified or changed, and give cryptocurrencies such as bitcoin the credentials of being transparent, traceable, immutable, and very difficult to dupe.
What is an ETF?
Sharemarkets such as the Australian Securities Exchange (ASX) offer a number of shares that investors can purchase including well-known local companies such as Telstra or Woolworths.
However, investors can also opt to purchase exchange-traded funds, which are bought and sold just like shares, but instead of representing a holding in just one company, they track the price of a basket of multiple shares.
For example, if you were to purchase a unit of a popular ETF such as an ASX 200 ETF, you’d be purchasing a small exposure to the top 200 companies on the local bourse, all bundled together into one product.
Investors, especially inexperienced ones, opt for ETFs thanks to their lower risk profile than individual shares, along with the level of diversification they can offer.
What did American authorities decide?
The US Securities and Exchange Commission (SEC) approved 11 applications from major fund managers such as Blackrock, VanEck and Fidelity to issue ETF products that track the price of bitcoin. These products are expected to begin trading as early as this week.
Major funds have been vying to launch bitcoin ETFs for years but have been held back by the SEC, which until now had been concerned over the potential for market manipulation and the general volatility of the asset class.
SEC chair Gary Gensler said in the commission’s statement that the move should not be viewed as an endorsement of cryptocurrency by the SEC.
“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.
“While we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse bitcoin.”
The SEC’s announcement was muddled yesterday after the regulator’s account on X (formerly Twitter) issued an “unauthorised” tweet announcing the decision.
What does this mean for cryptocurrency?
Crypto proponents have hailed the move as a watershed moment for the industry, believing the approval by the influential SEC will further legitimise the asset class, which has long been viewed as volatile and unreliable.
ETF approval will also theoretically allow sophisticated investors and funds to invest in bitcoin in a simpler manner, which supporters again believe will accelerate the cryptocurrency’s path to broader adoption.
“This further opens cryptocurrency to both retail and institutional investors via a traditional financial product,” says the chief executive of local crypto exchange BTCMarkets, Caroline Bowler.
“It is also reasonable to assume that this will expand crypto markets in general, as liquidity follows utility.
“So while this is an historic day for the industry, the impacts will be increasingly felt over time.”
However, the widely expected announcement is unlikely to be the panacea crypto supporters are looking for, as the industry is still recovering after the disastrous collapse of numerous exchanges in 2022, including the $32 billion FTX.
Regulators are still eyeing off many players in the industry, with local enforcer – the Australian Securities and Investments Commission – signalling last year it wouldn’t hesitate to act where needed.
Will there be an Australian offering?
The US regulator’s announcement will likely spur a wave of crypto ETFs locally, with Queensland-based fund Monochrome intending to launch its own offering in the first half of this year.
In late 2022, the ASX amended its listing rules to allow for ETFs tracking the price of bitcoin and ethereum – the second-largest cryptocurrency – however no funds have yet gained approval from the local bourse, which has implemented strict rules to protect investors.
What has the news meant for the price of bitcoin?
Following the announcement, bitcoin’s price rose about 8 per cent to $69,000. A raft of other smaller cryptocurrencies followed suit, with ethereum gaining 14 per cent to $3800.
Despite the SEC’s approval being heavily foreshadowed, investors are betting on the new ETFs introducing a wave of new buyers, which could further increase the asset’s price.
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Source: Thanks smh.com