What is Bitcoin?

Bitcoin is a peer-to-peer, permissionless blockchain that pioneered a way to independently create, manage and validate digital money. Bitcoin was introduced to the public in Oct-2008 with the release of a whitepaper, authored by the pseudonymous Satoshi Nakamoto. The Bitcoin network went live in Jan-2009 when the genesis block was mined. The network utilizes a proof-of-work sybil resistance mechanism and public-key encryption in order to create an immutable ledger of digital transactions.

What is BTC?

BTC is the native cryptocurrency of the Bitcoin network, and acts as the network’s medium of exchange and unit of account. BTC supply is capped at a maximum of 21 million coins. By solving complex cryptographic problems, Bitcoin miners verify the validity of transactions within a given block and are rewarded with newly minted BTC. These rewards are referred to as a block reward, and are cut in half every 210k blocks mined (~every 4 years).

Background – The Start Of A New Era

Bitcoin, the cryptocurrency that kicked off a trillion-dollar industry, is slowly becoming a mainstream asset. Anonymous founder Satoshi Nakamoto founded Bitcoin in response to the unprecedented bailout of financial institutions in 2008. Satoshi believed we needed a digital, self-sovereign currency outside anyone’s control. Satoshi initially released Bitcoin to a small community of anarchists, cypherpunks, and libertarians on a cryptography forum, where they quickly adopted it and saw its potential.

Initially, as a permissionless monetary system, illicit entities and those cut out from the traditional financial systems used Bitcoin. Silk Road users famously used Bitcoin to buy and sell drugs and black market weapons early in Bitcoin’s life. Since those early days, however, more and more people have understood Bitcoin as digital gold, native internet money, or a Swiss bank account in your pocket. Bitcoin has evolved past its more illicit past, and many now see it as an essential part of any portfolio.

However, many institutions, investors, and individuals are unable or unwilling to invest in Bitcoin due to challenges around custody or other regulations. For many, it’s the same story as gold. Few investors want to custody and secure $10M in gold. As such, many large capital allocators require some sort of traditional investment vehicle for their BTC exposure – like an ETF.

Bitcoin ETF

An ETF, an exchange-traded fund, is a pooled investment vehicle that tracks the price of a specific commodity, index, or sector. Investors can freely trade ETFs on traditional stock exchanges, and as such, they are highly liquid and easy to use. For example, buying a gold ETF is a much easier way to get exposure to gold than purchasing the physical metal itself.

There are already Bitcoin ETFs, but these are generally futures-based Bitcoin ETFs. There are currently no spot Bitcoin ETFs that simply track the price of BTC. But investors are demanding BTC exposure regardless, so the race for a spot Bitcoin ETF and its lucrative fees is on.

The ETF Race

The nearest potential date for approvals or denials from the SEC is sometime in Q1 2024 – but it could come sooner. As of December 2023, the SEC has received twelve spot Bitcoin ETF applications from the following firms:

An exciting dynamic that the amount of applications creates is that there will be significant competition in Bitcoin ETFs. Firms must reduce fees or make other differentiating factors to attract capital to their ETFs. Sometimes ETFs can have onerous fees, but it seems unlikely due to the competition for a Bitcoin one.

Impact of a Bitcoin ETF

For those who already hold spot BTC or have other crypto, a Bitcoin ETF may not seem like a big deal. However, a spot Bitcoin ETF trading on traditional stock exchanges could significantly impact the currency. The first ramification for Bitcoin is that a spot ETF is a strong signal that Bitcoin, and by extension, the rest of the cryptocurrency market, is a serious asset class. Before a spot, ETF cryptocurrencies are in a sort of grey state. Many investors consider them a legitimate asset class, but many do not – Warren Buffet famously called Bitcoin rat poison. A spot Bitcoin ETF, managed by well-regarded firms like VanEck or Blackrock, is a strong signal that Bitcoin has transitioned from an asset class for cipher punks, libertarians, degens, and anarchists to a serious asset class at home in grandpa’s and grandma’s 401K.

Secondly, and more importantly to most, is that a spot Bitcoin ETF opens the doors to a flood of capital. As we mentioned, many capital allocators cannot invest in Bitcoin. Rules and regulations may preclude them from transacting with crypto exchanges, and existing custody solutions may not be suitable. But a spot ETF managed by reputable firms and trading on well-regulated stock exchanges opens the door to almost everyone. Investors can buy the ETF through a bank, financial app, a company 401K, and more. A spot Bitcoin ETF puts Bitcoin firmly in the mainstream and opens the coin up to a vast pool of liquidity.

Readers can see an excellent example of what a spot ETF could mean for Bitcoin in how the price of gold behaved after spot gold ETFs came to market. The first gold ETF entered the market in 2003 when gold was trading at around $650 an ounce. Gold ETFs opened the gates to a massive influx of capital, and now gold is trading at $2000 an ounce, an increase of more than 3x. A spot Bitcoin ETF could have the same effect on the price of BTC – hence why people are watching this process closely.

How will Bitcoin ETF affect GBTC?

A minor effect on the market is that a spot Bitcoin ETF will probably kill off Grayscale’s existing GBTC product. Grayscale’s Bitcoin Trust product, GBTC, is an investment vehicle allowing investors to gain exposure to BTC by buying trust shares. GBTC currently holds 643,572 BTC, and investors can purchase shares of the fund at the direct NAV of its holdings. However, as GBTC is a derivative of its Bitcoin holdings, sometimes GBTC trades at a discount or premium, meaning it doesn’t necessarily track the price of spot Bitcoin. A spot Bitcoin ETF is a better way to get exposure to Bitcoin than GBTC, and as such, Grayscale has applied to convert GBTC to an actual ETF.

The Biggest Event

As readers can see, an ETF is a massive step for Bitcoin. A spot ETF signals that Bitcoin is a serious asset, crypto a serious asset class, and opens the gates to a flood of liquidity. If gold ETFs, which helped triple the price of the metal over 20 years, are any indication of what an ETF can do for Bitcoin, the approval or denial of an ETF is one of the watershed moments for the currency.

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