The U.S. Securities and Exchange Commission (SEC) gave the green light to Bitcoin spot exchange-traded funds (ETFs) on Wednesday (January 10), with 11 ETFs approved to be listed and traded starting Thursday (January 11) local time, a step that changes the rules of the game in the cryptocurrency industry.

The crypto industry has been trying to launch such products for more than a decade. In 2013, the Winklevoss Bitcoin Trust filed the first Bitcoin ETF application, and several asset management companies followed suit, but the SEC rejected these proposals on the grounds that they were susceptible to market manipulation.

These efforts took a turn in August last year, when the U.S. Court of Appeals for the District of Columbia Circuit ruled that the SEC was wrong to reject the Bitcoin spot ETF application of cryptocurrency fund Grayscale Investments, calling the SEC's decision "arbitrary and capricious" and failing to explain its different treatment of Bitcoin futures ETFs and spot ETFs, forcing the SEC to reconsider its position.

Finally, after long-term mediation between the crypto market and the SEC, the SEC compromised on Wednesday and approved the Bitcoin spot ETF applications from 11 issuers including ARK Investments, BlackRock, Fidelity, Invesco, Bitwise, and Grayscale. The SEC has approved the listing of these ETFs through an expedited mode and is expected to start trading as early as Thursday.

The launch of a Bitcoin spot ETF is undoubtedly a game changer for Bitcoin, allowing institutional and retail investors to gain exposure to the world's largest cryptocurrency by market value without directly holding Bitcoin.

How will ETFs work?

In terms of the operating model, issuers will purchase physical Bitcoin from cryptocurrency exchanges and store it in custodian institutions such as Coinbase Global, which will then issue ETFs.

The bitcoin ETFs will be listed on Nasdaq, the New York Stock Exchange and the Chicago Board Options Exchange and are expected to begin trading as early as Thursday.

The competition among issuers in terms of fees is also fierce. In general, issuers plan to charge 0.2% to 0.8%, which is much lower than the average of the overall ETF market. The lowest fee comes from Bitwise Asset Management, which only charges an annual fee rate of 0.2%.

In addition, some issuers including Bitwise, ARK 21Shares, and Invesco have even released a "big move", planning to completely waive management fees for the top $1 billion to $5 billion in assets under management within six months.

Additionally, to address the SEC’s concerns about market manipulation, Nasdaq and CBOE have established a market surveillance mechanism with Coinbase, the largest cryptocurrency exchange in the United States.

The difference between Bitcoin spot ETF and futures ETF

The SEC approved a Bitcoin futures ETF earlier in 2021, which tracks agreements to buy and sell Bitcoin at a pre-agreed price. However, these products do not track price movements precisely.

In addition, futures ETFs typically involve futures contract operations, and the cost of rolling over futures contracts may affect returns, making these products less appealing to many investors.

Cynthia Lo Bessette, head of Fidelity Digital Asset Management, said the latest product is different from the Bitcoin futures ETF approved by the United States in 2021, which invests in derivatives rather than digital assets themselves, while spot ETFs provide more options for investors interested in digital assets.

Bessette noted, “We have long believed that spot-priced exchange-traded products (ETPs) would be an effective way for investors to gain exposure to Bitcoin, and as a company we remain committed to meeting the growing needs of investors, providing them with tools that support their choice and facilitate safe access to the market.”

What are the advantages compared to direct purchase?

There are several risks associated with holding Bitcoin in a dedicated cryptocurrency trading account. First, if you buy Bitcoin directly, investors sometimes have to pay more than 1% of their purchase amount in fees. In addition, some exchanges have a poor cybersecurity record and are prone to hacker attacks, and investors' account passwords are also easily lost, which scares away many investors.

The industry has also previously experienced a series of scandals, including the collapse of crypto exchange FTX, whose founder Sam Bankman-Fried was convicted of fraud, and Binance, the world's largest cryptocurrency exchange, which recently admitted to violating US anti-money laundering laws. All of this has made many investors continue to be wary.

In contrast, spot Bitcoin ETFs are listed on strictly regulated stock exchanges, allowing investors to gain exposure to Bitcoin prices through traditional stock accounts without the complexity and risks of directly holding Bitcoin.

Moreover, the structure of ETFs also increases the possibility of exposure to Bitcoin by institutional investors, some of whom are prohibited from investing directly in alternative assets. Products like ETFs will attract large-scale funds to enter the market, thereby driving the continued growth of the Bitcoin market.

A spokesperson for Cboe Global Markets said the ETF will provide investors with a "transparent and regulated" way to track the price of Bitcoin, and "this approval marks an important step in establishing cryptocurrency as a tradable asset class, paving the way for new trading opportunities."

Going mainstream

Overall, the approval of a spot Bitcoin ETF is a huge victory for the cryptocurrency industry, increasing its legitimacy and pushing Bitcoin further into the mainstream.

At the same time, the long-running tug-of-war between the crypto industry and the SEC has come to an end. In this particular battle, the crypto industry can declare victory.

David Mann, head of ETF products and capital markets at Franklin Templeton, said in an interview that it is difficult to predict the inflows in the first few days. He expects the market to be "very excited" on the first day, but also said that the growth of interest and investment may be slower than people think.

However, SEC Chairman Gary Gensler still maintains his cautious attitude towards encrypted digital assets such as Bitcoin.

He said, "While we have approved the listing and trading of certain Bitcoin spot ETP shares today, we have not approved or endorsed Bitcoin. Investors should remain cautious about the myriad risks associated with Bitcoin and products related to value and cryptocurrencies."