Bitcoin ETFs
Bitcoin ETFs are exchange-traded funds that track the value of Bitcoin and trade on traditional market exchanges rather than cryptocurrency exchanges. They allow investors to invest in Bitcoin without using a crypto exchange while providing leverage to its price. [1][7]
On January 10, 2024, the SEC approved the first Bitcoin ETFs in the United States. The U.S. Securities and Exchange Commission has approved 11 spot bitcoin exchange-traded funds, including those of Grayscale, Bitwise, and Hashdex, according to a statement on Wednesday. [16]
- Grayscale Bitcoin Trust
- Bitwise Bitcoin ETF
- Hashdex Bitcoin ETF
- iShares Bitcoin Fund
- Valkyrie Bitcoin Fund
- ARK 21Shares Bitcoin ETF
- Invesco Galaxy Bitcoin ETF
- Vaneck Bitcoin Trust
- WisdomTree Bitcoin Fund
- Fidelity Wise Origin Bitcoin Fund
- Franklin Bitcoin ETF
US Bitcoin ETF Approval
On January 10, 2024, the SEC published an order approving the U.S.'s first spot Bitcoin ETFs. The document declared effective the trading of spot Bitcoin ETFs, including those of Grayscale, Bitwise, Hashdex, iShares, Valkyrie, ARK 21Shares, Invesco Galaxy, Vaneck, WisdomTree Fidelity, and Franklin Bitcoin ETFs.[16]
In a statement, SEC Chair Gary Gensler mentioned:
Today, the Commission approved the listing and trading of a number of spot bitcoin exchange-traded product (ETP) shares. First, sponsors of bitcoin ETPs will be required to provide full, fair, and truthful disclosure about the products. Second, these products will be listed and traded on registered national securities exchanges. Further, existing rules and standards of conduct will apply to the purchase and sale of the approved ETPs. Third, Commission staff is separately completing the review of registration statements for 10 spot bitcoin ETPs simultaneously, which will help create a level playing field for issuers and promote fairness and competition, benefiting investors and the broader market.[17]
While we recognize the changing landscape, our decision to approve these products is confined to bitcoin ETPs and does not extend to other crypto asset securities or their legal status.[17]
The Chairman of the House Financial Services Committee, Patrick McHenry, and the Chairman of the Digital Assets, Financial Technology and Inclusion Subcommittee, French Hill, released a statement regarding the SEC's spot Bitcoin ETF approvals:
Today’s spot Bitcoin ETF approvals mark a historic milestone for the future of the digital asset ecosystem in the United States. While legislation to provide clarity and certainty for digital assets remains necessary, the steps taken today are a significant improvement over the SEC’s track record of regulation by enforcement. We are pleased that investors and our markets will finally be afforded greater access to this generational technology. We remain committed to enhancing consumer protection in the digital asset markets through comprehensive market structure and payment stablecoin legislation.[22]
SEC Commissioner Hester Pierce commented:
Today marks the end of an unnecessary, but consequential, saga. More than ten years after the filing of the first spot bitcoin exchange-traded product (“ETP”) application, the Commission finally has approved multiple applications by exchanges to allow the listing and trading of spot bitcoin ETPs. [...] ETPs are an important innovation. Through them, investors can gain exposure to securities and non-securities, such as precious metals, in a convenient vehicle. Even if that exposure is available directly elsewhere, the ETP structure offers its own advantages. ETP shares trade continually on national stock exchanges at market prices, much as regular stocks do. By creating and redeeming shares of the fund, institutional traders, called authorized participants, help to maintain the price of these shares in line with the price of the assets in the investment pool. ETPs are accessible to investors and operate within the framework of the federal securities laws.[23]
SEC Commissioner Mark Uyeda advocated his approval but expressed several concerns about the particular aspects of the order:
Today marks the Commission’s long-anticipated approval of applications to list and trade shares of spot bitcoin exchange-traded products (“ETPs”). While I concur with the approval of the spot bitcoin ETP applications under the standards set forth in Section 19(b)(2) of the Securities Exchange Act of 1934 (“Exchange Act”), I have strong concerns with three aspects of the order (the “Approval Order”):
1) The Approval Order improperly attempts to validate the application of the “significant size” test to spot bitcoin ETPs that was struck down by judicial review.
2) The Approval Order invents a novel, previously unarticulated standard to form the basis for approval.
3) The Approval Order disguises the Commission’s motivation for accelerating the approval of the applications, which is to prevent a first-mover advantage among spot bitcoin ETPs.[33]
According to the official information from Final Commission Votes for Agency Proceedings, Democrats Caroline Crenshaw & Jaime Lizárrage were the only two SEC commissioners to vote against spot Bitcoin ETF approval. While Lizárrage did not release any statement regarding the order, Commissioner Caroline Crenshaw sharply dissented from the approval in her statement:
Today the Securities and Exchange Commission approved a series of proposed rule changes that will allow for the listing and trading of bitcoin-based products on national securities exchanges. These Commission actions are unsound and ahistorical. And worse, they put us on a wayward path that could further sacrifice investor protection. I cannot agree that these actions serve either our statutory or foundational investor protection mandates and, as such, I dissent from today’s Order.[32]
I am concerned about what comes next – when new, potentially more speculative products bearing greater risks of investor harm seek to list, we will hear a chorus of well-heeled voices saying that the SEC’s hands are tied by the new standards that we have set. I fear that today we are setting ourselves up for tomorrow’s failure, and it will be the investors that we have a duty to protect who will ultimately pay the price.[32]
Bitwise, one of the first Bitcoin ETFs issuers, announced on X.com and their official website that 10% of BITB profits would be donated to Bitcoin open-source development, such as Brink, OpenSats, and the Human Rights Foundation’s Bitcoin Development Fund:
Bitwise will donate 10% of the profits of the Bitwise Bitcoin ETF (ticker: BITB) to bitcoin open-source development. Recipient orgs:
- @BitcoinBrink
- @OpenSats
- @HRF
Bitcoin is important to the future. We're excited for $BITB to support its foundation.[26][27][28]
Bitwise first filed for a spot bitcoin ETF 5 years ago. Today is a milestone we do not take lightly. Our vision and hope for $BITB is to be the ETF this space deserves.[26][27][28]
According to the announcement, Bitwise's donations "have no strings attached and will be made annually for at least the next 10 years."[27][28]
Approval Controversy
On January 10, 2024, the SEC initially published and then removed an order approving the U.S.'s first spot bitcoin ETFs. This acted as a confirmation of approval for all 11 spot Bitcoin ETF applications. The applications were from Blackrock, Valkyrie, Franklin, Bitwise, Fidelity, Hashdex, Ark Invest, Grayscale, WisdomTree, Van Eck, and Invesco Galaxy. A 22-page PDF approving exchange filings went live on the SEC website shortly before 4:00 p.m. ET Wednesday, though the link later led to a 404 page.[25]
The document later officially reappeared on the regulator's website.[25]
SEC X.com Account Hack
Prior to the official release, on January 9, multiple news outlets published inaccurate information after the official X (formerly Twitter) account of the SEC posted a tweet claiming that the regulator had approved Bitcoin ETFs for the first time. Approximately 15 minutes later, SEC Chair Gary Gensler said in an X post:
The @SECGov twitter account was compromised, and an unauthorized tweet was posted. The SEC has not approved the listing and trading of spot bitcoin exchange-traded products.[19]
Various news outlets, including Cointelegraph, Blockworks, and Reuters, had initially reported on the story from the SEC before Gensler’s statement.[18][19] The SEC also removed the initial tweet, commenting on the hack:
The @SECGov X account was compromised, and an unauthorized post was posted. The SEC has not approved the listing and trading of spot bitcoin exchange-traded products.[20]
The safety team at X (formerly Twitter) later revealed that the SEC did not have two-factor authentication (2FA) enabled on its main X account, allowing a hacker to gain access to it. The X report also stated:
We can confirm that the account @SECGov was compromised and we have completed a preliminary investigation. Based on our investigation, the compromise was not due to any breach of X’s systems, but rather due to an unidentified individual obtaining control over a phone number associated with the @SECGov account through a third party. We can confirm that the account @SECGov was compromised and we have completed a preliminary investigation. [21]
Overview
In an exchange-traded fund (ETF) that tracks stocks, the stocks are purchased by the fund. These are the fund's holdings, and the company that bought them offers fractionalized shares on exchanges. [2]
A Bitcoin ETF buys and holds Bitcoin, then offers fractional shares on an exchange for trading like a traditional ETF. [2]
As Bitcoin's price rose above several thousand dollars, retail, and average investors lost the opportunity to invest in Bitcoin directly. Brokerages, responding to demand for investor access to Bitcoin, started to design Bitcoin exchange-traded funds. [2]
Applications with the Securities and Exchange Commission (SEC) for approval started in 2013 with the Winklevoss brothers. [4]
Bitcoin Futures ETF
A Bitcoin futures ETF is an Exchange-Traded Fund that doesn't necessarily rely on actual BTC held in wallets. Instead, it employs Bitcoin futures contracts as its foundational assets. The SEC has shown a preference for futures ETFs linked to the Chicago Mercantile Exchange’s (CME) Bitcoin futures, which are regulated financial instruments. [7]
In this setup, a Bitcoin futures ETF utilizes the CME’s Bitcoin Reference Rate (BRR) for pricing, in contrast to the spot price. The primary distinction between a Bitcoin physical ETF and a Bitcoin futures ETF lies in the source from which their respective prices are determined. [7]
Bitcoin Futures Contract
A futures contract is a standardized contract where two parties agree to exchange a specific quantity of assets on a specific day for a particular price. A Bitcoin futures contract is an agreement between two parties to exchange a contract unit of Bitcoin. [2]
Many Bitcoin ETFs hold futures contracts, which are derivative contracts to buy or sell an asset — in this case, Bitcoin — at some future date and at some agreed price. One example is ProShares Bitcoin Strategy ETF (BITO), which was the first of its kind when it launched in October 2021. [3]
Bitcoin ETF History
USA
In 2013, the US SEC rejected the initial proposal of Bitcoin ETF by the Winklevoss twins, Cameron & Tyler Winklevoss. SEC later received proposals from multiple companies including a second Winklevoss Twin ETF in 2018, one from Bitwise, five from Direxion, two from GraniteShares, etc. The main arguments given by the SEC for the repeat rejections had been that the Bitcoin market was too volatile, lacked sufficient surveillance, and was too easily manipulated.[5]
In June 2023, BlackRock, an asset management firm, added its application to the bundle of Bitcoin ETF filings being reviewed by the SEC, creating renewed interest among investors in and out of the crypto space. The company later added a “surveillance-sharing agreement” with cryptocurrency exchange Coinbase following reports the SEC could be more open to accepting an ETF application under such conditions. [6]
Under SEC guidelines, the federal regulator has the authority to delay ETF applications for up to 240 days — by opening them to public comment or otherwise — from the first filing in the Federal Register. This sets deadlines for Bitcoin ETF approval to early 2024. [6]
On August 31, 2023, the SEC announced delays until October on deciding on all of the spot bitcoin exchange-traded fund (ETF) applications filed by applicants including BlackRock, WisdomTree, Invesco Galaxy, Wise Origin, VanEck, Bitwise, and Valkyrie Digital Assets. [8]
On August 31, 2023, Ark Invest, an investment firm, in its report highlighted positive market trends in Grayscale Bitcoin Trust (GBTC), indicating increasing confidence in spot Bitcoin ETF approval. Ark Invest’s report attributed the rising price of GBTC to positive market sentiment following Grayscale’s recent court victory. [9][10]
On August 29, the US Court of Appeals ruled that the SEC must review and reconsider the terms of its rejection of Grayscale Bitcoin Trust’s (GBTC’s) application to convert into a spot Bitcoin ETF. On that same day, Ark Invest noticed a favorable change in market activity.
“That day, GBTC’s discount- to-NAV increased from -24% to -18%, suggesting market optimism that the odds of a Bitcoin spot ETF in the short term have increased.”[10]
On September 5, 2023, Grayscale Investments urged the U.S. SEC to quickly approve its proposed exchange-traded fund (ETF) that would track bitcoin, following the crypto asset manager's court victory against the agency. [11]
"We hope you will agree that the best use of resources now is for the (SEC) to issue an order approving" the product, Grayscale's law firm DavisPolk wrote in a letter which was filed with the SEC on September 5.[11]
On October 13, 2023, after the initial rejection from the SEC, followed by the court ruling that the SEC was wrong to reject Grayscale, it was revealed that the SEC would not appeal the court's decision regarding Grayscale's spot Bitcoin ETF case. Following this news, the price of Bitcoin rose by 1 percent, and experts suggested that the SEC may be more inclined to approve spot Bitcoin ETFs. [12][13]
On January 10, 2024, the SEC approved the first Bitcoin ETFs in the United States. The U.S. Securities and Exchange Commission has approved 11 spot bitcoin exchange-traded funds, including those of Grayscale, Bitwise, Hashdex, iShares, Valkyrie, ARK 21Shares, Invesco Galaxy, Vaneck, WisdomTree Fidelity, and Franklin Bitcoin ETFs.[16][17]
Canada
In 2022, Canada’s financial regulator, the Ontario Securities Commission (OSC) approved the world’s first two bitcoin ETFs in quick succession. The Purpose Bitcoin ETF (BTCC) and the Evolve Bitcoin ETF (EBIT) are both physically settled ETFs.[5]
China
In December 2023, the Hong Kong Securities and Futures Commission (SFC), in collaboration with the city's Monetary Authority, released a joint circular delineating the criteria for the approval of a spot cryptocurrency exchange-traded fund (ETF). [14]
The circular underscores that spot crypto investment products must meet the same requirements as set by Hong Kong regulators for mutual funds and other structured investment products. Product issuers are expected to have a good track record of regulatory compliance, employ at least one competent staff member with relevant experience in virtual assets, and follow a list of permitted tokens available for spot trading on approved crypto exchanges in Hong Kong. Additionally, products are not allowed to have leveraged exposure, and issuers must work with approved exchanges for trading and asset acquisition. [14][15]
EU
In August 2021, French asset manager Melanion Capital won regulatory approval to launch an ETF tracking the price of Bitcoin for investors across the European Union (EU). A fund would track a basket of up to 30 stocks with a 90% correlation to Bitcoin's price. The Melanion BTC Equities Universe Ucits ETF was determined by regulators to meet EU standards, known as "undertakings for the collective investment in transferable securities" (UCITS), meaning it would be available to investors across the block. The fund would track stocks such as mining firms Argo Blockchain, Riot Blockchain, and Hive Blockchain as well as crypto investment firm Arcane Crypto.[29][30][31]
Melanion mentioned in a comment to CoinDesk:
While there have been many bitcoin-backed exchange-traded products listed in Europe, most European regulators apply a look-through approach, rendering them ineligible for most institutional investors due to their investment restrictions.[29]
The weighting of the fund was determined by German fintech Bita, which provides software for the calculation of financial indexes and quantitative investment strategies. The fund was listed on Euronext in Paris on October 22, 2021, charging a fee of 0.75%.[29][31]
