SEC Approves Spot Bitcoin ETF, What Now?

The SEC recently permitted the creation of spot Bitcoin ETF, allowing everyday investors greater exposure to the digital currency through a familiar and regulated investment vehicle. A Bitcoin ETF trails the price of Bitcoin via direct ownership of the underlying asset, unlike futures-based ETFs, which rely on derivative contracts.

A $30 Trillion Injection in the Digital Arm of Bitcoin?

On January 10, the US Securities and Exchange Commission (SEC) approved the listing and trading of spot bitcoin exchange-traded products (ETPs), which includes exchange-traded funds (ETFs)—the SEC had previously permitted the trading of bitcoin futures in ETFs, with several countries already allowing both ETFs. Initially, the US regulator had been hesitant to enable spot ETFs due to the risk of market manipulation and custody of the asset. The key difference is that bitcoin ETFs can now invest directly into the underlying asset rather than price-based derivative contracts, as was previously the case.

Some market participants questioned the practical impact of the new ETF since bitcoin is a digital asset. Trading ETFs would provide retail investors with the benefit of gaining exposure to the underlying asset without the requirement for physical delivery. Media coverage highlighted that the move enables the $30 trillion wealth management industry to access bitcoin trading on an equal footing, with analysts forecasting cryptocurrency inflows of between $50-100 billion through such channels over the course of the year.

The Initial Reaction and Signs for the Future

Immediately following approval by the SEC, eleven ETFs were created, including those managed by Blackrock and ARK Invest. The following day, combined trading totalled $4.6 billion, with bitcoin reaching its highest level since late 2021, dragging other cryptocurrencies higher. While a "sell-off" followed by short-term speculators, the cryptocurrency space as a whole is likely to benefit from the legitimacy and mainstream acceptance signalled by the SEC's approval.

However, if the pattern observed following previous ETF approvals holds true, there may be a "buy the rumour, sell the news" effect that leads to a substantial plunge. For now, the cryptocurrency sector's 'fear and greed' index is trading back to "neutral", ending its prolonged period in "greed" that had persisted since October. Speculation over potential Fed rate cuts had weakened the US dollar alongside expectations ahead of the SEC's approval of the spot ETFs.

Analysts do suggest increased regulation will further demand for cryptocurrencies anyway, as trading through regulated brokers provides greater protection for retail investors. However, the collapse of FTX and extensive media coverage of fraud in the crypto space could leave some traders feeling wary and nervous. Nonetheless, major brokers are not finished with crypto, with the CEO of BlackRock, Larry Fink, stating that launching its spot bitcoin ETF is merely the "first step", and an Ethereum ETF remains a future prospect. With the world's largest asset managers still bullish on crypto, there may be additional support for the volatility surrounding the introduction of new investment vehicles.

Is This Time Really Different?

The long-term bitcoin price has accelerated past the upper ascending channel barrier, suggesting a positive 2024 and beyond as bullish momentum builds up. However, there is potential for a change in the medium and short-term trends following a rising pennant completion and its subsequent extension to $48980.

If prices reenter the basis trend and bulls lose $38990, the breakdown of 31K could drive bitcoin towards $24920. Conversely, reclaiming $48980 could be seen as an opportunity to reach new record highs past $68990 should bulls take over $59610 and maintain support at $53780. This could see prices extend towards $80K and eventually higher.

Source: SpreadEx / BITCOIN (USD)

Key Takeaways

The SEC recently approved the first US bitcoin spot ETF, allowing investors to invest in bitcoin through regulated funds. This gives retail investors exposure to bitcoin without holding the actual asset. The approval caused bitcoin's price to spike to its highest since late 2021 as other cryptos rose but could ultimately plunge if post-ETF history repeats itself. While regulation may boost crypto demand through ETFs that provide more protection, the FTX collapse has left some traders wary. However, large asset managers remain bullish, and new investment vehicles could give more support.