The crypto world watched as the first bitcoin Exchange Trade Fund (ETF) was first traded on October 19, 2021, in the New York Stock Exchange.
Within 30 minutes, the pro shares bitcoin futures ETF witnessed over $250 million in trading volume, and when the market closed it was $10 million short of hitting $1 billion in daily trading volume.
What are ETFs?
Exchange Trade Funds, commonly known among crypto traders as ETFs, are like stocks but do not represent a share in any company, instead they track the price of an asset.
Take for instance, a gold ETF would track the price of gold. The benefit of gold ETF is that you can trade gold without holding it physically. If the ETF is physically backed then the company that created the ETF would physically hold the gold on your behalf and then redeem its ETF shares based on demand.
So, assuming an ETF tracks the price of one ounce of gold, meaning for every share you buy, the company would have to buy an ounce of physical gold behind the scene, and for every ETF you sell, the company would have to sell an ounce of physical gold.
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As ETFs are a kind of financial security, they are regulated by the Security and Exchange Commission (SEC). Any company that wishes to get an ETF must get approval from the SEC before listing it on a stock exchange.
The Future ETFs that saw massive trades on its first day however had no direct effect on the price of bitcoin, but experts say if the same amount of capital was injected into a physical bitcoin ETF, on its first day of trading, the physical purchase of bitcoin would create huge upside market volatility for bitcoin.
You may be asking what future ETF or physical ETF means and the differences. Well, future bitcoin ETFs are basically an agreement to buy bitcoin later at a predetermined price. While a physically backed or spot bitcoin ETF tracks the actual price of bitcoin, not the price of a future exchange.
Based on current market conditions, bitcoin price surged back to nearly $61,800 from the $30,000 low point in July. The average market depth for bitcoin is between $20 – $40 million on any given day and it is predicted to double after the physical bitcoin ETF is listed on the exchange market.
Looking at how high bitcoin could go once a physical backed bitcoin ETF begins trading on a US stock market, US bitcoin traders are saying since an already physically backed bitcoin ETF exists in Canada – (Purpose Bitcoin CAD ETF), which was listed on the Toronto Stock Exchange in February of 2021, the “Purpose bitcoin” ETF has accumulated over $1.4 billion in bitcoin with a Canadian GDP of $1.643 trillion.
The US GDP however is over $20 trillion and analysts claim that if the US saw the same proportion of investment into a physically backed bitcoin ETF, it is estimated to see a bare minimum of $20 billion of investment in its first year.
Gary Gensler, chairman of the US Securities and Exchange Commission, speaking on CNBC, the reason why the SEC only approved a future-backed bitcoin ETFs was because the bitcoin futures on the Chicago Mercantile Exchange (CME) are regulated by the US Commodity Futures Trading Commission (CFTC) for the past four years. In simple terms, the reason why the SEC has not yet approved a physical backed bitcoin ETF is because of a lack of regulation, specifically around cryptocurrency custody.
“My personal theory is that the SEC is waiting for banks to finish building their crypto-custody services before approving a spot bitcoin ETF because there is no third-party crypto custodian more trustworthy than a bank,” said a US crypto analyst.
It is also predicted that once the SEC is happy with the data collected in the trading of futures ETFs along with increased regulation around crypto currency custody, it could be enough to approve a physical bitcoin ETF.
There have been 12 bitcoin ETF company proposals sitting at the SEC office for months waiting to be approved but the three at the forefront of approval are kryptoin bitcoin ETF, GlobalX Bitcoin Trust and Wisdomtree bitcoin Trust. Another company, which could see an approval, is Grayscale who made an announcement recently to convert its grayscale bitcoin into an ETF.
