In partnership with Freedom24 – The very recent approval by the SEC, equivalent of our AMF, of 11 spot BTC ETFs after tough negotiations, constitutes a major regulatory change and a significant event in the history of cryptocurrencies. It is still necessary to understand the scope and potential impacts on the crypto market and its ecosystem but also to compare the acquisition of spot Bitcoin ETFs compared to the direct holding of the queen of cryptos, in terms of advantages and risk for the wearer.

Some semantic reminders

An ETF, otherwise called a tracker, is a financial product that tracks and closely replicates the performance of an index, itself representative of a basket of assets. A cryptocurrency is an encrypted electronic currency based on a blockchain. Bitcoin is the best known and most emblematic of cryptocurrencies. Spot refers to the characteristic of a “spot” market: the exchange of assets takes place at the time of the transaction. A Bicoin Spot ETF is a tracker-type fund in which the underlying asset, in this case Bictoin, is held.

A landscape now turned upside down…

On January 10, 2024, the SEC (Securities and Exchange Commission) approved 11 spot bitcoin ETFs, issued by big names in asset management like Blackrock and Fidelity. Before this date, the American stock market watchdog only authorized bitcoin futures ETFs, but not spot (spot) bitcoin ETFs. Immediate commercial success across the Atlantic, with two products at the top of the list of best launches, one month after their introduction, according to data distributed on the social network X by Eric Balchunas, from Bloomberg.

…Which will result in profound transformations

In a study by blockchain and digital asset specialist Galaxy, Charles Yu estimates $14 billion in new flows into a Bitcoin ETF in the first year after launch, increasing to $27 billion in the second year and $39 billion in the third year. Beyond the mechanical progression of liquidity, these regulatory changes constitute a real recognition of Bitcoin, which thus gains legitimacy. The opportunity is clear for the authorities to increase regulation on cryptocurrencies, which are now de facto switching to traditional finance. With the arrival of this generation of ETFs, the direction of the story is clear: more protection for investors in Bitcoin.

It is expected that by the end of 2024, between 437,000 and 1.32 million new bitcoins will be stored in US spot ETFs, which would result in a total inflow into Bitcoin of $50 billion to $100 billion for this year alone, all spot BTC ETFs combined. The major funds will also direct part of their profits from spot BTC ETFs to support and develop the Bitcoin ecosystem, thereby providing overall support for the development of the ecosystem. This estimated increase in demand may translate into an increase in the price of Bitcoin, all things being equal. As an analogy, consider the first gold spot exchange product and its impact on the price of gold. After the SPDR Gold Shares spot ETF was introduced in 2004, the price gradually increased, more than quadrupling in seven years. Given the nature of digital assets, the price of BTC could rise much faster.

This type of product could attract a range of new investors: individuals who will be able to invest more easily in the queen of cryptos, or institutional investors reassured by the trend towards more regulation on this asset. This is the whole question of democratization and better acceptance of Bitcoin.

The decisive step in choosing a broker

Before implementing purchase and sale strategies on this type of financial asset, like any other, it is essential to go through a reliable broker who combines quality of services and competitive prices. A regulated player with a representative office in France responsible for customer service in French, Freedom24 fully ticks all of these boxes. This European broker allows you to trade around a million instruments (shares, trackers, futures contracts, options, structured products, etc.) on the largest stock exchanges in America, Europe and Asia.

Investing in Bitcoin: direct holding or spot ETF?

This is not a question of issuing a verdict, but of comparing the advantages and risks linked to investing in Bitcoin ETFs compared to directly holding cryptocurrencies.

A) Direct holding, that is to say the acquisition of the cryptocurrency on the market, a bit like holding a live security in a portfolio.
Advantages: it is an investment in an asset which evolves according to supply and demand in the market, like a stock, but – fundamental difference! – you can also “do something” with it: make a payment, make a real estate investment, etc. Which the ETF naturally does not allow. Furthermore, direct ownership allows anyone who wishes to become fully involved in a technology that has its own DNA, far from traditional finance. The holder in a wallet therefore participates in this innovative ecosystem. Disadvantages: requires technological mastery, opening a specific wallet.

B) Indirect holding, via a tracker (ETF)
Advantages: Allows democratization of access, removal of the technological barrier, strengthening of legitimacy, removes the obstacle linked to opening a cryptocurrency exchange account. Furthermore, on the risk side, with an investment backed and held in its account lines by regulated groups, the Bitcoin ETF is a vector for reducing risk. And the investor is less subject to the complete volatility of the currency, by nature of the method of replication of the asset. Finally, no risk of losing the wallet key… Disadvantages: No direct holding of cryptocurrency, but share of a fund. We cannot therefore pay with it, nor participate in the security process, through mining operations. The risk is ultimately that of a loss of the original DNA of cryptos, which have distanced themselves from traditional finance. Another disadvantage is that of the associated fees, whether transaction fees, invoiced by the financial intermediary, or management fees, invoiced by the ETF issuer.

Mitigate risks

The volatility inherent in the cryptocurrency market is very significant, but the launch of this new generation of spot Bitcoin ETFs could ultimately mitigate these violent erratic movements through much greater operator participation. It is important to understand that when it comes to cryptocurrencies like other risky assets, risk is a function of volatility, and that by giving yourself a high expected return, you must accept the associated risk. Once this paradigm is established, the investor interested in the cryptocurrency market has concrete possibilities to reduce risks: diversify their assets well, and not overweight the crypto portion of their investments, and if necessary go through a regulated framework and centralized, through the acquisition of a BTC ETF.

In conclusion

So of course we can wonder if Bitcoin is not losing its original DNA with ETFs, which open the way towards more accessibility, simplicity and regulation. But the expected long-term impact, namely that of a substantial reduction in volatility, is in favor of investor protection. Enough to reinforce the attractiveness for a wider, less tech-savvy audience.

This content was produced in partnership with Freedom24. The News Bulletin 247 editorial staff did not participate in the production of this content.