Bitcoin and Ethereum spot ETFs will change the market in 2024

By Zain Jaffer

After a false start with a fake tweet, the US Securities and Exchange Commission (SEC) finally approved eleven spot Bitcoin Exchange Traded Funds (ETFs) on 10 January 2024 for sale to the public. The approved companies were Ark Invest with 21 Shares; Bitwise, BlackRock, Fidelity, Franklin Templeton, Greyscale, Hashdex, Invesco, WisdomTree, Valkyrie, and VanEck.

Also included is Greyscale, which is attempting to convert its Greyscale Bitcoin Trust — a different legal structure —  into an ETF, and had successfully won a case in the DC Court of Appeals against the SEC for denying its application. GBTC has $28bn assets under management.

The decade-long effort to get regulatory approval came on the anniversary of the late computer scientist Hal Finney’s tweet that he was “running Bitcoin.” Various issues have cropped up in the past, exacerbated by a plethora of high-profile frauds and scams in the sector. The latest hurdle that managed to get settled was cash creation versus in-kind creation, to which the applicants agreed to the cash creation scheme.

Demand was already strong before release, as the Chicago Mercantile Exchange (CME), where most commodities are supposed to be traded in the US, had overtaken Binance (the world’s largest crypto trading platform) as the venue to trade Bitcoin futures. This is significant because most traditional finance institutions do not typically use crypto exchanges, and instead trade only on the CME for commodities, and the NYSE, NASDAQ, and other traditional markets for stocks.

MOST PEOPLE AND COMPANIES ARE SET TO TRADE STOCKS

Most individuals, companies, funds, and other institutions are already set up to trade on traditional stock brokerage accounts. Having an SEC-approved ETF allows the public, companies, and institutions to use their existing accounts, instead of opening crypto exchange accounts, which can be cryptic (pardon the pun) for some.

More importantly, the SEC approval gives a Good Housekeeping legal seal of approval, because a cloud of legal doubt has lingered over the sector for a long time. The implosions at FTX/Alameda, Celsius, and others only served to highlight this legal doubt. This is why the ETF is a big matter for the crypto sector.

A massive reeducation of the public still needs to happen, as a lot of inflammatory articles have been published about Bitcoin in the past. The public is still largely in the dark about Bitcoin’s ability to hedge against inflation and currency debasement. Many are also not privy to its capacity to act as a good store of value, nor are they conscious of the disadvantages of traditional finance and the inflation stemming from the reckless overprinting of fiat currencies vis a vis growing global debt.

WHO HOLDS THE BITCOIN

Unlike futures, which are simply derivatives of spot prices, a spot ETF would require the issuing companies to hold Bitcoin in the fund. This is expected to create actual institutional demand for Bitcoin, although it may only seem so after a bit, especially since the Greyscale Trust has already bought its Bitcoin before the change and is simply changing its legal status. Until actual outside money comes in, the Bitcoin being bought and sold might initially just be internal reallocations of current holders and small ETF buyers at the start. How fast it takes off with major institutional demand is still anyone’s guess.

Unlike typical Bitcoin and crypto holders who take custody of their assets in their digital wallets, the buyers of spot ETFs are merely holding ownership claims to the assets but do not hold them in custody. The Bitcoin will be held in custody by companies such as Coinbase, who have the technical know-how to securely store these, on behalf of the issuing ETF companies and the holders.

This is good because there are a fair amount of people out there who are uncomfortable with hex wallet addresses, have forgotten their seed phrases, and passwords, or have lost their storage devices/wallets altogether. In effect, all those Bitcoins have been lost. With an ETF, all the regulatory, custody, and settlement issues will just be handled like a typical stock account that many people have.

DIGITAL ASSET ACCOUNTING RULE CHANGE

An important new development is the approval of the US Financial Accounting Standards Board (FASB) to allow the use of mark-to-market or fair value accounting for digital assets (such as Bitcoin and Ethereum) in balance sheets effective 15 December 2024. Typically, if a digital asset's current market value reflects a loss from the acquisition value, that loss has to be reflected in the current balance sheet. But before this rule change, if the digital asset market value is currently higher than the acquisition value, that asset value rise could not be reflected. This was a major disincentive for corporate ownership of digital assets until this new FASB accounting rule was passed. The rule becomes effective at the end of 2024.

ETHEREUM SPOT ETF

Enter Ethereum, another crypto that the US Commodity Futures Trading Commission (CFTC) has said in previous statements is a commodity. The first to file an Ethereum spot ETF in the US is Ark Invest and 21Shares. Some experts say that an Ethereum spot ETF could eventually be bigger than Bitcoin for various reasons, including a lower market cap which could have more room to run up price-wise, and the availability of yield on Ethereum because of staking.

It remains to be seen however if Gary Gensler and the other commissioners may draw the line on further digital asset ETF approvals after Bitcoin.

SMART CONTRACTS ON BLOCKCHAINS

Ethereum pioneered the use of “smart contracts” that allow it to have special features such as “tradeability” in decentralized exchanges (DEX) and other capabilities. Smart contracts are now a part of many new chains that came after it, such as Cardano and Solana. However, Bitcoin does not traditionally have this smart contract feature but is starting to have it through the efforts of other “layer two” blockchains that run alongside it, such as Stacks (symbol STX). Stacks plans to scale Bitcoin and plan to give it capabilities like smart contracts.

THE BIGGEST IMPACT OF THESE DEVELOPMENTS IN 2024

SEC approval for Bitcoin and possibly eventually Ethereum ETFs will be a major development in the US crypto sector, long dogged by legal uncertainties. It will pave the way for US individuals, companies, institutions, hedge funds, family offices, pension funds, sovereign wealth funds, and those more comfortable investing through their stock accounts to participate in this digital asset revolution.

One needs to remember though, that unlike traditional investment vehicles like stocks and bonds which began in Wall Street and other high financial circles that eventually trickled down to the masses, the opposite is true of digital assets such as Bitcoin and Ethereum. The traditional finance sector has shunned digital assets, with people like Warren Buffett, Jamie Dimon, and others calling it poison. Digital assets like Bitcoin have come from a portion of the masses, from the people, and are rising towards the establishment.

The approval of these spot ETFs can be the positive development that leads to the much-dreamed-about explosive adoption of crypto in the US and elsewhere.

Author Bio

Zain Jaffer is an accomplished entrepreneur and investor, actively involved in a range of investments including real estate, technology start-ups, private equity, and digital assets through his family office, Zain Ventures. He also supports underrepresented causes and underserved communities through the Zain Jaffer Foundation.