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Beyond bitcoin: How a spot crypto ETF could reshape the global financial landscape

'The market has not realized how big a deal this is,' says Matt Hougan of Bitwise Asset Management.
A bitcoin ETF is on the way. It could reshape the global financial landscape and make crypto mainstream.

The Securities and Exchange Commission is on the precipice of a landmark decision: approving the first-ever spot bitcoin. This seemingly innocuous bureaucratic step could disrupt the crypto market, traditional finance and the global financial landscape.

There are 13 applications for spot bitcoin exchange-traded funds pending approval from the SEC. These applications have been submitted by notable firms such as BlackRock BLK , ARK Invest, Grayscale Investments, WisdomTree, VanEck, Valkyrie, Invesco and Fidelity.

A gold rush in the making?

Proponents of bitcoin ETFs paint a picture of a gold rush 2.0. They draw parallels to the 2004 launch of the first gold ETF and envision a scenario where institutional investors, previously wary of the unregulated crypto world, flood into bitcoin. Just as the spot price of gold surged following the spot ETF launch, bitcoin proponents see the same happening following the launch of a spot bitcoin ETF.

Matt Hougan, chief investment officer at Bitwise Asset Management, champions this view, “The market has not realized how big a deal this is,” he said, comparing bitcoin’s current trajectory to gold’s pre-ETF stagnation.

One of the arguments for a possible price surge is spot ETFs issuing a quasi-stamp of approval for the bitcoin ecosystem. A possible increase in demand for bitcoin, paired with the asset’s fixed supply, could potentially trigger a 2021-style bull run, the argument goes.

Pandora’s box: Risks and regulatory hurdles

However, bitcoin ETF nirvana is far from guaranteed and critics warn of potential pitfalls, such as market manipulation. The opaque nature of crypto exchanges and the lack of robust regulatory frameworks enable bad actors to manipulate prices, potentially exposing retail investors to significant losses.

Hardcore bitcoin proponents also worry that ETFs could dilute bitcoin from a revolutionary technology into a mere asset class, focused only on short-term trading and price swings.

A significant increase in demand could also increase mining activity, making bitcoin a renewed target of environmental activists due to its high nominal energy consumption. Furthermore, the SEC has historically expressed concerns about fraud, market manipulation and investor protection in the crypto space.

But the entry of large institutions could bring much-needed stability and maturity to the often volatile crypto market. That could mark the beginning of a new era where traditional finance and cryptocurrency converge. Institutional investors, long hesitant to dip their toes into the crypto pool, could gain exposure through regulated ETFs, blurring the lines between the two worlds.

Four key areas investors should watch as a bitcoin ETF approaches.

The future for bitcoin and crypto in general

The SEC’s decision on bitcoin ETFs is not merely a technical regulatory matter; it’s a pivotal moment with far-reaching implications. An approval could pave the way for the development of new financial instruments, investment strategies, and even crypto-backed stablecoins, further integrating crypto into the global financial system.

It could lead to a more stable, institutionalized crypto market, unlocking its potential to revolutionize finance. However, further integration of bitcoin and other digital assets with traditional finance could threaten contagion effects between the previously siloed ecosystems.

Ultimately, the decision could mean a fork in the road for bitcoin and the wider financial system: it may be a golden opportunity for reform or open Pandora’s box of financial peril.