Europe's Bitcoin ETF sets an example of regulatory progress in the cryptocurrency space. However, integrating digital assets into traditional financial systems continues to be an issue.
While the United States’ cryptocurrency Exchange-Traded Fund (ETF) developments have garnered global attention, Europe has taken the lead by launching the first Bitcoin ETF. Europe’s ETF is designed to offer institutional investors a clear, secure, and transparent way to access Bitcoin while also meeting their sustainability requirements.
A Bitcoin ETF is a financial product that tracks the price of Bitcoin, allowing investors to gain exposure to the cryptocurrency without actually owning it. It operates similarly to traditional ETFs, which are investment funds traded on stock exchanges. A Bitcoin ETF holds Bitcoin as its underlying asset and issues shares that can be bought and sold on exchanges like stocks. While the investors’ desire to participate in the cryptocurrency market has led to the emergence of Bitcoin ETFs, their primary concern isn’t necessarily decentralisation or establishing a trustless system. Instead, it seems like their interest lies in capitalising on the significant price fluctuations that cryptocurrency experiences.
A Bitcoin ETF is a financial product that tracks the price of Bitcoin, allowing investors to gain exposure to the cryptocurrency without actually owning it.
Europe’s Bitcoin ETF, launched after a considerable delay following its initial approval, sets a global example of regulatory progress in the cryptocurrency space. However, challenges still remain as regulators and financial institutions grapple with the complexities of integrating digital assets into traditional financial systems.
Investors in a Bitcoin ETF do not directly own Bitcoin itself but rather hold shares of the ETF, which represent ownership in the fund’s Bitcoin holdings. This allows investors to speculate on the price movement of Bitcoin without the complexities of owning and securing the cryptocurrency directly. Bitcoin ETFs have been proposed as a way to make investing in Bitcoin more accessible to traditional investors. However, their approval and launch have faced regulatory and market challenges in various jurisdictions, coupled with some recent success. At the moment, the US Securities and Exchange Commission (SEC) has rejected every application for Bitcoin ETFs, citing a lack of evidence that the applicants can safeguard investors against market manipulation. Additionally, while aiming to match Bitcoin’s price, discrepancies exist among different ETFs. Unlike owning Bitcoin directly, ETF ownership yields no control over holdings, contrasting with the foundational properties of cryptocurrencies.
On the other hand, Bitcoin ETFs offer distinct advantages. They facilitate convenient access for retail investors who can easily buy through their existing brokerage accounts, eliminating the need for setting up crypto accounts and wallets. Moreover, managing taxes becomes simpler as ETF transactions can seamlessly integrate with tax software. The established trust factor in trading on reputable platforms lends a sense of security amidst the evolving crypto landscape.
The US Securities and Exchange Commission (SEC) has rejected every application for Bitcoin ETFs, citing a lack of evidence that the applicants can safeguard investors against market manipulation.
The potential approval of a Bitcoin ETF by the SEC could streamline institutional investors’ ability to speculate on Bitcoin’s price. This action could effectively bring Bitcoin into the fold of Wall Street, where the Bitcoin ETF would be traded in conjunction with established assets such as stock, bonds, gold, and oil, all within the framework of familiar trading platforms. This expansion may signify a fundamental shift in how financial landscapes intersect, offering new opportunities and challenges that demand a careful examination of their implications.
The core issue lies here: individuals seek crypto returns through familiar financial avenues, desiring Bitcoin to seamlessly integrate into their portfolios. However, this inclination is misguided. Bitcoin differs substantially from typical financial products due to intricate technology, debatable intrinsic value, and rampant illegal use. Without delving into its nuances, one can’t grasp the associated risks; thus, owning it is perhaps unwise.
As observed through the collapse of FTX and the resulting market turmoil, centralised exchanges have proven to be inadequate for everyday investors seeking to engage with the promise of Bitcoin. ETFs linked to Bitcoin could be more problematic than centralised exchanges due to the fundamental inability to withdraw the underlying asset, which is the actual Bitcoin. This deficiency deprives holders of the key advantage of Bitcoin: the ability to have complete control over their assets without relying on trust.
There are more extensive concerns for the entire market to consider. The notion of “paper Bitcoin,” which involves claims to Bitcoin without genuine backing, presents an intriguing and thought-provoking aspect. Unlike exchanges that have issued such claims and faced consequences, ETFs may not encounter similar repercussions. Given that the underlying asset cannot be withdrawn, the creation of paper Bitcoin could persist without oversight. If Bitcoin ETFs become dominant in the investment landscape, there is a substantial risk of inundating the market with numerous fictitious Bitcoin units, potentially influencing Bitcoin price.
ETFs linked to Bitcoin could be more problematic than centralised exchanges due to the fundamental inability to withdraw the underlying asset, which is the actual Bitcoin.
Bitcoin ownership is intricately tied to control over the cryptographic keys linked to specific Bitcoin addresses. While it’s feasible to possess Bitcoin in a legal sense without direct key control, such as holding an exchange account or ETF share, this is not a prudent approach in the Bitcoin ecosystem. Given Bitcoin’s digital nature, exceptional portability, and global liquidity, it is particularly susceptible to embezzlement, theft, and mismanagement. True ownership of Bitcoin necessitates key control.
While some might initially welcome a potential temporary price surge upon a major Bitcoin ETF’s approval, such as one from BlackRock, the long-term impact on Bitcoin adoption is unclear, including its trajectory. Authentic adoption revolves around self-custody, as any other approach is essentially a pitfall.
In the crypto world, profits have become a key driver, altering the original ideals of anonymity, alternative financial transactions, and decentralisation that Bitcoin and its counterparts were meant to embody. This shift towards profit-seeking isn’t inherently negative; rather, it reflects the rapid evolution of crypto’s intrinsic potential. While some purists value decentralisation and self-custody, investors prioritise returns. Cryptocurrency’s recent trajectory encompasses both worlds.
The continuous expansion of the cryptocurrency ecosystem is evident through the various experiments built upon its foundation.
Governments have a role to play in safeguarding individuals from risks, necessitating regulatory measures. The imminent approval of ETFs as an investment avenue underscores the industry’s mainstreaming, enabling broader participation. Cryptocurrency’s resilience is evident; it’s here to stay. The continuous expansion of the cryptocurrency ecosystem is evident through the various experiments built upon its foundation. Ultimately, as the landscape evolves to balance profit motives with technological innovation, the success of cryptocurrency and the ETF hinges on an equilibrium between its transformative principles and its evolving utility.
India’s cryptocurrency market has witnessed considerable uncertainty and volatility due to conflicting signals from both the government and the Reserve Bank of India (RBI). In 2018, the RBI imposed a ban on crypto transactions, effectively segregating them from the traditional financial system. However, the Supreme Court’s decision to lift this ban in 2020 ushered in a period of growth and innovation within India’s crypto sector, giving rise to numerous startups. Starting from 1 April 2022, investors and traders became subject to a 30-percent tax on profits derived from crypto asset transfers. The government’s inconsistent and unclear regulatory stance has left the prospect of a Bitcoin ETF in India uncertain, with no direct investment options available on Indian stock exchanges. However, in this rapidly evolving landscape, the future always remains unpredictable.
Sauradeep Bag is an Associate Fellow at Observer Research Foundation
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
Sauradeep is an Associate Fellow at the Centre for Security, Strategy, and Technology at the Observer Research Foundation. His experience spans the startup ecosystem, impact ...
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