As expected, the rollout of spot Bitcoin exchange-traded funds (ETFs) in the US market has had a huge positive impact on the digital asset industry. This led to a flood of retail investors, setting records for investments in Bitcoin (BTC) and ETFs.
More importantly, being a product approved by the U.S. Securities and Exchange Commission (SEC) has changed Bitcoin's risk-reward ratio and brought the cryptocurrency back into the conversation among institutional investors. This has sparked renewed interest in some companies and emboldened others to restart suspended projects. The doors to the mainstream financial system have been opened again.
Note: The views expressed in this column are those of the author and do not necessarily reflect the views of CoinDesk, Inc. or its owners and affiliates.
Institutional investors think about risk in many aspects, including risks related to products, counterparties, and the underlying assets themselves. In traditional finance (TradFi), all of this is well understood.
Products have become commoditized, and many companies offer similar products. Counterparties such as market makers, custodians, and clearing houses that help absorb trading risks are well known. The various asset classes are also well understood and there are traditional ways to assess the risk of specific assets.
Over the years, a lot of risk and volatility has been taken out of the system. It is events like black swans that cause problems. The risks are low, but so are the rewards. Finding opportunities to beat the market is difficult.
What we have seen in the crypto industry is a series of events that have had negative effects, but are foreseeable given the lack of regulation and control in the industry. The risk of such an event occurring is too high for institutions to aim for large rewards.
A Bitcoin ETF reduces risk across all three dimensions.
ETFs have been available in the U.S. market for over 30 years. Everyone understands the product. Purchasing assets with securitized products is easier than purchasing spot Bitcoin outright. Many investors find it better to pay a management fee and have someone else handle the custody, settlement risk, and other operational aspects of their Bitcoin transactions. They no longer have to bear those risks directly.
The presence of major brands such as BlackRock and Fidelity reduces counterparty risk. There are many native custodians, liquidity providers, and market makers for cryptocurrencies, but they are relatively unknown in the TradFi world.
ETFs introduce retail investors to some of the trusted counterparties within the cryptocurrency universe. Knowing that a leading TradFi company has done its due diligence on its financials, processes, procedures, and security practices will ease your fears. Not only that, but we'll also show you who to ask for help if you want to hold Bitcoin or other digital assets and do spot trading yourself in the future.
The SEC has reduced the risk at the fundamental level of the asset by approving Bitcoin as a foundational product in the ETF space. In other words, there are concerns that cryptocurrencies will be completely banned in the United States. Of course, regulatory clarity could further reduce asset risk, but market demand for ETFs is forcing the SEC to address some important questions. It also requires ETF issuers to implement many of the risk-mitigating plain vanilla elements that institutional investors expect.
All these factors create confidence in the market. This is essential for digital assets to become mainstream again. There is a lot of ideology, jargon, and jargon surrounding cryptocurrencies. But essentially it's just another asset class that uses different technology.
Before FTX, many people put those risks aside and focused on increasing prices and gaining access to the market. After FTX, people say I want to participate too, but they need to know that they are protected on a fundamental level. ETFs do that while also exposing institutional investors to crypto dependencies. They put the industry back on a positive track.
There are two things currently keeping institutions away from digital assets. One is philosophical. They don't believe in or like Bitcoin or cryptocurrencies. Then there is the second camp, where the risk/reward ratio is not yet attractive enough. For these people, the success of ETFs has made it increasingly difficult to sit on the sidelines, especially if their customers are seeking crypto products.
As with TradFi, there will come a day when the primary risk of Bitcoin and other digital assets will be the fundamental level of asset performance. It won't magically come true by one ruling or his one product. It will be a long process, but in the end all questions about products, suppliers and regulations will disappear.
The only question is whether you want to invest in digital assets.
