Spot Bitcoin ETFs Will Move the Needle for Institutional Adoption of Digital Assets in the U.S.
By Adam Sporn, BitGo’s Head of Prime Brokerage and US Institutional Sales
Exchange traded funds (ETFs) in the United States have already witnessed tremendous growth, and now there’s an increasing number of solid applications to offer spot Bitcoin ETFs by some of the largest traditional financial institutions. By taking those two factors into account, along with Grayscale’s recent court battle win and Franklin Templeton’s spot Bitcoin ETF application, it seems that it’s a matter of when spot Bitcoin ETFs will be available to investors rather than if this will happen. When they’re available, they will help to streamline and facilitate mainstream institutional adoption of digital assets in the United States.
ETF Growth in the United States and World
ETFs can be a logical choice for investors: cost efficient and easily accessible. As a quick overview, total U.S. ETF net assets under management (AUM) have exploded from $102B in 2002 to $6.44T in 2022. Projected growth hasn’t stagnated, either. According to BlackRock — which shows a global total of $10T USD in ETFs in 2022 — this financial product could reach $14T in value, worldwide, by the end of 2024.
Spot Bitcoin ETFs are a natural progression in this financial product.
Spot Bitcoin ETFs
Although debate still exists about whether a spot Bitcoin ETF in the United States would create a pathway to mainstream crypto adoption, many people in the digital asset world are increasingly optimistic — both about the potential for approval and its impact.
We believe this approval will help to bring fresh capital into the market through demand for the product. Spot Bitcoin ETFs allow people to directly invest in Bitcoin in simplified ways. Investments are based on current market prices with the owners holding the crypto like they would a stock within the fund, which would make it feel familiar to people who are used to investing but new to crypto. These opportunities already exist in Canada and are launching in Europe; currently, though, eyes are on the U.S. Securities and Exchange Commission (SEC) and the spot Bitcoin ETF application from BlackRock — which was quickly followed up by applications from additional traditional finance mainstays; the following have filed for a Nasdaq spot Bitcoin ETF listing: Fidelity, VanEck, Invesco, WisdomTree, Valkyrie, and Bitwise.
To date, the SEC has not approved any spot Bitcoin ETF applications, citing market manipulation of Bitcoin prices as the primary reason for most rejections. BlackRock’s (BLK) iShares Bitcoin Trust application, though, contains an element that may cause the SEC to agree to the fund’s creation: a proposed surveillance-sharing agreement with Nasdaq and a large U.S. digital asset exchange that will serve as a barrier against market manipulation.
This surveillance-sharing agreement would provide transparency in market trading and clearing activities as well as customer identification. Plus, if this approach meets the SEC’s approval, it would serve as a guidebook for other companies to follow.
Once these spot ETFs are available, providing ease of investing in Bitcoin, it will naturally lead to more institutional flows of funds — especially as the number of distribution sources increases. Because Bitcoin supply is limited to 21MM, this capped availability could provide a positive price action as increasing numbers of institutional investors have more seamless access to the coins.
Because the likelihood of SEC approval seems high, several major asset managers have recently applied to offer Ethereum ETFs: Van Eck, Volatility Shares, Bitwise, Grayscale, Roundhill, and Proshares.
Hedge Funds Increasing Exposure to Digital Assets
On a related topic, “Rebuilding confidence in crypto: 5th Annual Global Crypto Hedge Fund Report (2023)” notes how traditional hedge funds have continued to look at increasing their digital asset exposure despite the volatile 2022 environment.
More than half of the traditional hedge funds currently investing in crypto-assets intend to maintain the same levels of capital deployed this year while nearly half (46 percent) intend to deploy more capital into this asset class by the end of 2023. Notably, none of the respondents said they planned to reduce their exposure.
Crypto curiosity has edged up among those funds not yet investing in crypto-assets. More than one third (37 percent) of survey respondents confirm that they’re simply waiting for further maturity before investing — with more than two thirds (69 percent) of the curious survey participants being hedge funds managing over a billion dollars.
Optimism about the future reigns: 93 percent of crypto hedge funds expect crypto-asset market capitalization to be higher at the end of 2023 than it was at the end of 2022.
As for the investors in crypto hedge funds, they want the following: mandatory asset segregation; mandatory financial audits; independent statement of reserve assets; and platform security. To further build confidence with these investors, the hedge fund industry is increasing their use of standard liquidity management tools and enhancing their counterparty risk management policies. They’re focusing on optimal custody solutions, and use for third party custodians is strong with 80 percent of crypto and traditional hedge funds selecting this as their primary custody route. The SEC’s proposed rule on qualified custodians would further regulations in that direction, appropriately segregating assets and otherwise protecting investors — which meshes with what the hedge fund industry and its investors desire in risk management.
ETFs Offer the Best Avenue to Traditional Financial Adoption Today
Spot Bitcoin and Ether ETFs available through trusted traditional financial institutions will break down barriers and streamline mainstream adoption, helping investors to navigate a crypto ecosystem that might seem complex and feel intimidating. Once available through familiar traditional financial institutions, the process will feel more comfortable and welcoming. Some investors may limit digital asset exposure to ETFs while others may ultimately expand beyond that into the broader world of crypto investing. Traditional asset managers increasing allocations to digital assets will also help to drive mainstream adoption going forward.
About BitGo
BitGo provides the most secure and scalable solutions for the digital asset economy, offering regulated custody, borrowing and lending, and core infrastructure to investors and builders alike.
Founded in 2013 — the early days of crypto — BitGo pioneered the multi-signature wallet and later built TSS to improve upon other companies’ MPC offerings. Between multi-sig and TSS, BitGo offers the safest technology on the market and safeguards over 600 tokens across a wide variety of blockchains.
Over the years, BitGo has expanded from offering wallets into providing a full-suite solution that lets clients hold assets safely and then put them to work.
BitGo launched BitGo Trust Company in 2018, providing fully regulated, qualified cold storage to complement BitGo Inc’s original hot wallet solution. In 2020, BitGo launched BitGo Prime, which allows its clients to trade, borrow, and lend. Moreover, BitGo also provides access to DeFi, staking, NFT wallets, and beyond, and serves as the world’s sole custodian for WBTC, or wrapped Bitcoin.
Today, BitGo is the leader in digital asset security, custody, and liquidity, providing the operational backbone for more than 700 institutional clients in over 50 countries — a list that includes many regulated entities and the world’s top cryptocurrency exchanges and platforms. BitGo also processes approximately 20% of all global Bitcoin transactions by value.
For more information, please visit www.bitgo.com.
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