ETF Fever: Legitimization or Bust for Bitcoin?

Bitcoin is the crypto king and serves as both the spearhead and foundation for all other cryptocurrencies. Its role is to bring together all the other crypto competitors into a single fold as part of a concerted new industry capable of generating and preserving wealth. Another role, and one which may well be much harder to fulfill compared to the technical challenge, is legitimizing its own existence.

As things stand, top-tier regulators have sent out mixed messages to the cryptosphere. Just last year, the ECB declared that Bitcoin is artificially “propped up” and should, therefore, not be legitimized by regulators or financial companies. The central bank sees the crypto endeavor as more akin to gambling rather than investment or trading.

On the flip side, several points of note suggest that crypto is not a transitory fly-by-night fad but, rather, is a paradigm shift in finance. In 2020, US banks were legally permitted to provide crypto custody services for clients. At the time, the move was hailed as “the first major dominoes in the US leading to the path of legitimacy and legalization for Bitcoin and crypto.”

The following year, the European Investment Bank (EIB) opted to issue more than €100 million in 2-year “digital bonds” for the first time in history on the Ethereum network. The bonds, possibly due to their historicity, were oversubscribed and made headlines because of the 35% discount they offered on issuance costs. Quite possibly a precedent.

According to Forbes, 650 US banks have agreed to offer Bitcoin purchases to an estimated 24 million people as part of the deal between enterprise payments giant NCR and digital-asset management firm NYDIG.

For more serious investors, exchange-traded funds (ETFs) are being made available, although in a staggered manner, as various regulators evaluate risks in varied ways. For the time being, Canada, Dubai, and Brazil have approved Bitcoin ETFs, while the US SEC – the unofficial bellwether for global crypto regulation – is evaluating over a dozen Bitcoin ETF applications from proactively aspirational financial firms.

One of the most significant advantages of a Bitcoin ETF is that it can open the doors to a more extensive range of investors, including institutional investors, thereby attracting a broader audience that ultimately makes the underlying asset more liquid and secure. As a consequence of better liquidity and greater adoption, greater price stability is likely to follow.

If Bitcoin ETFs were to become ubiquitous in the financial markets, their presence is likely to serve as a signal to investors that cryptocurrencies are on track to be accepted within the financial industry, albeit more gradually compared to other fintech innovations such as e-payments and same-day loans.

If Bitcoin legitimization still seems like a doubt, the case of El Salvador may add certainty. The Central American country became the first nation in the world to make Bitcoin legal tender alongside the US Dollar. The policy change meant all local businesses, including hair salons and coffee shops, would have to accept Bitcoin as legal tender. Since being introduced as El Salvador’s new currency, more locals have a Bitcoin wallet than a US dollar bank account. Inspired by their local neighbors, Paraguay, Mexico, and Panama plan to follow suit in the coming years.

Legitimization prevents bust

Bitcoin legitimization, at least in the eyes of seasoned investors and regulators, is a slow and winding road. It is a road with many twists and turns that have already seen Bitcoin facing early setbacks as well as early milestones.

The advent and use of ETFs have been a great boon for the financial sector in general, so it makes complete sense that Bitcoin adopters would seek to legitimize their favorite asset via an ETF.

Such an ETF would likely elevate the entire crypto-sphere up to a higher level of technical ability, investor access, and market sophistication. If the SEC sets a significant precedent and approves its first Bitcoin ETF, it would likely be a game-changer for the entire crypto-sphere.

In all probability, a Bitcoin ETF would democratize access to Bitcoin, boost liquidity, encourage institutional investment, and finally, bring the asset from out in the cold and into the warmth of all investors’ hands.

Investors shouldn’t celebrate just yet, though.

Caution is advised because regulatory hurdles, political machinations, espionage fears, market manipulation risks, and persistent price volatility remain clear and present risks to the aspirational Bitcoin ETF outlook.