Bitcoin Spot ETFs in the U.S - How did we finally get here?

The traditional finance industry has been skeptical of the crypto industry, often referring to it as the wild west.  They’ve pointed to the extreme volatility in crypto prices with frequent highs and lows, and the lack of regulation has led many to advise their clients to stay out - or only explore with amounts they can afford to lose. While these are valid arguments, over time, the demand from investment platforms’ customers has grown louder and louder.  

Despite the perceived risks, there was a huge appetite from everyday investors to get involved in crypto, with FOMO being a big driver.

The crypto industry listened, and in 2013, Grayscale, an asset management firm, introduced The Grayscale Bitcoin Trust under the ticker symbol: GBTC. Accredited investors could purchase shares in the trust, which held over 600,000 BTC and tracked its price using a published index. The success was remarkable and it was later opened up to certain types of brokerage and retirement accounts.

Meanwhile, in 2021, ProShares launched the Bitcoin Strategy Fund under the ticker symbol: BITO.  It became one of the most heavily traded ETFs in history, closing its first day with roughly $1billion traded.  But the ProShares ETF didn’t launch because the SEC approved it.  It launched because the SEC made no decision and simply allowed its 75-day comment period to lapse, paving the way for ProShares to move ahead regardless.

After the BITO launch, Bitcoin ETFs soared in popularity because now the everyday investor could easily buy into Bitcoin via ETFs, a regulated financial product that investors understood and could be bought and sold through their trusted brokerage platform.

Despite the success of ETFs such as BITO, as demand grew, so did the calls for an ETF which would allow the everyday investor to buy into the actual price of bitcoin, without the need to directly own and hold bitcoin.  

Products like BITO tracked the price of bitcoin through futures contracts - a financial contract which allows the investor to trade based on the future price of an asset - not actually tracking the market price of bitcoin.   But this would require approval from the SEC.  The U.S. Securities Regulator which had made public its concerns about volatility and illicit activity in the crypto space.

After several failed applications and legal battles, Grayscale bought a case against the SEC and won. On January 10th, 2024, the SEC reluctantly approved spot Bitcoin exchange-traded products (ETPs), giving investors direct exposure to the price movements of Bitcoin. The first ETFs went public the next day, and the response was overwhelming.

Within minutes of trading, spot Bitcoin ETFs saw volumes exceeding $500 million, and within 30 minutes, volumes surpassed $1.2 billion.

Gary Gensler, Chairman of the SEC, acknowledged that the D.C Court of Appeals' ruling against the SEC regarding Grayscale's application left it with little choice but to approve the pending applications on January 10th, 2024. However, Gensler emphasized that this approval did not mean the SEC endorsed Bitcoin or crypto.

The introduction of spot BTC ETFs provides investors with alternative avenues to enter the crypto market without the risks and responsibilities associated with owning actual cryptocurrencies. Some view this as a significant milestone in crypto adoption, while others argue that if you want to delve into crypto, simply buy crypto!

Whichever choice an investor makes, having choices can only be positive and another sign of confidence in the sustainability of certain crypto assets.