Yesterday, the US Securities and Exchange Commission (SEC) approved the trading of spot bitcoin ETFs, roughly ten years after the first application. The approval follows last year’s decision by a US Appeals Court that limited the SEC’s discretion in denying applications. While we doubt this decision will meaningfully impact sophisticated investors in the near term, we expect that these ETFs will increase bitcoin’s liquidity, reduce its volatility, and deepen derivative markets linked to the asset. As a result, we believe a higher share of hedge funds will trade the asset in the future, especially those funds with quantitative and macro strategies.

Bitcoin ETFs are unlikely to impact sophisticated investors in the near term because few are interested in exposure and those that are interested in the space may already have exposure to bitcoin-only or broader crypto asset closed-end funds, which have existed for years. Still, retail flows to these bitcoin ETFs will likely be substantial. These flows will improve the market’s depth, increase options and futures activity, and attract more hedge funds to the space. As a result, sophisticated investors may acquire modest exposures to the space over time via existing hedge fund exposures.

The approval of bitcoin ETFs does not signal a shift in the SEC’s skeptical attitude toward crypto assets, and the broader regulatory environment in the United States remains cloudy. The United States lagged some countries in spot bitcoin ETF trading, but it is ahead of other jurisdictions. On broader crypto regulations, the United States is behind the EU, and some countries in the Middle East and Asia. We do not expect any changes in the US regulatory situation until after the 2024 election, if at all.

Investors targeting bitcoin exposure will have to decide whether to hold the asset directly or via an ETF, much like the dilemma gold investors face. Those investors that prefer to hold gold bullion will likely also prefer to hold bitcoin directly. But, as with gold, investors will need to decide if a speculative bitcoin investment makes sense in their portfolios.

Joe Marenda
Head of Hedge Fund Research and Digital Assets Investing