With the world’s first Bitcoin ETFs set to win SEC approval, could we be looking at one of the biggest breakthroughs in recent years on the path to institutional acceptance of crypto?
Firms like BlackRock, Fidelity, and Valkyrie have all filed requests to launch their own Bitcoin spot exchange-traded funds on Wall Street. Subject to approval from the US Securities and Exchange Commission, the ETFs could pave the way for institutional investors to enter the world of cryptocurrency by taking up a more traditional position, rather than directly owning a currency.
With SEC approval seemingly just a matter of time, the arrival of a Bitcoin ETF will represent a major hurdle in removing some of the lingering barriers to adoption between institutions and cryptocurrency.
Bitcoin ETFs Driving Change for Institutions
What changes with the arrival of a Bitcoin ETF? Fundamentally, a cryptocurrency ETF would still have the same functionality as more traditional ETFs. This means that it would be regulated by the SEC and subject to strict reporting protocols.
Crucially, this would bring greater levels of transparency and oversight that institutions may feel are lacking throughout the crypto landscape at present.
In addition to this, the introduction of a Bitcoin ETF would herald a new era of institutional custody solutions which can help to limit the risk of theft or loss of Bitcoin at a time when concerns surrounding counterparty risk are still fresh in the minds of institutions following the high profile collapse of FTX in 2022.
The Starter Klaxon for Institutional Adoption?
SEC approval for the world’s first Bitcoin ETFs could be looked back upon as the starter klaxon for more institutional adoption of cryptocurrency, helping to see more inflows into the market in a structured manner.
The reason that a Bitcoin ETF represents a major step for institutions is because it represents a secure and regulated entry point for investors.
Without the necessity of dedicated cryptocurrency wallets or crypto exchanges to take their first steps in the ecosystem, the streamlined investment process can attract investors of all levels without the fear of the unknown clouding their judgment.
The arrival of a spot Bitcoin ETF could also open the door to brand new investment opportunities, such as short-selling which can help institutions to trade cryptocurrency news faster.
Above all else, the arrival of Bitcoin ETFs provides a gateway for institutional investors to enter the world of crypto and build their confidence before taking their next steps in immersing themselves further.
According to data from PwC’s Rebuilding confidence in crypto: 5th Annual Global Crypto Hedge Fund Report (2023), some 46% of hedge funds currently investing in crypto assets intend to add more capital into their holdings by the end of the year, while 37% state that they’re waiting for further market maturity before investing further.
Overcoming Counterparty Risk
The acceptance of a Bitcoin ETF will be a major stepping stone for a cryptocurrency landscape that’s been contending with counterparty risk for many years.
Regulators continually express concerns about crypto’s vulnerability to market manipulation, a lack of protection for investors, and even the prospect of fraud.
But the approval of a Bitcoin ETF will help to signify a maturing market that’s been strengthened through better regulated exchanges, more widespread transparency, and more technological innovations geared towards aiding the growth of institutional confidence.
Because Bitcoin ETFs don’t involve direct ownership of cryptocurrencies, they can be an excellent resource for managing counterparty risk, which occurs when a counterparty default on its obligation causes an institution to lose client funds.
However, its arrival coincides with maturing technology that’s geared towards aiding institutions in better managing their counterparty risk when choosing to take their next steps in cryptocurrency trading.
Offering a single point of access to manage trading, position monitoring, and risk management, Skarb’s unique trading terminal leverages client access to a vast range of liquidity venues.
This means that institutions that are seeking to immerse themselves into the wider world of cryptocurrency trading can tap into an array of exchanges and liquidity pools to execute and monitor trades within a single intuitive user interface.
Skarb’s terminal offers optionality throughout liquidity venues for investors and traders to use asset safeguards like custodial services, which can keep assets securely away from exchanges until it’s time to make a transaction.
When it comes to the hunt for “optimal execution,” Skarb’s network of liquidity providers and proprietary tools, like the pre-trade analyzer, allow traders execute their trades with efficiency at the best available price. In addition, proprietary algorithmic trading can pave the way for setting up trades across multiple venues simultaneously, while investors are supported by real-time reporting and trade cost analysis (TCA) tools for a more holistic overview.
Solving Lingering Liquidity Hurdles
One of the biggest barriers to institutional acceptance of crypto today focuses on a lack of liquidity across the market. Institutional investors generally utilize significantly high levels of liquidity to leverage trades without a more widespread impact on asset prices.
However, with the total cryptocurrency market capitalization standing at around $1.6 trillion at the time of writing, crypto is less than one-hundredth the size of the global total stock market capitalization, which is around $112 trillion.
The introduction of Bitcoin ETFs can aid matters of liquidity and market stability as a whole within the world of crypto. Because these ETFs trade on established stock exchanges with more robust liquidity, they can leverage a more liquid market overall for Bitcoin and make it easier for institutional investors to enter or exit positions without major price ramifications.
In turn, these greater liquidity levels brought by institutional investors taking their first steps into the crypto landscape can help to create a more stable market, paving the way for more entrants and greater levels of direct investment into the ecosystem.
Bitcoin’s Bright Future
Securing SEC approval for Bitcoin ETFs will invariably aid institutional acceptance of cryptocurrencies as a whole. Aside from providing an excellent entry point for institutions and leveraging more regulatory approval, this increased level of activity will help to increase the value of Bitcoin and improve its functionality.
With this in mind, the starting klaxon for the age of Bitcoin ETFs will carry a major positive impact on the market, and may well be looked back on as a watershed moment for cryptocurrency acceptance on Wall Street.
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