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In a historic development, US officials have approved a Spot Bitcoin ETF, marking a monumental day in the world of cryptocurrency. This event, occurring exactly 15 years after Hal Finney’s notable tweet about Bitcoin being operational, opens new doors for Bitcoin’s acceptance in institutional circles on Wall Street. Now the question arises: Why is the ETF approval so important for Bitcoin and the broader crypto market? Analyst Michaël van de Poppe answered.
Bitcoin’s Intrinsic Strength and the Need for Regulation
Bitcoin operates independently, in a decentralized manner, and without government interference. However, according to the Analyst, regulatory measures and tools such as Exchange Traded Funds (ETFs) are necessary to integrate Bitcoin into the contemporary social framework. While Bitcoin’s technology continues to be decentralized, navigating current social structures requires compliance with regulations.
An Exchange Traded Fund (ETF) serves as a tracker or derivative of an underlying asset such as a commodity, index, bond, or stock. In the case of Bitcoin, an ETF tracks its value and holds Spot Bitcoin as collateral. Unlike Bitcoin traded on cryptocurrency exchanges, an ETF appears as a fully regulated product that can be traded on mainstream exchanges like Nasdaq or AEX.
Eleven parties successfully applied for an ETF and all received approval. However, the prices of these ETFs differ significantly from the real market value of Bitcoin. This discrepancy is a result of the ETF being a derivative and essentially ‘tracking’ the price of Bitcoin.
The Nuances of ETF Pricing and Its Impact on Bitcoin
An ETF operates as a fund with a predefined size and allocated number of shares. For example, if a $100 million ETF issues 10 million shares, each share is initially priced at $10. Although different from Bitcoin’s value, an ETF is a distinct tool that appeals to institutional investors.
Bitcoin’s relatively unregulated structure limits institutional investors from holding it directly in their portfolios. AML practices, concerns about financing terrorism, and not being classified as a financial instrument contribute to this limitation. An ETF within regulatory frameworks allows institutional players to participate indirectly in the crypto market.
The Mechanics of ETF Price Movements and Their Ripple Effect on Bitcoin
Assuming a $100 million allocation for an ETF with a starting price of $10, an increase in the ETF price indicates market positivity and interest. An ETF backed by Spot Bitcoins requires collateral equal to its value. Therefore, if institutional interest increases and the ETF value rises to $15, the issuer will need to provide additional Bitcoin collateral.
This influx of interest could significantly affect Bitcoin’s price if it indeed comes from institutional investors totaling $200 billion. A rising ETF value indicates increased corporate trust and positively influences Bitcoin’s perception as a mature asset.
Bitcoin’s Maturity and Expanding Acceptance
According to the Analyst, the approval of a Bitcoin ETF represents a very important moment where Bitcoin is embraced as a fully-fledged asset within a ‘mature economy’.
This approval will necessitate a greater focus on education, regulation, policy, and finance surrounding Bitcoin. The cryptocurrency, often referred to as ‘digital gold,’ is taking its first steps towards maturity.
A Positive Ripple Effect in the Crypto Market
Positive outcomes encompass all participants in the crypto market, including developers, miners, and investors. According to the Analyst, the potential creation of ETFs involving different crypto currency groups is becoming more likely, opening ways for investors to interact with multiple cryptocurrencies.
The approval of the Bitcoin ETF will also set a precedent that increases the likelihood of Ethereum securing a similar ETF in the future. Consequently, the approval of the Bitcoin ETF marks a transformative moment for the entire crypto environment.
As Bitcoin matures and gains acceptance within traditional financial systems, the ripple effect is poised to benefit a broad range of market participants, heralding an era of increased institutional participation and wider adoption of digital assets.
