SEC approves spot bitcoin ETF, paving ways for more investors to gain exposure

The approval follows years of failed attempts by ETF sponsors to list a bitcoin spot product, all of which were denied by regulators, who argued that the markets where bitcoin trades are too unregulated and vulnerable to market manipulation to ensure that average investors would be protected from fraud.

The approval of bitcoin ETFs removes the obstacle many institutional and retail investors faces in investing bitcoin, which is to self custody the coins, said Will McDonough, chairman and founder of Corestone Capital. 

Austin Reid, global head of business at FalconX, said the approval of bitcoin ETFs could allow investment and financial advisors to advise their clients to allocate their capital to digital assets. “What you’re really looking at is the potential for a significant unlock in the capital that can be deployed into this asset class,” Reid said.

According to a recent survey conducted by Bitwise Asset Management and VettaFi, about 88% of advisors who are interested in purchasing bitcoin were waiting until after a spot bitcoin ETF is approved.

A federal judge ruled last August that the SEC’s reasons for denying an application by Grayscale Investments to list a bitcoin spot ETF were “arbitrary and capricious” and in violation of federal administrative law.

The judge argued that the SEC’s decision to approve two bitcoin futures funds but to deny a bitcoin spot fund was a breach of the principle in the law that agencies “must treat like cases alike” because prices in the bitcoin futures market closely tracked those in the spot market.

The SEC first approved a bitcoin futures ETF in late 2021 and had argued that bitcoin spot markets could not be sufficiently surveilled to prevent fraud and manipulation, while bitcoin futures markets were overseen by registered futures exchanges with sophisticated surveillance capabilities.

Following the judge’s ruling however, most experts believed it was only a matter of time before the agency would approve a spot ETF.

Industry participants are also now watching whether any ETFs based on other digital assets will be approved. 

McDonough said it could take much longer for regulators to greenlight ETFs investing in smaller coins, such as ether. The SEC Chairman Gary Gensler previously said bitcoin was the only crypto he was prepared to publicly label a commodity, rather than a security.