Regulators approve new bitcoin funds in move that could spur more investment in cryptocurrency

NEW YORK (AP) — The Securities and Exchange Commission on Wednesday reluctantly approved the first exchange-traded funds containing bitcoin, saying it is still deeply skeptical about cryptocurrencies and that its decision does not mean it approves or endorses bitcoin.

The SEC said it gave the green light to 11 exchange-traded funds for bitcoin even though it only had one application deadline. The agency said that would provide competition and a “level playing field.”

LOOK: The role of cryptocurrencies in the financing of terrorist organizations

It's a major victory for Wall Street, particularly for trillion-dollar fund managers like BlackRock, Fidelity Investments and Invesco, which have pushed hard for the SEC to approve their applications. It is also a victory for the cryptocurrency industry, which needed a victory after almost two years of turmoil that resulted in the failure of several cryptocurrency companies, most notably FTX in November 2022.

The SEC's approval was lukewarm at best. Gary Gensler, president of the agency, has repeatedly said that cryptocurrencies need more regulation and investor protection.

"Investors should be cautious of the myriad risks associated with bitcoin and products whose value is tied to cryptocurrencies," Gensler said.

An exchange-traded fund, or ETF, is an easy way to invest in assets or a group of assets, such as gold, junk bonds, or bitcoin, without having to directly purchase the assets. Cryptocurrency advocates hope the development will further propel the once niche and nerdy corner of the Internet into the financial mainstream.

The regulatory green light has been expected for several months and the price of bitcoin has risen about 70 percent since October.

In a perhaps fitting turn for the unpredictable cryptocurrency industry, a fake tweet from the Securities and Exchange Commission account on Tuesday X stated that bitcoin ETFs had been approved for trading, but that the agency had not issued any approvals. .

Here are some things you should know about bitcoin ETFs.

Why so much enthusiasm for a Bitcoin ETF?

An exchange-traded fund, or ETF, is an easy way to invest in something or a group of things, like gold or junk bonds, without having to buy the things themselves. Unlike traditional mutual funds, ETFs trade like stocks, meaning they can be bought and sold throughout the day.

Since the beginning of bitcoin, anyone who wanted to own one would have to buy it. That, in turn, would mean having to learn what a cold wallet is or open an account on a crypto trading platform like Coinbase or Binance.

A spot bitcoin ETF could open the door to many new investors who don't want to take additional steps.

The price of bitcoin has already skyrocketed in anticipation of SEC approval, with bitcoin trading at $45,890 on Wednesday, up from $27,000 in mid-October. The price had fallen as low as $16,000 in November 2022 following the bankruptcy of the FTX crypto exchange.

How would the ETF work?

The Bitcoin Strategy ETF (BITO) has been trading since 2021, but it holds futures related to bitcoin, not the cryptocurrency itself.

The new bitcoin ETF will work like the SPDR Gold Shares ETF (GLD), which allows anyone to invest in gold without having to find a place to store a bar or having to secure it. It's the same reason some people invest in the SPDR Bloomberg High Yield Bond ETF (JNK), which allows investors to simply buy one thing instead of the more than 1,000 low-quality bonds that make up the index.

How many Bitcoin ETFs could there be?

The SEC said it is finalizing approval of applications for 10 bitcoin ETFs.

What are the disadvantages of an ETF?

Longtime cryptocurrency fans might object. Cryptocurrencies like bitcoin were created in part due to distrust of the traditional financial system. Wall Street would become an intermediary between investors and cryptocurrencies in the case of ETFs.

ANALYSIS: Crypto Companies' Ties to Sports Raise Ethical Questions

ETFs also charge fees, although they tend to be relatively low compared to the financial industry as a whole. These fees are shown through what's called an expense ratio, which indicates how much of a fund's assets the ETF will take each year to cover its costs.

When is it best to have real Bitcoin?

An ETF will not put actual cryptocurrencies into investors' accounts, meaning they cannot use them. Additionally, an ETF would not provide investors with the same anonymity as cryptocurrencies, one of the big draws for many cryptocurrency investors.

What concerns should investors have?

The biggest concern for an investor in one of these ETFs is the notorious volatility of the price of bitcoin.

Despite failing to catch on as a replacement for fiat or paper currencies, bitcoin soared near $68,000 in November 2021. A year later it fell below $20,000 as investors generally avoided riskier assets and A series of company explosions and scandals shook faith in the crypto industry.

Even as regulators and law enforcement crack down on some of crypto's bad actors, such as FTX's Sam Bankman-Fried, the industry still has a modern “Wild West” feel. The hack of SEC Account X raises questions about the scammers' ability to manipulate the price of bitcoin and the SEC's own ability to stop them.