Approval of Bitcoin ETFs by the US SEC and the broader acceptance of bitcoin

Approval by the US SEC 

The US Securities and Exchange Commission (SEC) has approved eleven applications for Bitcoin Exchange Traded Funds (Bitcoin ETFs) last Wednesday. Investors have eagerly waited for the news from the SEC, questioning whether they would continue their pattern of rejecting applications due to previous investor protection and market manipulation concerns. Could the SECs regulatory approval be a positive step toward the wider acceptance of bitcoin? 

What are ETFs and Bitcoin ETFs? 

ETFs are collective investment schemes. This is a type of fund where a group of investors pool their money together. The fund is professionally managed by an independent manager who controls a basket of assets which are traded on a stock exchange. Investments in the fund are divided into units and these are a portion of an investor’s ownership of the fund’s total assets. Investors do not, however, own the underlying assets in the fund. Ownership vests in the fund provider but investors are entitled to a share of the profits. ETFs try to replicate the performance of a specific market index, which is a way of assessing how a group of stocks or assets are performing. 

A spot Bitcoin ETF directly invests in and safely stores bitcoins in a digital vault. A Bitcoin ETF allows for the trading of bitcoin but on traditional stock exchanges as opposed to trading on a cryptocurrency spot exchange. This provides ordinary investors an opportunity to access the crypto market through the exposure to the price moves of bitcoin but in a regular brokerage account. 

The Bitcoin Halving Event 

An event on bitcoin’s blockchain called ‘halving’ will begin in early-to-mid 2024. This is an event which typically occurs every four years where the reward for mining is reduced by 50%. ‘Mining’ refers to the creation of new bitcoins on the blockchain. It involves a process of solving complicated cryptographic puzzles using specialised computers. When a miner finds a solution, they are rewarded with bitcoins. Currently, miners who validate transactions are rewarded 6.25 BTC for each successfully mined block. This year, the block reward will fall to 3.125 BTC. The purpose of halving is to reduce the number of new coins entering the network, sending a supply shock to the market with an aim to counteract inflation. Provided that demand stays the same, prices have, historically, increased during the bitcoin halving event . 

The timing of both the halving event and the approval of Bitcoin ETFs by the SEC in 2024 can create a momentum effect. This is because reduced supply in combination with growing demand indicates that bitcoin can maintain its value over time and that it is an asset worthy of investment. 

The Network Effect 

The network effect, most known as Metcalfe’s Law, is a concept used to understand the network effect of communication systems like blockchain networks and cryptocurrencies. This principle of network economics suggests that as a network’s users expand in numbers, so does the value of the network increase. More users mean more potential transactions and interactions resulting in higher liquidity and trading volumes. 

The introduction of Bitcoin ETFs can reinforce the network effect because of its ability to influence network participation. This is because ETFs are familiar investment vehicles used in traditional finance. Risk-averse investors, who are already comfortable with the financial product, can now enter the crypto market without the need to buy bitcoins from exchanges directly. While the use of Bitcoin ETFs has no direct impact on the value of bitcoin on the blockchain itself, it can still have an indirect impact on its value because of its increased accessibility and rising demand among diverse investors. This increase in accessibility for investors has the potential to boost bitcoin's widespread adoption while simultaneously increasing interactions and participation between users on bitcoin's blockchain, contributing to its overall acceptance. 

Importance of Regulatory Approval

The recent approval of Bitcoin ETFs by the SEC represents authenticity. Introducing a regulated investment vehicle increases trust among investors who have otherwise steered away from the crypto space due to a lack of regulatory oversight. Bitcoin ETFs have the potential to function as a catalyst for the expansion of market participation by attracting diverse types of investors, but the psychological impact of having regulated Bitcoin ETFs might be the most crucial factor in driving wider adoption and cumulating the perception of bitcoin as being a reliable and valuable investment.