Anticipation of a new wave of investors has Bitcoin booming once again, ahead of indications that the U.S. is gearing up to approve exchange-traded funds that invest directly in the cryptocurrency. ETFs, as they’re known, have become enormously popular among U.S. investors. For years, the U.S. Securities and Exchange Commission routinely rejected these types of crypto-centric products, citing wariness over volatility and potential manipulation. But the SEC’s resistance appears to be weakening, and the market has been closely watching as a Jan. 10 deadline approaches for the regulator to act on at least one application.

1. WHERE DO THINGS STAND?

The world’s biggest asset manager, BlackRock Inc., filed an application for a spot Bitcoin ETF last June. That led to a major crypto market rally and a flurry of similar ETF applications and resubmissions from issuers including Fidelity Investments, Invesco and WisdomTree. Momentum grew when Grayscale Investments LLC won an Aug. 29 court ruling in its push to turn its Bitcoin trust into an ETF. On Oct. 13, the SEC said it wouldn’t fight the ruling, and after a federal appeals court finalized it, Bitcoin surged to US$35,000 for the first time since May 2022. Investors, analysts and market-watchers are awaiting the SEC’s next move.

2. WHAT IS A BITCOIN ETF?

ETFs, a US$7 trillion industry, are part of a broader family of products known as exchange-traded products, though people frequently use “ETFs” to refer to all of them since they are by far the largest and most popular category. Crypto-native firms and major Wall Street financial institutions alike are trying to launch a kind of ETF that actually holds Bitcoin, as opposed to the products that invest in Bitcoin futures. (Futures are contracts to buy or sell an asset at a specified price at a later date.) Futures-backed Bitcoin ETFs have been available to U.S. customers since 2021, but the SEC hasn’t approved any applications for so-called spot Bitcoin ETFs. Issuers and investors are advocating for spot Bitcoin ETFs to be similarly accessible to retail and institutional investors in the U.S., a development that’s perceived as having the potential to greatly broaden participation in the cryptocurrency industry.

3. WHAT’S BEEN AVAILABLE BEFORE NOW?

The ProShares Bitcoin Strategy ETF became the first Bitcoin futures ETF available in the U.S., opening on Oct. 19, 2021, to strong demand. The Purpose Bitcoin ETF (ticker BTCC) made its debut in Toronto in early 2021; it invests directly in “physical/digital Bitcoin,” according to its issuer, Purpose Investments Inc. In June, issuer Volatility Shares launched a leveraged Bitcoin-futures ETF. Multiple Ether-futures funds debuted in October. Meanwhile, several U.S. investment trusts have been following Bitcoin in a manner that’s similar to ETFs but with certain restrictions. The Grayscale Bitcoin Trust (ticker GBTC) is physically backed, meaning that it holds Bitcoin.

4. WHY DID REGULATORS SHUN A BITCOIN ETF FOR SO LONG?

In addition to their worries about liquidity and manipulation, regulators have expressed concern that Bitcoin’s volatility might be too intense for ordinary investors — Bitcoin’s last three full-year returns were gains of 305 per cent in 2020, up another 60 per cent in 2021, followed by a loss of 64 per cent in 2022. The SEC has also questioned whether funds would have the information necessary to adequately value tokens like Bitcoin, including whether they can validate who owns the underlying coins. In 2021, SEC Chairman Gary Gensler testified to the Senate Banking Committee that the lack of regulatory oversight and surveillance in crypto markets led to “concerns about the potential for fraud and manipulation.” In an attempt to allay some of the SEC’s concerns, BlackRock and other issuers following in its footsteps have proposed so-called surveillance-sharing agreements, a way to mitigate the risk of market manipulation and fraud. Coinbase Inc., the only publicly traded, pure-play spot-crypto exchange in the U.S., has emerged as ETF issuers’ market surveillance partner of choice.