Bitcoin ETF Approved. Good news for bitcoin?
Yes
A Bitcoin ETF is on the horizon, with the SEC approving them. Cathie Wood has spruiked such an ETF, with ARK being at the forefront of proposing one. What does this mean for bitcoin?
The Bitcoin ETF is non-negative for Bitcoin’s price. However, it is important to not overstate the benefits. The clear benefits are severalfold:
Increased demand: Institutions and retail investors might be reticent to engage with standard cryptocurrency exchanges. Many exchanges are reliable. However, scandals involving exchanges, such as FTX, have dented confidence. Trading on a traditional exchange is likely to incrementally increase retail demand; it certainly will not decrease it. Similarly with institutional investors that might not be able to invest directly in cryptocurrency, but might be able to buy a Bitcoin ETF.
Price discovery: The increase in ETFs will increase demand from established investors. This can only incrementally improve price discovery and liquidity. It will not harm price discovery. Thus, the ETFs will have a non-negative impact on information asymmetry, will help nudge Bitcoin towards its true value and will improve liquidity.
Regulation: the Bitcoin ETFs enable access to bitcoin in a slightly more regulated manner. Bitcoin will still face issues with frontrunning (etc) that will exist outside of established exchanges or ETFs. However, the ETFs themselves will be subject to traditional disclosure rules, creating some confidence in them.
The notion of ‘traditional finance’ becoming involved in Bitcoin might be anathema to its founding principles. However, centralized exchanges have increasingly dominated Bitcoin. Further, governments have increasingly sought to control cryptocurrencies via exchanges; and thus, it is not clear that a Bitcoin ETF would adversely impact Bitcoin from a normative perspective.
These factors overall mean that the Bitcoin ETFs are non-negative for Bitcoin prices. Many of these benefits are priced in: the market anticipates the ETFs and incorporates the value-benefits weighted by the probability of them arising. However, a Bitcoin ETF will not harm Bitcoin prices and could help encourage them.