This cryptocurrency craze isn't going away anytime soon.
The first exchange-traded fund connected to bitcoin made its stock market debut this week, marking a big step forward in cryptocurrency's mainstreaming. Simply said, anyone with a brokerage account will be able to purchase and sell bitcoin-backed financial products on the stock market in the near future. This comes after years of US financial regulators avoiding the highly volatile cryptocurrency. However, it appears that the government is now willing to attempt new ideas.
The debut was a huge success. The ETF surpassed $1 billion in trading volume on its first day after ProShares, the Maryland-based business behind it, rung the bell at the New York Stock Exchange on Tuesday morning. This makes it one of the most successful ETF debuts ever. The price of bitcoin rocketed over its all-time high of $64,895 to a new high of $66,975 later that day. Experts don't appear to be surprised.
“It was a blockbuster, smash, home run debut,” Eric Balchunas, a senior ETF analyst at Bloomberg, told me. “This brings a lot of legitimacy and eyeballs into the crypto space.”
But before we get into why that is, you probably have a few more questions about the terms being thrown around here. For example, what on Earth is an “exchange-traded fund linked to bitcoin?” What does “futures-based” mean? And do most people really need to pay attention to cryptocurrency after so many years of probably not paying attention to cryptocurrency? Let’s walk through these questions one by one.
An exchange-traded fund, or ETF, is a portfolio of securities that are linked to the price of assets such as stocks, bonds, or commodities and may be bought or sold on stock exchanges by anyone with a brokerage account. An ETF linked to bitcoin is, of course, related to the price of bitcoin, and all new ETFs are required to register with the Securities and Exchange Commission under the Investment Company Act of 1940. This is significant because the agency's approval of a bitcoin ETF signals that it is willing to allow more cryptocurrency-related products to be traded. Previously, the Securities and Exchange Commission (SEC) did not consider cryptocurrencies to be securities, the latest development suggests that its views on the matter are evolving.
But it seems it will take some time before the SEC decides if it will allow bitcoin trading on the stock market. The new ProShares fund, which is called the Bitcoin Strategy ETF, is futures-based. That means the fund tracks bitcoin futures contracts traded on the highly regulated Chicago Mercantile Exchange. In other words, the ProShares Bitcoin Strategy ETF doesn’t contain bitcoin itself but rather bets on the future price of bitcoin. In a Tuesday CNBC appearance, SEC chairman Gary Gensler pointed out that the new product will be overseen by the Commodity Futures Trading Commission, the SEC’s sister agency, which will provide some protection to investors — but it is “still a highly speculative asset class.”
Regardless of the nitty-gritty technicalities, this new bitcoin-based ETF is significant. For years, the bitcoin community has wished for a financial product like this, but regulators have been wary of approving one. Cameron and Tyler Winklevoss proposed the first bitcoin-based ETF in 2013, but the Securities and Exchange Commission (SEC) rejected their first application four years later — and again in 2018 — citing the cryptocurrency market's volatility. The SEC has postponed judgments on several bitcoin-based ETFs since then, but it is presently reviewing several fresh proposals, which are subject to a 75-day review period after companies file them. If the SEC remains silent, as it did in the instance of ProShares, the funds can start trading. In the next couple of weeks, the SEC review periods for cryptocurrency-based proposals from other companies, including Valkyrie Investments, Invesco, and VanEck, will end as well.
“It’s not that this particular ETF is going to bring in hundreds of billions of dollars or anything,” Balchunas explained. But it’s an important moment because “It’s a bridge to this whole other world that probably isn’t that into crypto and might start to be, now that it’s being delivered in the format they like.”
To put it another way, there will be more crypto-based ETFs in the horizon. And if Gensler sees that these new financial products are being traded without incident, his SEC may open the door to many more, including ones that contain cryptocurrencies like bitcoin and ethereum. The existence of these ETFs not only makes it easier to invest in cryptocurrency. It also means bitcoin has more in common with gold than it has in the past.
This story first published in the Recode newsletter.