The recent bitcoin surge in October 2023 has caused a significant increase in bitcoin’s price. It went from $28,740 to $34,158 in just 7 days. This is almost a 20% increase in price. That is quite a rise considering the bear market slump we have been experiencing in the past year.
The surge seems to have been influenced by many factors. However, one which stood out like a sore- thumb was the ongoing talk of bitcoin spot ETF approvals.
What are bitcoin spot ETFs and how does it work?
An exchange-traded fund (ETF) is an investment vehicle designed to follow the performance of a particular asset or commodity. In this case, bitcoin. ETFs are tradable on stock exchanges and through brokerage accounts. The responsibility for safeguarding the underlying asset rests with the ETF manager.
So, a bitcoin spot ETF is a type of investment that aims to mirror the performance of bitcoin.
Unlike traditional bitcoin ownership, where individuals must manage their own assets, a spot bitcoin ETF is managed by a professional fund manager. This allows investors to buy and sell shares of the ETF on stock exchanges or through brokerage accounts. This is a convenient way to gain exposure to bitcoin’s price movements.
This means that investors do not have to worry about handling and securing bitcoin themselves. Futures-based bitcoin ETFs which have been approved in the past track contracts for future bitcoin prices. However, a spot bitcoin ETF directly tracks the current bitcoin price.
Why has approval for a bitcoin Spot ETF taking so long?
The Securities and Exchange Commission (SEC) has repeatedly rejected applications for spot Bitcoin exchange-traded funds (ETFs) from various issuers.
Previously, the SEC cited the absence of a “surveillance-sharing agreement with a regulated market of significant size related to bitcoin” as the reason for these rejections. Such agreements are designed to prevent market manipulation and enable thorough investigations in case of suspicious activities.
Recently, there has been a increase in applications following BlackRock’s submission of the iShares Bitcoin Trust application. This also includes provisions for surveillance-sharing agreements. Given BlackRock’s strong track record of ETF approvals, there’s optimism for a favorable decision.
Is a spot ETF good for bitcoin?
You might have already realized that there is a lot of talk about the bitcoin spot ETF. But why is everyone excited about it?
We have identified a number of reasons as to why the excitement is rising for the approvals:
- Bitcoin would be legitimized as a recognised asset class
When Bitcoin is listed on the stock exchange as a regulated ETF, this would provide the trust to institutions and traditional investors. Bitcoin would be seen as a credible asset to invest in.
- Increased liquidity for Bitcoin
Having a spot ETF provides more accessibility to a wider range of investors. This is especially appealing to the older investors who may initially be more skeptical of cryptocurrencies. Ultimately, this can potentially reduce price volatility.
- Boosting demand for Bitcoin
ETF providers would have to acquire actual Bitcoin to back the spot ETF. This can potentially increase demand for Bitcoin.
- Transparency and security within Bitcoin regulation
Since ETFs are subjected to stock market regulations, they would require oversight. Having to adhere to strict compliance and regulations would boost the confidence of investors to invest in Bitcoin. Furthermore, the ETF has to comply with securities laws which would reduce the risk of fraud or theft.
- Lowering barrier to entry
For those who are already in traditional finance, opening a bitcoin wallet might seem like a hassle. The processes may be too complicated for traditional investors which is why having an ETF would simplify the process. This is because they would only have to have a traditional stock brokerage to invest in the ETF.
- Frictionless process
When it comes to investment decisions made by larger institutions, it would be easier to have exposure to Bitcoin through a recognized financial infrastructure. This is to ensure documentation is t be recorded frictionlessly which includes accounting and tax fillings for the investment.
Other reasons why bitcoin might be surging
While the main reason bitcoin is surging seems to be due to the pending approval of the bitcoin spot ETF, there may be other impending reasons there could be a widespread interest in bitcoin for the past few days.
- Hashrate of bitcoin went up
On October 16 2023, Bitcoin.com reported that Bitcoin’s difficulty has reached an unprecedented 61.03 trillion, marking the fourth most significant spike this year. Miners had previously navigated two consecutive increases, with a 5.48% rise on September 19, followed by a modest 0.35% upward adjustment on October 3.
Despite these challenges, the hashrate is nearing its peak, closely resembling the high observed on October 12, 2023. As of Tuesday, October 17, following the 6.47% surge in difficulty, the hashrate confidently stands at 444 exahash per second (EH/s).
- Bitcoin halving
A crucial event in the Bitcoin blockchain is the halving, which reduces the mining reward by half. Since 2020, those verifying transactions on the network have received 6.25 bitcoins (BTC) for successfully mining each block.
The upcoming halving is anticipated to take place in early-to-mid 2024, leading to a reduced block reward of 3.125 bitcoins. As time progresses, the influence of each halving will lessen as the block reward gets closer to one satoshi.
- Geopolitical instability
Recent news of war especially with the Israel-Hamas issue which happened quite recently suggests that Bitcoin could be used as a safe haven. Thus, some people may use it as a store of value as opposed to immature asset classes like memecoins if they are already invested in crypto.
In conclusion, while the recent surge in bitcoin’s price in October 2023 has been fueled by a confluence of factors, the talk surrounding the approval of bitcoin spot ETFs has undoubtedly played a significant role.
These ETFs offer several potential advantages for bitcoin, including legitimizing it as an asset class, increasing liquidity, boosting demand, and enhancing transparency and security within the cryptocurrency market.
The pending approval of the bitcoin spot ETFs has generated excitement and optimism among investors and institutions, contributing to the recent price surge.
However, it’s worth noting that other factors such as a rising hashrate and the anticipation of bitcoin halving have also contributed to the renewed interest in bitcoin as a potential safe haven asset amidst geopolitical uncertainties.