U.S. regulators have officially signed off on a new entrant in the cryptocurrency pool: exchange-traded funds (ETFs) linked to the spot bitcoin market. Trading was expected to begin today.
Late yesterday, the U.S. Securities and Exchange Commission (SEC) approved rule changes that allow the launch of spot bitcoin ETFs in the United States. The SEC did not name the ETFs, but The Wall Street Journal reported 11 asset managers were "greenlighted" to launch the new product.
The spot market, also known as the cash market, refers to forums where commodities, securities, and other assets can be immediately exchanged between buyers and sellers.
The SEC decision marks a potentially significant shift in how cryptocurrencies are viewed and traded by the investing public. For years, SEC leaders had warned of the risks of the largely unregulated crypto markets, previously turned away numerous crypto-based investment applications, and levied fines on alleged crypto scams.
SEC chair Gary Gensler, in a statement, echoed the regulator's long-running skepticism over cryptocurrencies.
"While we approved the listing and trading of certain spot bitcoin (ETFs) today, we did not approve or endorse bitcoin," Gensler said in the statement. "Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto."
The SEC approvals were among over a dozen applications for spot bitcoin ETFs submitted over the past year, as a sharp rally in the cryptocurrency fueled renewed investor attention in the largely unregulated world of crypto.
There are thousands of cryptocurrencies that have been trading for several years, as well as a few other ETFs linked to bitcoin futures. But SEC approval of spot bitcoin ETFs listed on established, regulated exchanges, such as the NYSE, Nasdaq, and Cboe Global markets, potentially opens up a new crypto inroad for investors who might otherwise not want to hold actual bitcoin.
However, crypto is still crypto, they are very different from traditional assets like stocks and bonds, and investors should be fully aware of the unique risks these vehicles pose.
Here are a few basics.
What is bitcoin?
Bitcoin and other cryptocurrencies, also referred to as coins, are virtual, digital currencies secured through one-way cryptography. Many are based on public technology known as blockchain, a distributed ledger of all transactions that's decentralized and can't be changed under most circumstances. Unlike traditional currencies, such as the U.S. dollar, cryptocurrencies are not controlled by any central government or authority.
Cryptocurrencies enable online payments to be made directly from one party to another through a worldwide payment system, without the need for a central third-party intermediary like a bank. Similar to physical gold, bitcoin's value stems from a combination of its perceived scarcity and the perception that it can be a store of value, an anonymous means of payment, or a hedge against inflation, though none of these characteristics have yet to establish a long-term track record.
As of December 2023, there were some 9,000 cryptocurrencies and tokens worldwide, according to CoinMarketCap. Bitcoin, launched in 2009, is one of the most actively traded cryptocurrencies, with an overall market cap in excess of $859 billion. Other popular cryptocurrencies include ethereum, tether, and BNB.
Trading bitcoin ETFs on Schwab
Spot bitcoin-based ETFs are now available to trade on Schwab.com and the thinkorswim® platform.
If you have questions about the recently approved spot bitcoin ETFs, please visit schwab.com/cryptocurrency to learn more about Schwab's perspective on cryptocurrency.
What are the potential benefits of a spot bitcoin ETF?
ETFs, which trade on exchanges like shares of stock, are relatively new to the investing world but have grown rapidly since the first ones launched in the early 1990s. There are now around 3,000 U.S.-based ETFs with combined assets totaling more than $6 trillion, according to the Investment Company Institute. ETFs can also offer ways to invest in certain assets, such as commodities and real estate, that individual investors may otherwise have difficulty accessing.
Similar principles apply to spot bitcoin ETFs.
Investors can now buy shares in a spot bitcoin ETF and based on the structure of the fund, track the movements of the underlying cryptocurrency. Assuming the ETF has sufficient "liquidity"—ample numbers of buyers and sellers in the market day after day—an investor would be able to enter or exit a position in a spot bitcoin ETF with relative ease, just as they would with stock shares (ETF shares could also be sold "short" if an investor believes the price of the underlying asset may decline, albeit with unlimited risk potential).
It's important to remember that because these are new ETFs, the market's liquidity may or may not be deep enough to enable quick and efficient trade execution investors have come to expect with stocks. A market lacking liquidity could lead to unusually wide bid/ask spreads and difficulty executing trades, especially in volatile markets.
Bitcoin-linked futures contracts traded on CME Group illustrate growing investor interest in the crypto market. In December 2023, bitcoin futures trading averaged 12,178 contracts per day, up nearly 64% from the same month in 2022, according to CME Group data (futures contracts, similar to cryptocurrencies, also pose unique risks and are not appropriate for many investors).
What are the primary risks behind bitcoin and other cryptocurrencies?
Despite the SEC's recent approval of spot bitcoin ETFs, cryptocurrencies still lack a regulatory structure like stocks. Nothing exists yet to backstop investors like the Federal Deposit Insurance Corporation does for U.S. bank customers. That means investors are entirely responsible for the security of any cryptocurrency holdings.
In recent years, the SEC noted that with cryptocurrencies, there is "substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation."
Additionally, cryptocurrency prices and prices for any related securities can be volatile and prone to sharp and unexpected price swings. Prudent investors, as they would before putting money into any asset, should carefully assess their risk tolerance and do their homework and make sure any crypto-based investments are appropriate for them and align with their long-term financial goals. ETFs have their own distinct risks and potential drawbacks as well that investors should carefully consider. Investors should also study any ETF's prospectus and understand its investment objectives.
The bottom line
Schwab continues to monitor cryptocurrencies as regulations and technology evolve. While some traders have made money on the change in price of bitcoin or other cryptocurrencies (and others have lost money), we suggest most investors continue to treat them as a speculative asset primarily for trading with money outside a traditional long-term portfolio.
Cryptocurrency-related products carry a substantial level of risk and are not suitable for all investors. Investments in cryptocurrencies are relatively new, highly speculative, and may be subject to extreme price volatility, illiquidity, and increased risk of loss, including your entire investment in the fund. Spot markets on which cryptocurrencies trade are relatively new and largely unregulated, and therefore, may be more exposed to fraud and security breaches than established, regulated exchanges for other financial assets or instruments. Some cryptocurrency-related products use futures contracts to attempt to duplicate the performance of an investment in cryptocurrency, which may result in unpredictable pricing, higher transaction costs, and performance that fails to track the price of the reference cryptocurrency as intended. Please read more about risks of trading cryptocurrency futures here.
Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Shares of ETFs are not individually redeemable directly with the ETF. Shares are bought and sold at market price, which may be higher or lower than the net asset value (NAV).
Futures and futures options trading involves substantial risk and is not suitable for all investors. Please read the Risk Disclosure Statement for Futures and Options prior to trading futures products.
Futures and futures options trading services provided by Charles Schwab Futures and Forex LLC. Trading privileges subject to review and approval. Not all clients will qualify.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
Investing involves risk, including loss of principal.
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