As the U.S. inches toward the launch of a Bitcoin (BTC) spot exchange-traded fund (ETF), enthusiasts are mulling over the range of benefits to be gleaned by the offering.

A recent report from investment firm Bernstein noted that approval for a spot ETF will offer a seal of legitimacy for Bitcoin and other virtual currencies. The report predicted an influx of institutional capital into the ecosystem, noting that the ETF’s size could be as high as 10% of BTC’s market capitalization in less than three years.

The fallout of an injection of funds into the markets will trigger a price rally for the entire cryptocurrency market following a lengthy bear market.

The report opined that approving one spot bitcoin ETF application by the U.S. Securities and Exchange Commission (SEC) would open the floodgates for more applications, akin to the 2021 approval of a BTC future-based ETF.

Aside from price spikes and institutional interests, a spot-based bitcoin ETF could change the landscape for the custody of digital assets. Since the start of the year, there has been a surging demand for institutional-grade custody solutions, with the custody space reaching a valuation of over $250 billion.

The SEC has been inundated with applications from leading Wall Street firms seeking approvals to roll out their spot bitcoin ETFs. After a string of regulatory back-and-forth, the securities watchdog extended its review of the application from Ark 21Shares, making it the second extension by the SEC for the application.

“With the interest of leading global asset managers in Bitcoin (BTC) spot ETFs and potential mechanisms to address the U.S. Securities and Exchange Commission (SEC) objections, the probability of approval has risen,” read the report.

Several theorists point to the ripple effects of Canada’s Purpose Bitcoin ETF as it racked up over $400 million worth of assets in less than 48 hours after its launch. While the U.S. adopts a slow-and-steady approach, pundits are touting Southeast Asia as the next region to roll out a spot BTC ETF.

Downsides of a spot ETF

For all its upsides, critics have warned that offering a spot Bitcoin ETF has several flaws. Perhaps, the most significant downside is the inability of investors to withdraw the underlying instruments, a flaw that runs contrary to the ethos of Web 3.

Another downside is the absence of uniform BTC prices, which could open several market arbitrage opportunities. The SEC remains wary of existing custody solutions and bases its refusal to approve based on insufficient guardrails for investor protection.

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Filed under: Bitcoin - @ August 20, 2023 9:17 pm