by Brendan Duane

The Bitcoin ETFs are trading.

Depending on where you start counting, this was as long as a ten year process culminating in a court order forcing the SEC to cease arbitrarily blocking these products from listing.

Why care? For one thing, the amount of friction involved in buying Bitcoin has been significantly reduced. Sure, setting up a Coinbase or Robinhood account isn’t actually hard, but it’s got to be over a dozen clicks, plus a new password, a new 2FA, you need to link a bank account… Too many hurdles for many people to bother. But their traditional brokerage accounts are already set up, and already have money in them. Now they can type in “bitcoin” and products that represent direct exposure to Bitcoin show up. Innovation. What’s more, they can put also this stuff into tax advantaged accounts. The impact there shouldn’t be understated, especially considering we’re talking about an asset that historically measures appreciation in multiples, rather than percent.

Benefits to consumers aside, the Wall Street marketing machine is now incentivized: an “exotic” untapped source of commissions and fees just popped up. Ads are already running on CNBC. Seems likely these ETFs will be pushed in front of people until they’re at least a small piece of everyone’s retirement accounts. All the familiar, well trod marketing points bitcoiners have been repeating for years–“digital gold” “artificial scarcity” “monetary debasement hedge”–will be coming from adults in suits with official sounding titles and from well-known financial giants, rather than from guys in buckskin jackets from no-name firms. It’s likely, I think, they’ll find purchase as investors wonder about the implications of AI and global political instability.

A bit of back of the envelope math bitcoiners like uses the mining analogy to compare the amount of BTC in circulation vs. the amount of gold. All told, gold bullion in circulation adds up to a bit above $13 trillion. As of this writing, BTC is not quite $1 trillion. If we consider BTC, at minimum, a comparable substitute for gold, there’s plenty of room for it to grow and market share to eat.

Then there are individual retirement accounts (currently representing $35T+ in assets) as well as the weighting of 401k allocations going forward. Even a small piece migrating to BTC could have outsized impact.

At least as important as the new ease of transacting in BTC, the existence of SEC-approved ETFs signals its institutional legitimation–and implies, I think, the possibility of billions of dollars in inflows to them over the remainder of the decade. From there it’s not hard to imagine some combination of events in AI, geopolitics, or energy markets that might accelerate the trend.

Footnote-ish stuff (by Dan Duane)  a little geeky, maybe a lot geeky, but important nonetheless

ETFs are an evolution of the traditional mutual fund form. Mutual funds are bought and sold, by the management company, once daily, after 4pm New York time, at the US market-closing prices (prices of any non-US securities are set by third-party estimates–which I’ve found in my career to be shockingly accurate). The market for ETFs, in contrast, is made by authorized participants, i.e. big brokerage firms, who trade them just like individual stocks, who also calculate the fund NAV in real time and take a bid-asked spread as their fee for services. The APs also keep the records of ETF holders, saving the fund that expense.

When an AP takes money from you or me and promises delivery of ETF shares, it gets those shares by collecting up a bundle of stocks that replicates the ETF structure and swapping them for shares of the ETF. Conversely, if the AP has bought a bunch of ETF shares from you and me and promised to pay us money, it gets that cash by swapping the shares for a matching bundle of stocks that it then sells in the market.

In the case of bitcoin ETFs, however, the SEC will not permit the exchange of assets. It has stipulated that the AP must give the ETF cash to buy shares from it, and the ETF must give the AP cash (not bitcoin) to redeem shares. Two reasons for this: it’s the same structure as, say, gold ETFs holding physical gold (rather than futures contracts). And allows firms that don’t deal in bitcoin to be APs. But it also means that tax treatment is different for taxable investors.