US regulator approves Bitcoin exchange traded funds but risks remain

The US financial regular has paved the way for the launch of Bitcoin-linked exchange traded funds (ETFs) in a boost for the cryptocurrency market but UK investors will remain blocked from the products.

The Securities and Exchange Commission (SEC) has previously blocked attempts to launch Bitcoin spot ETFS, which track the price of the popular cryptocurrency rather than investing through futures, claiming the asset is open to fraud and manipulation.

US courts have queried its opposition and the SEC yesterday gave the go ahead for 11 ETFs to list from established providers including Blackrock, Fidelity and Grayscale.

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Investors in the US will be able to access the ETFs but they are still banned for Brits due to Financial Conduct Authority rules.

The SEC remains cautious though due to the volatility of cryptocurrencies and its chairman Gary Gensler highlighted that the regulator was by no means endorsing Bitcoin.

“While we approved the listing and trading of certain spot bitcoin exchange traded product shares, we did not approve or endorse Bitcoin,” says Gensler.

“Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.”

What is a Bitcoin ETF?

A Bitcoin ETF lets investors track the price of the cryptocurrency through a regulated investment provider.

This is arguably a safer way to get exposure to Bitcoin compared with holding it on a crypto exchange where there may be high fees and risks of fraud or by investing in risky futures products.

The price of Bitcoin has already hit two-year highs in anticipation of the SEC approval but it doesn’t remove the volatility of cryptocurrencies.

They are still subject to wild price swings depending on sentiment and there are risks of big losses.

Ben Laidler, global markets strategist at eToro, says this could pave the way for ETFs linked to other cryptocurrencies such as Ethereum.

“The long-awaited approval of a US spot Bitcoin ETF is a key step forward in the development of the youngest, smallest, and most retail-investor dominated of asset classes, in the world's biggest capital market,” he says.

“This will also likely be a sign post for other regulators to follow as global investors increasingly turn to US markets to access the new Bitcoin ETF.

 “The first US spot Bitcoin application was made way back in 2013. Whilst the total crypto market capitalisation today is only $1.6 trillion, even after its huge asset-class leading gains of 2023, making it just the same size as Amazon, for example.

“Approval is only the first of a long list of potential catalysts this year. From an Ethereum spot ETF, to Bitcoin's April 'halving', mid-year Fed interest rate cuts, and year-end US accounting and global regulatory changes making it easier for companies and banks to own crypto assets.”

Will Bitcoin ETFs be available in the UK?

The approval won’t help UK investors as the FCA has banned the marketing of crypto ETFs.

That means the main option for UK crypto enthusiasts is purchasing Bitcoin through crypto trading platforms.

Jason Hollands, managing director of Bestinvest, suggests it is unlikely that UK regulators will follow suit with crypto ETFs.

“To be made accessible to UK retail investors, funds – including ETFs – must produce very prescriptive and detailed documents known as Key Information Documents under EU-inherited Packaged Retail and Insurance-based Investment Products Regulation, which US listed ETF funds don’t," he says.

“A further reason why UK platforms are unlikely to offer access to the US listed Bitcoin ETFS is the FCA’s recently introduced Consumer Duty regime, which has raised the bar on regulated UK firms insuring good outcomes for retail investors, which is likely to deter platforms from offering access to products that our own regulator regards as high risk.”

He adds that the money flowing into Bitcoin for ETFs may help the price but it also risks making the value more volatile.

The risks of cryptocurrency investing

Cryptocurrencies are unregulated in the UK.

Trading platforms must get FCA approval for money laundering and are required to ensure users understand the risks of the asset.

But there are few fundamentals underlining the prices beyond supply, demand and market sentiment.

This means the price of Bitcoin and other cryptocurrencies can fluctuate wildly and investors may end up with major losses.

There have also been cases of fraud and hacks of trading platform, resulting in customer money being stolen.

“Bitcoin has endured a number of scandals and huge price volatility, but large investment groups are clearly still interested in packaging it into a tradeable product for punters,” says Laith Khalaf, head of investment analysis at AJ Bell.

“This is presumably because there would be large consumer demand for Bitcoin ETFs, but sometimes you should be careful what you wish for. 

"It’s hard to make a case that crypto fulfils a genuine financial planning need that can’t be met by other assets, but it definitely does open up investors to the possibility of very heavy losses.”