Understanding Bitcoin ETF: What it means for everyone in Web3

As Bitcoin and the crypto asset space have become better-known and more popular, various novel ways of extending their reach have been developed. The biggest recent such effort, for example, has been the introduction of Bitcoin ordinals, which are ways of creating Bitcoin-native NFTs through inscriptions on satoshis.
Another way of extending the reach of Bitcoin that has been the subject of many conversations (and more than a little legal controversy) is an exchange-traded fund (ETF) focusing specifically on Bitcoin.
This piece will provide some background information on how ETFs work, before covering ongoing attempts to build a Bitcoin ETF and the consequences this will have on the broader arena of digital assets. All of this context will be of interest to the Core Chain and Core enthusiasts. Remember that Core was built from the ground up to align with Bitcoin mining and the Bitcoin ecosystem, so its evolution, prospects, and future are of great interest.

What is an ETF?

ETFs are baskets of assets, and they’re usually constructed to track an index or a segment of the economy. Rather than buying shares of random biotech companies, for example, you could buy shares of a biotech-focused ETF and quickly gain exposure to a wide variety of relevant companies all at once.
ETFs are often described as being similar to mutual funds, with one major difference being that ETFs can be bought and sold on the stock market, where mutual funds cannot. One thing both have in common, however, is that they provide a relatively straightforward source of diversification, which is one of the main reasons investors favor them (demand for liquidity being another).

What is a Bitcoin ETF?

Another reason that investors favor ETFs is that they substantially reduce the friction involved in making investments. There’s no reason you can’t figure out what companies are in that biotech ETF we just talked about and then buy them on your own, but having the ETF available removes the need to go through all the trouble.
Well, the same thing is true for a Bitcoin spot ETF. Such an ETF would allow tradfi investors to gain exposure to Bitcoin, but without the research into crypto wallets and private-key storage that occupies so much attention in Bitcoin circles. It would also provide a safer, more regulated avenue by which to invest in the Bitcoin boom (though self custody is still preferable if you’re able and knowledgeable enough to manage it).
There have also been discussions around a similar sort of vehicle, Bitcoin futures ETFs. Rather than holding actual digital assets like a spot ETF, a Bitcoin futures ETF would instead trade in so-called futures contracts which speculate on Bitcoin’s future price movements. Until recently, the seven Bitcoin ETFs all dealt in futures contracts.
Broadly speaking, a Bitcoin spot ETF would act as a bridge between the tradfi and web3 domains. Until now they’ve had relatively little contact, but an ETF will change that dramatically.

The Historic Approval of a Bitcoin ETF

And, this process recently took a major step forward. On Wednesday January 10th, 2024, the first Bitcoin spot ETF’s approval was announced by the SEC. Applications from eleven issuers — Valkyrie, Fidelity, Hashdex, ARK Invest, BlackRock, and others — were cleared, with trading set to begin the next morning. It is believed that this will release a great deal of institutional investment; with Bitcoin no longer being considered a strange and exotic asset class, it will instead come to be seen as a standard part of many portfolios.
In an interesting historical wrinkle, the real announcement came shortly after a false one. The SEC’s Twitter account was hacked on Tuesday and a fake Tweet claiming the approval of a Bitcoin spot ETF was posted, but that didn’t stop the actual approval being broadcast just a day later.
Needless to say, this is fantastic and welcome news!

How Will a Bitcoin ETF Help the Web3 Space?

Now that this has come to pass, what does it mean for crypto? The specific ramifications can’t be predicted in advance, but the key takeaway is that this will be a huge step toward the widespread adoption of Bitcoin.
The formal acknowledgment of Bitcoin by the world’s preeminent financial institutions lends a heightened level of credibility to the entirety of the Web3 ecosystem. This recognition underscores the growing acceptance and validation of Bitcoin within the global financial landscape, thereby enhancing its status as a noteworthy and legitimate asset.
From the beginning, Bitcoin has largely been the province of a small group of hardcore enthusiasts — hackers, cryptographers, libertarians, and the like. The existence of a Bitcoin spot ETF, however, offers a clear signal that digital assets have achieved broader interest and significance. This could make it easier to clear future regulatory hurdles, and even establishes precedent for the creation of spot ETFs for other crypto assets.
Viewed from the other direction, a Bitcoin spot ETF would also represent progress in the legitimization of Bitcoin, offering it unprecedented penetration into traditional financial markets. It will now be possible to gain exposure to Bitcoin with a retirement vehicle like a 401(k), or a plain brokerage account.
Since a Bitcoin spot ETF will make it much easier to invest in Bitcoin through traditional means, it could also lead to additional waves of adoption. Even better, with more capital, liquidity, and trading volume in the space, Bitcoin’s famed volatility might begin to dampen.
As the most Bitcoin-aligned layer 1 project, these are all developments that would please the Core community.