What a US bitcoin ETF could mean for Canadian investors, advisors?

Analysts are predicting SEC approval as early as Wednesday, how will ETFs in the world’s largest financial market change the dynamic for cryptocurrency?

What a US bitcoin ETF could mean for Canadian investors, advisors?

The US Securities and Exchange Commission (SEC) could approve spot bitcoin ETFs for listing in US markets as early as Wednesday, according to some analysts. Significant asset managers, including BlackRock, Fidelity, and Cathie Wood’s Ark Invest have already announced their fee structures for pending ETFs — which could very likely indicate they expect approval soon.

The approval of bitcoin ETFs could bring a much wider swathe of the US financial market — the largest financial market in the world — into the cryptocurrency. In part due to anticipation of an ETF’s approval bitcoin prices have run up recently. However, Mark Connors does not believe that the impact of these ETFs on the value of bitcoin has been fully priced in by the market yet. The director of research at 3iQ Corp outlined exactly what brought US regulators around to the approval of bitcoin ETFs, what Canadian advisors should take from the news, and how the introduction of a US ETF could change the overall dynamics of the cryptocurrency.

“The US market represents about 40 per cent of all financial assets globally, so that right there is demand,” Connors says. “In addition, other markets don’t look to the SEC for approval of an investment, but they do look for SEC approval to remove an impediment. Now you also have the introduction of the institutional managers introducing bitcoin into a portfolio with a rebalancing structure that could dampen the troughs and spikes and result in a more modulated trajectory [for bitcoin].”

Read more: Former Citi execs plan 'SEC free' Bitcoin-backed securities | Wealth Professional

Connors explains that the US approval of a Bitcoin ETF was made likely in the autumn of 2023 after the SEC chose not to appeal the ruling by Judge Neomi Rao of the US Court of Appeals for the DC Circuit in August which ruled that the SEC could not reject the proposal to list shares of the Grayscale Bitcoin Trust as an exchange traded product. Since its decision not to appeal, Connors says the SEC has been more proactive in its work with ETF issuers, offering them feedback and guidance to get their products approved. 

Connors predicts that the approval of US bitcoin ETFs should have huge upside potential for the asset. In addition to the demand uptick from US institutional money managers, he expects more investors to be drawn to what he considers bitcoin’s ‘good volatility,’ the fact that often spikes in Bitcoin volatility come with significant movement to the upside rather than just to the downside.

That said, Connors notes that many investors have already lost out on their bitcoin holdings, largely due to the significant volatility they have experienced in the past. Nevertheless, those who held the cryptocurrency have largely been rewarded, with bitcoin ending 2023 as the best-performing asset. Connors views bitcoin as a very different kind of asset, and while he says 3iQ’s base case is bitcoin rising to between $110,000 and $160,000 (USD) per coin by the end of 2024, he expects there to be volatility to both the upside and downside along the way. He does not advocate for day trading in bitcoin or using leverage to invest in the cryptocurrency.

As any looming ETF approvals gather headlines and potentially drive up bitcoin prices, Canadian advisors may begin to field more questions from their clients about the cryptocurrency. He believes that this is a moment for advisors to broaden and deepen their understanding of the baseline dynamics of bitcoin. They should be able to ask and address questions around issues like bitcoin’s volatility, its supply and demand dynamics, its alleged use as a criminal currency, and the energy required in bitcoin mining. Whatever an advisor’s view on bitcoin, the approval of US ETFs, and the resultant changes in demand dynamics, should be greeted as an opportunity for education.

Canadians already have a great deal of experience with bitcoin ETFs. Canada has had bitcoin ETFs available on the market since 2020. While the regulatory environments are different enough that these US asset managers may not take queues from their Canadian counterparts, Connors predicts that the coming demand following any ETF approval should reward Canadian bitcoin ETF investors.

“Canadians got in early and now there’s a market ten times the size coming in. Be alert. Volatility could increase materially because of that,” Connors says. “The daily supply is going down from the halving in April. 900 new tokens get created every day by miners, and that drops to 450 in April. Supply is going to be cut in half and, at the same time, a 10 times larger animal is coming into the market. We’re very constructive, but it’s not going to be a straight line.”