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Can Crypto ETFs Waltz the Crypto Market into Mainstream?

Since November, the crypto market has seen a much-awaited rally: all major tokens recorded substantial gains for the first time since the 2022 crypto winter. As BTC and ETH are showing nearly 80% and 150% yearly gains, it could be the beginning of a long-awaited sustained recovery.

Largely, this rally is attributed to the market’s anticipation of Bitcoin Exchange-Traded Funds (ETFs). Grayscale’s historic victory over the SEC in October meant that regulators could no longer hold back on green-lighting crypto-based ETFs; now, industry experts believe that there is a good chance the first Bitcoin ETF could be approved as early as January 2024.

Let’s have a closer look at the state of crypto ETFs, and answer two pressing questions: can they actually drive mainstream adoption — and how sustainable the current gains are?

Current State of ETF Approval

For months, the SEC has been pending decision over several high-profile Bitcoin ETF applications from financial juggernauts like Grayscale, ARK, BlackRock (iShares), VanEck, and others — but it looks like the wait is finally over. The critical window for this decision is slated between January 5th and 10th, 2024. As I write this, the committee is giving final comments to issuers, according to reports.

The timelines for Ethereum spot ETF approvals are more vague and less publicized. However, there are several Ethereum spot ETF applications proposed by firms like Ark Invest, 21Shares, and VanEck in the pipeline, following a similar approval process as Bitcoin ETFs​. According to Matrixport research head Markus Thielen, a decision for spot-based Ether ETF applications is likely to arrive around May.

Should the approval be granted, the influx of funds into these new ETFs could be staggering. Industry estimates, like those from VanEck, suggest that about $2.4 billion could flow into these ETFs in just the first quarter of 2024. BlackRock, with its colossal $9.42 trillion in assets under management, could inject substantial capital into the already growing Bitcoin market if its ETFs are approved. Such a capital injection would not only validate the crypto market but could also spur unprecedented growth.

Conversely, a delay or denial could send ripples of disappointment across the market. However, it’s important to note that this wouldn’t necessarily spell doom for the crypto industry. The fact that such significant financial institutions are vying for ETF approval underscores cryptocurrencies’ growing legitimacy and allure as an investment class.

Impact On Market Behavior: Liquidity and Volatility

One of the likely impacts of ETFs would be an increase in market liquidity. ETFs make it simpler for a wider array of investors to gain exposure to Bitcoin and Ethereum, thereby increasing the trade volume. Trading ETFs is much simpler than trading crypto, which largely resembles stock trading. This would mean that crypto products would enter the traditional stock market and trigger a great influx of capital — which, in turn, can lead to a more liquid market, reducing the costs associated with buying and selling digital assets and making the market more efficient.

If greenlighted, ETFs may also drastically change the investor demographics: currently dominated by tech-savvy individuals and risk-tolerant investors, the market could see an influx of traditional and institutional investors.

As ETFs are regulated investment products, they will provide a more stable and predictable way to invest in cryptocurrencies, attracting investors who may have previously been wary of the market’s erratic nature — and, potentially, bringing some stability into the extremely volatile market.

A Stepping Stone to Mainstream Adoption?

The approval of crypto ETFs by the SEC would be a significant endorsement of the legitimacy of cryptocurrencies as an asset class. This regulatory nod could pave the way for more comprehensive crypto regulations, fostering a safer and more reliable market environment.

Also, beyond immediate market effects, it may change our very perception of crypto – from a speculative venture to a legitimate part of the larger financial system. This shift could spur innovation and investment in the sector, potentially leading to broader adoption of blockchain technology and new use cases for digital assets.

Summing up, the approval of Bitcoin and Ethereum ETFs may be a game-changer for the crypto market in 2024. The excitement around it is profoundly legitimate, and if expectations are met, it could catalyze crypto as an institutional investment product in the long term.