The landscape of cryptocurrency investment is on the verge of a significant transformation with the potential approval of spot Bitcoin Exchange-Traded Funds (ETFs) by the United States Securities and Exchange Commission (U.S SEC). While the prospect of Bitcoin ETF has generated excitement among investors, examining the potential downsides that could result from their approval is crucial.
Just as the expectation of a likely approval by the U.S SEC has driven bitcoin (BTC) price up, a recent report predicting a likely disapproval has also negatively affected BTC price.
This article discusses spot Bitcoin ETFs and the crypto market, highlighting the possible negative effects that may emerge if regulatory authorities give the highly anticipated go-ahead.
Read also: What is a cryptocurrency ETF?
Spot bitcoin ETFs outlook
Spot bitcoin ETFs, unlike futures-based ETFs, directly hold the underlying asset—BTC. The attraction of these investment vehicles lies in their potential to provide crypto investors with a regulated gateway into the world of cryptocurrencies.
Notably, several proposals for spot Bitcoin ETFs have been submitted to the U.S SEC by leading global asset managers including BlackRock, Ark Investment, and Fidelity Investment. However, the regulatory landscape surrounding cryptocurrency ETFs, including spot Bitcoin ETFs, has remained a subject of ongoing discussion and evaluation by the U.S SEC.
Citing concerns related to market surveillance, investor protection, and price volatility, no spot bitcoin ETF has been approved by the U.S SEC at the time of writing. Nonetheless, the crypto community continues to monitor developments surrounding spot Bitcoin ETFs as their approval could mark a pivotal moment for the cryptocurrency market.
Most importantly, the approval of spot Bitcoin ETFs could signal a maturation of the crypto market. Also, the development could lead to increased institutional and retail interest in the leading cryptoasset, potentially driving the price of BTC higher. Moreover, it would offer investors a regulated and more secure means of exposure to BTC. Regardless of these and many more upsides, it’s essential to acknowledge the potential negative aspects that spot Bitcoin ETFs could bring to the crypto market.
Read also: Bitcoin Spot ETF vs. Bitcoin Futures ETF
Possible Downsides of spot bitcoin ETFs
Of course, there are always two sides to a coin. The same can be said of spot bitcoin ETFs. Below are some of the major possible drawbacks of this highly anticipated financial instrument:
- Market manipulation and increased volatility
Spot bitcoin ETFs, if approved, could amplify the volatility of the bitcoin market. That is, large institutional investors, through the creation and redemption process of ETF shares, may exert significant influence on BTC price, leading to increased volatility. In other words, the advent of spot bitcoin ETFs could open the door for increased market manipulations. Given there is relatively lower liquidity in the crypto market compared to traditional assets, large-scale investors could exploit this vulnerability, executing trades that impact the broader market and thereby, undermine fair price discovery.
- Centralization threats
The approval of spot bitcoin ETFs could lead to increased centralization which contradicts bitcoin’s core principle of decentralization. Practically, as large institutional investors enter the market, there is a risk that the decentralized ethos underpinning BTC may be compromised. In other words, a concentration of BTC ownership among a few powerful entities could undermine the principles of a decentralized financial system. More so, with spot bitcoin ETFs, users do not have full control or direct ownership of their assets.
- Custodial risks
Spot bitcoin ETFs necessitate the custody of significant amounts of BTC by a single entity or platform. The security of these holdings becomes a critical concern as the crypto market has witnessed high-profile hacks and security breaches throughout its young history. Therefore, institutional crypto investors may become the targets for malicious actors or hackers seeking to exploit vulnerabilities in the centralized custody arrangements.
- Tax complexity
The taxation of crypto investments is already a complex terrain given most countries are yet to fully regulate cryptoassets trading. Notably, the introduction of spot bitcoin ETFs could further complicate matters. Accordingly, investors may face challenges in navigating the tax implications associated with ETF transactions, potentially leading to unintended tax consequences.
The potential approval of spot bitcoin ETFs by the U.S SEC presents both opportunities and challenges for the crypto market. While the benefits include increased institutional interest and a regulated entry point for traditional investors, the potential negative impacts should not be overlooked. Concerns about market manipulation, increased price volatility, centralization threats, custodial risks, and tax complexity warrant careful consideration.
Image source: Cryptorank.io
Credit: Ndianabasi Tom A crypto journalist and content writer who has been talking about cryptocurrency and blockchain technology since 2018, Ndianabasi is a Writer at Crypto Asset Buyer (CAB).