Among the news that have received international attention last month, one of the most prominent developments was the historic approval given by U.S. regulatory authorities on Thursday, January 11, to the first exchange-traded funds (ETFs) that directly hold Bitcoin. The approval of Bitcoin ETFs, ratified after 10 years of waiting and postponements, represents a decision that has the potential to redefine the future of digital currencies and the meaning attached to the term “crypto.”
For the potential impact of this new financial instrument, we decided to delve deeper into the matter with Giacomo Zucco, a well-known entrepreneur and educator in the international landscape. Last year, Zucco was among the leading instructors of the Plan ₿ Summer School and one of the most highly regarded speakers at the Plan ₿ Forum, both of which are educational events held in Lugano.
Giacomo, could you start by explaining what a Bitcoin ETF is and how it differs from traditional Bitcoin investments?
“An ETF is an Exchange Traded Fund: a financial instrument that allows you to ‘virtually’ invest in a particular asset or currency, tracking its price movements even without owning it directly, and therefore with a fairly agile and cost-effective passive management. There are ETFs that track stock indices, ETFs that track various types of commodities, such as precious metals and energy resources, and now there are ETFs that track Bitcoin: financial instruments that replicate its market performance, and you can invest in them according to the U.S. SEC.”
How do you think the introduction of Bitcoin ETFs will influence the overall Bitcoin market and its volatility?
“The way the introduction of Bitcoin ETFs, particularly the ones recently approved in the most important financial market in the world, the United States, will influence the Bitcoin market as a whole is not currently predictable with certainty. On one hand, it’s possible that these instruments allow access for a type of capital that previously couldn’t flow into this ‘new’ asset. Think, for example, of conservative pension funds or other institutional funds, or even individuals or companies that couldn’t or didn’t want to register on a cryptocurrency exchange. This influx of capital could clearly increase the demand for Bitcoin under certain conditions.
On the other hand, a financial instrument like this is also prone to selling mechanisms and possibly even price suppression operations (with the specter of fractional reserve in the background). So, despite what is being said elsewhere, the price impact could go in both directions. In the first few days after approval, many expected an unequivocally positive effect, but in reality, the impact on the price is generally almost neutral, at least for now. Volatility, on the other hand, should theoretically decrease, in the sense that an increase in liquidity and market depth typically reduces the impact of individual buying or selling decisions by economic actors.”
Do Bitcoin ETFs make Bitcoin investment more accessible to the average investor? If so, how?
“Yes and no, depending on what is meant by the ‘average investor.’ If by that definition, we mean institutional investors who already have a strong presence in the regulated market, especially in the United States, then the answer is clearly yes. They can now easily and quickly expose themselves to Bitcoin’s price through familiar channels already used to buy any other type of financial asset, without technical, legal, or tax uncertainties.
If, on the other hand, we refer to the occasional investor or individuals with limited market access, an ETF is actually the opposite of one of the characteristics that favor those who own the Bitcoin asset directly: the fact that it can be owned and traded by anyone, regardless of geographic location, nationality, age, political affiliation, and financial qualifications.”
What are the main practical differences for investors between holding Bitcoin ETFs and directly holding Bitcoin?
“There are many significant differences between holding a Bitcoin ETF and directly holding the Bitcoin asset at the individual level. The first difference, as mentioned earlier, is access: an ETF is only easily available to the restricted circle of current qualified investors, while the Bitcoin asset is accessible to anyone with access to a computer and an internet connection. The second difference is control: an ETF cannot be moved as and when the investor wants, without first obtaining permission from regulated markets and regulators themselves. It can also only be transferred to other authorized investors during market opening windows. An ETF can also be frozen or confiscated for legal or political reasons. It can also be canceled or suspended for volatility reasons by a financial market. On the other hand, actual Bitcoin, held directly and therefore individually, depends only on cryptography and not on regulation or policy. It is virtually non-confiscatable and unstoppable in its movements, without closing days or hours for trading. The third difference is the guarantee of underlying supply: an ETF could create so-called ‘paper Bitcoin,’ that is, exposure that does not correspond 1 to 1 with collateral, while the actual Bitcoin that we can verify on our own node has a certain supply, which anyone can verify and which can never be changed by anyone, cannot be inflated or altered or manipulated.”
How do Bitcoin ETFs fit into the traditional financial system, and what does this mean for the future of decentralized finance?
“Personally, I don’t believe that the approval of Bitcoin ETFs has a particular impact on so-called ‘decentralized finance,’ beyond the obvious influence characterized by Bitcoin’s price dynamics in particular. These financial instruments are completely centralized and are in the hands of centralized traditional finance, following its patterns, benefits, and disadvantages without significant changes. So, apart from bringing new liquidity into the price of Bitcoin, which is itself used in what we could define as the ‘decentralized finance’ world, I don’t see particular connections or mutual consequences.”
What should investors consider in terms of risk management when investing in Bitcoin ETFs?
“When investing in Bitcoin ETFs, individuals and companies should primarily consider two classes of risk. The first concerns price volatility, which should be comparable between ETFs and the underlying asset. Bitcoin is a very young asset, with a certain and unchangeable supply, but its demand is still immature and highly volatile. For now, it has fluctuated globally positively over the years, but in the short term, volatility is very intense and not suitable for all financial tastes. The second category of risk is typical of ETFs as a financial instrument, unrelated to direct ownership of an underlying asset, as mentioned earlier: counterparty risk, or the potential risk of failures, confiscations, freezes, suspensions, or exclusions from access.”
