Will bitcoin ETFs bring crypto in from the cold?

On 10 January, the US Securities and Exchange Commission (SEC) approved the first spot bitcoin exchange-traded fund (ETF). But in typical crypto fashion, even a dry regulatory announcement was high on drama: the day before, the SEC regulator was forced to admit that its X social media account “had been compromised” after a tweet prematurely claimed that approval had been granted. 

In the statement issued alongside the (genuine) approval, the regulator stressed that “while we approved the listing and trading of certain spot bitcoin exchange traded product shares today, we did not approve or endorse bitcoin”.

The whole episode seems to have thrown up tension at the heart of the crypto world. Economists at the Official Monetary and Financial Institutions Forum (OMFIF) think tank describe bitcoin as “designed to wrest control of the world of finance from banks – both central and commercial”. Yet despite the apparent hostility, the gap between the crypto world and the incumbent financial system seems to be shrinking. Will a new spot ETF bring crypto assets into the mainstream?

Has the crypto winter thawed? 

After ETF approval was granted, the bitcoin price hovered around $45,000 – above the $16,000 trough it hit in December 2022, but below the $69,000 peak it hit before the ‘crypto winter’ set in. The OMFIF calculates that the period wiped 75 per cent – a whopping $2.3tn – from the supposed value of digital assets.

Although humbling for crypto asset holders, analysts think that the crypto winter might have been good for the market as a whole. Economists at OMFIF said that “the winds of the crypto winter have blown away much of the speculative froth in the digital assets space”. In a September report, Deutsche Bank analysts said that the period was a “net positive”, edging the crypto system closer to the established financial sector and exposing some “well-known structural issues”.

The crypto winter may have swept away some of the hype, but it appears to have swept away some confidence in the crypto market, too. A September Deutsche Bank survey revealed that in all countries, the biggest barriers to adoption were still concerns that cryptocurrencies were too risky, highly volatile, and not subject to regulation. SEC chair Gary Gensler issued almost identical warnings in a thread on X earlier this month. 

Yet analysts at Morgan Stanley think that bitcoin could rally again this year, thanks to a ‘halving event’. To preserve scarcity, the number of bitcoins created every 10 minutes is cut in half every four years. (Very recent) history suggests that a halving event gives way to a crypto ‘summer’, where the value of bitcoin climbs and regains its previous high. But there have only been three so far: Morgan Stanley analysts cautioned that “in other words, there is still a lot to learn”.

Is the gap between the crypto world and the rest of the financial system closing?

Meanwhile, 131 central banks have taken steps towards developing their own central bank digital currencies (CBDC). As the table below shows, these are distinctly different to speculative crypto tokens: designed, at their core, to act as a digital version of notes and coins already in use.

But the role that ‘Britcoin’ would play in the UK economy remains unclear. In December, the Treasury Select Committee produced a report on the digital pound, entitled “still a solution in search of a problem?” – and the rest was no less sceptical. The Committee concluded that “it is not clear to us at this stage” that the benefits of a digital currency could offset the risks to privacy and financial stability. It also suggested that the Treasury and the Bank of England (BoE) should consider paying interest on a digital pound. 

This could have the advantage of making monetary policy more effective: rate changes would be transmitted directly to CBDC holders, rather than through banks and savings providers. Yet the idea puts the committee at odds with the BoE and the Treasury, which have previously stressed that a digital pound would not be a savings (or speculative investment) product. For now, the question of just how a digital pound would work is still, like the value of bitcoin, up in the air.