The approval of 11 spot bitcoin exchange-traded funds (ETFs) by the U.S. Securities and Exchange Commission (SEC) from issuers including BlackRock and Invesco/Galaxy Digital has intensified the connection between cryptocurrencies and the traditional financial system. While crypto enthusiasts see these ETFs as a means for investors to easily and safely gain exposure to bitcoin, some experts caution that this development could introduce unforeseen risks, creating potential challenges during market stress.
The combined assets of the approved bitcoin ETFs amount to around $21 billion, and some analysts predict that they could draw as much as $100 billion this year alone from retail and institutional investors. However, concerns have been raised about the potential risks associated with increased interconnection between the traditional financial system and the crypto ecosystem.
SEC Chair Gary Gensler acknowledged bitcoin’s volatility and urged investors to exercise caution. Critics argue that as more money flows into these products, there is an elevated risk of greater interconnection between the core of the financial system and the crypto ecosystem, posing challenges during periods of market stress.
The historical volatility of bitcoin, which is approximately 3.5 times that of equities, raises concerns about how bitcoin ETFs could exacerbate volatility during market stress. Additionally, there are fears of dislocations between the price of the ETF and bitcoin, potentially creating systemic risks.
Experts point to past instances where exchange-traded products, especially those that are complex, less liquid, and highly leveraged, experienced stress and contributed to market disruptions. The approval of bitcoin ETFs marks a significant development in the evolving relationship between cryptocurrencies and traditional finance, but it also introduces new considerations for market participants and regulators.
