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Bitcoin in the Stock Market- What can we Expect?
BlackRock’s filings set a precedent for cryptocurrency being integrated into traditional finance markets amid SEC’s pending approval
It’s no surprise we’re here. With the investment giant BlackRock implementing recent changes to its stock exchange database, it seems an exchange-traded fund (ETF) tied to Bitcoin is imminent, which would mark the most significant point of integration for decentralized finance (DeFi) into traditional markets (TradFi). But how did this happen, and what are some of the downstream effects that might surface from it? What does it all really mean?
What is an Exchange-Traded-Fund?
First, a short explanation of what exchange-traded funds are and how they’re used. An ETF is essentially the synthesis of a mutual fund that can issue unlimited shares, with a stock’s ability to be continuously traded. Because an ETF is like a stock in that regard, you can sell your shares at any time while the market is open, rather than having to wait until it closes like a mutual fund. Imagine a car dealership not allowing you to sell your car to them until after they close — and they’ll tell you what its worth only once you get there.
Now, there are some important caveats. Just like a car, if you don’t know how to drive it or how it works, it’s not of much use to you, and trying to drive it might end up in a crash. Much the same way, its good to know how ETFs work.
At the most fundamental level, the shares which make up an ETF can be created and destroyed by the fund manager or sponsor. The sponsor is an organization which generates shares initially and the monetary backing for said shares. In terms of what the shares have their value tied to (because money doesn’t just appear out of thin air), they may track an index, particular economic area, commodity, or other financial instrument. In the case of a Bitcoin ETF, what it’s tied to is Bitcoin, with the sponsor being BlackRock. And it's no wonder they can do this – they manage almost 9 trillion in assets.
The future ramifications of a Bitcoin ETF
Returning to the implications of a Bitcoin ETF, its important to recognize the history of both financial networks would connect. TradFi garners a lot more trust than its newer and younger and scarier brother, deFi, for various reasons. Institutional investment has been around for much longer (like, 200 years longer), people have been interacting with the markets for greater periods of time, and most actually how to engage with those markets should they pick up day-trading as their next hobby. And admittedly, that's because it's simple. Stocks are tied to the values of companies, commodities futures are tied to the value of their underlying commodity, etc. All someone has to do is login to Charles Schwab (or any investment platform), put in some information, and boom, they can start speculating on their favorite fortune 500 company.
Cryptocurrency is way different in this aspect, and it's scarier because it’s not immediately intuitive how it gets its value. It’s just a much more convoluted process, but I promise it doesn’t lead to money being created out of thin air, otherwise why would so many tech nerds be using it? Because of this greater “barrier of entry” alongside a general lack of trust in the new blockchain ecosystem, both institutions and individual investors have largely chosen to remain out of the crypto-activity. As things have caught on over the past couple of years however, we’ve seen a large shift in this paradigm (the “crypto hype,” so to speak) in that there has been much more attention surrounding cryptocurrency. In fact, there has been so much that the largest investment firm and asset holder on the planet has chosen to vest its faith in it.
So back to the original question, what could this do to markets? And how could it impact the underlying markets as well?
Since their introduction in the 1990s, ETFs have skyrocketed in terms of their share of total investments by corporations. From only 66 billion in assets in 2000, they now amount to over 6 trillion in the United States. That’s an absurd and quite honestly incomprehensible figure. Here’s the thing about Bitcoin though. Around 60% of wealth in the United States is held by those who are 60 and older, but only 8% of those have invested in crypto, as compared to 25% of younger adults. Older people primarily use means of tradFi to facilitate their investments/trades. Older people also have most of the money. So with the introduction of Bitcoin onto this far more widely used platform, there is great potential for a portion of this massive amount of wealth to be invested into deFi. Here’s a graphic from the Investment Company Institute displaying just how massive this growth has been for ETFs since 2000:
ETF total asset growth since 2000. There is a slight deterioration in 2022, however, net issuance and volume have still remained high despite it. Source: Investment Company Institute
If more and more investors, institutional or individual, put their money into a bitcoin ETF, there could very well be heightened interest in bitcoin itself, spurring not only a shift in the price of bitcoin, but cryptocurrencies in general. After all, when the news came out on BlackRock listing a potential bitcoin ETF, bitcoin jumped up literally $5000 in the span of several hours.
And not only price would see a dramatic rise should those investors gain interest, but volume (and consequently significance/interest) as well. In the context of history, this would not be an unfamiliar pattern with newly introduced ETFs, and they have outperformed large indexes like the S&P 500 by orders of magnitude, seeing average annual growth rates of 132% (for context the S&P 500, albeit an older index, typically sees an 11-13% annual return!) from 1995 into the 2000s. Woah. ETFs became extremely popular because of this, and this could quite possibly repeat itself with the advent of a Bitcoin-tied one on the regular markets.
Where its going in the coming weeks & months
As a Bitcoin ETF continues pending for approval, we’ll likely see the crypto markets fluctuate and possibly gain some traction over the lull they’ve experienced since 2022, a time of bankruptcy for many major cryptocurrency organizations. However, the importance of this point of connection between tradFi and deFi should not be underestimated, and it may end up changing the market’s (both crypto and regular) behavior for the foreseeable future. Having so much wealth suddenly gaining access to an asset which is already valued at over 600 billion dollars could and likely will be quite jarring. Nonetheless, the already increasing interest in cryptocurrency could be propelled by this, and could result in decentralized finance becoming a more integral part of the world’s economic systems.
Best of luck in your journey learning (and maybe investing) in blockchain — I’m glad you made this one of your stops.