Bitcoin ETFs: is crypto staging a comeback?

The bitcoin ETF has generated front page headlines throughout the world. © Keystone / Christian Beutler

The approval of bitcoin Exchange-Traded Funds (ETFs) in the United States has generated many headlines. What do this mean for cryptocurrencies and for the growing crypto industry in Switzerland?

The US financial regulator, the Securities and Exchange Commission (SEC), has given the green light for major mainstream financial firms, such as Blackrock, to offer cryptocurrency-backed investments to the general public.

The price of bitcoin has been driven up by this news. Swissinfo.ch looks at the key talking points of this development.

What are bitcoin ETFs?

Exchange-Traded Funds have been around since the early 1990s and have become one of the most popular investment products, growing into a market worth trillions of dollars.

ETFs allow people to invest in a range of assets, such as company shares and precious metals, without having to go to the bother of buying and storing these assets themselves.

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The ETF manager, a financial firm, will do this heavy lifting (for a fee) while the investor simply takes a stake in the profit or loss. This stake can be easily bought and sold on exchanges.

Bitcoin demands technical know-how to acquire and a secure means of keeping encrypted passwords – which are equivalent to the keys to a vault – safe from theft or loss. ETFs solve this problem and give investors a hands-off exposure to bitcoin.

Why has the price of bitcoin risen so sharply?

Bitcoin surged in value from around $27,000 in mid-October to $46,000 by the time the SEC made its announcement on January 10. Part of this rise in value has been attributed to growing rumours about the arrival of bitcoin ETFs.

The SEC’s endorsement of bitcoin ETFs in the world’s largest financial market has simultaneously opened the doors to large numbers of new investors and boosted the credibility of cryptocurrencies.

“Having a transparent, regulated financial product in place is a major breakthrough for the crypto industry,” Dirk Klee, CEO of Swiss crypto company Bitcoin Suisse, told SWI swissinfo.ch. “Bitcoin has now reached the mass market with the engagement of triple A asset managers, like Blackrock and Fidelity. Bitcoin’s endorsement by these big players shows that crypto is now mainstream and unstoppable.”

The SEC decision has also subdued fear about bitcoin in the traditional financial world, according to Sina Meier, head of 21Shares Switzerland, a company that specialises in crypto Exchange-Traded Products. The SEC has approved a bitcoin ETF issued by 21Shares in collaboration with US tech investor ARK Invest.

“It’s only natural that everyone looks to the United States for clarity,” Meier told SWI swissinfo.ch. “Financial advisors will feel more secure with crypto ETFs with a clear regulatory perspective from the US. They now know they won’t get into trouble for advising clients to buy into these products.”

Is bitcoin now a safe bet?

Just like with any asset class, investors could also endure bitcoin losses. Cryptocurrency prices are notoriously volatile, rapidly gaining or dropping in value in a short space of time.

The SEC has reluctantly given the green light to bitcoin ETFs, having dismissed similar applications in the last few years. When a US court ruled last October that the SEC acted unfairly in declining one such application, the regulator forced the regulator to soften its stance.

As the first bitcoin ETFs were finally approved on January 10, SEC Chair Gary Gensler statedExternal link that “bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing.”

But provided ETF managers behave correctly in accordance with the regulator’s rules, the SEC is now prepared to let investors take their own chances with an asset it still believes to be toxic.

What does this mean for Switzerland?

The SEC-approved bitcoin ETFs are offered only in the US market. Different regulations make it difficult to offer the exactly same investment product in the European Union, says Sina Meier of 21Shares.

But other crypto financial products, such as Exchange-Traded Notes (ETNs), which bear some similarities to ETFs, have existed in Switzerland and Europe for several years. These investment vehicles also allow people to put their money into cryptocurrencies without having to own them.

The SEC’s ETF decision could have a long-term indirect effect on the crypto industry in Switzerland by virtue of increasing adoption of cryptocurrencies.

Switzerland is developing a domestic cryptocurrency and blockchain industry that markets itself under the banner of “Crypto Nation”. This sector counts well over 1,000 companies, supporting nearly 6,000 jobs.

A growing number of traditional banks, such as the cantonal banks of Zug, Lucerne and St Gallen, plus the financial arm of the Swiss Post Office, are increasingly offering crypto trading and investment services to clients.

What does a typical Swiss bitcoin investor look like?

Bitcoin trading app Relai has witnessed growth in business over the last four months, during which time the price of cryptocurrencies has steadily recovered.

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Relai’s 300,000 customers are currently generating CHF30 million in trading volumes per month. The average single investment is in the CHF200-CHF250 range, but this can extend to over CHF10,000, according to CEO Julian Liniger.

A typical client would be male, aged between 25 and 35 looking to invest for at least a year, Liniger told SWI swissinfo.ch.

Cryptocurrencies can inspire both fascination and concern. The rebellious form of digital money was invented as an open challenge to the established financial system and has frequently been associated with money laundering and fraud.

The SEC’s endorsement of bitcoin ETFs gives the industry more credibility, says Sina Meier, head of 21Shares Switzerland.