Broader Access to Investment in Crypto-Assets in the US

The year 2024 brought positive news from the world of crypto-assets. On 10 January, the US Securities and Exchange Commission approved 11 exchange-traded funds (ETFs) tied to Bitcoin (BTC), the most popular crypto-asset.

ETFs are investment funds that are listed on exchanges, and they can contain several asset classes, for example, stocks, bonds, currency instruments, commodities, etc. The inclusion of crypto-assets in ETFs and their trading on traditional exchanges will provide opportunities for more people to invest in BTC.

Until now, acquiring crypto-assets was relatively complicated. It could be done on specialised exchanges or using special digital wallets. BTC ETFs trade the shares of the fund managed by licensed managers that are well-known to a wider range of investors, for example, BlackRock, one of the largest US investment firms. When investing in a BTC ETF, the investor does not directly purchase and hold BTC, but uses the services of a BTC ETF manager of his choice. The complexity of acquiring and holding crypto-assets has so far been a significant barrier discouraging a large number of potential investors, both individual and institutional, from investing in crypto-assets.

The crypto-asset world awaited the approval of BTC ETFs with a large dose of enthusiasm, hoping that this would draw more private and institutional investors to BTC, thereby increasing its value. From 15 January 2023 when BlackRock first announced its intention to create a BTC ETF until the January 2024 decision, BTC appreciated by 96%, primarily on account of the expected approval of the BTC ETFs.

But what is the direct effect of the BTC ETFs on the market price of BTC? The answer is more complicated than it may initially seem. BTC ETFs have both pros and cons. The main assumption is that access to BTC funds on conventional investment platforms provides significant convenience to the potential investors and helps to avoid a number of risks associated with direct holding of crypto-assets (in digital wallets). Purchasing ETFs also enables investors to diversify their investment portfolios. An ETF may simultaneously contain various assets, for example, BTC and tech or other sector stocks. Such diversification mitigates investment risks, as depreciation of one asset may be offset by appreciation of another asset included in the fund.

At the same time, every investor must be aware of the remaining risks. Currently, no additional investor protection mechanisms with regard to BTC have been provided in the US.

It should also be noted that the BTC ETFs track the value of BTC, which is highly volatile. Given the weak regulation of crypto-assets, the value of a BTC ETF depends on various external shocks in the crypto-asset world, including the adoption of new regulation or individual problems in major crypto-asset exchanges (such as the relatively recent collapse of the FTX cryptocurrency exchange).

It is virtually impossible to predict the price movements of BTC or any other asset with a high degree of accuracy. Right after the US Securities and Exchange Commission's decision to approve the launch of BTC ETFs, contrary to expectations, BTC depreciated by 14.5% in a 12-day period, soon followed by a rally to an all-time high of over 70 000 US dollars in March 2024.

The upward movement of the BTC's value could also be associated with the halving of the BTC mining rewards expected this year. Halving is embedded in the BTC's algorithm and is scheduled to occur roughly every four years. As a result, the reward of BTC miners for each new block mined is halved, thereby reducing the number of new BTCs entering circulation. BTC is a fixed supply asset limited to a maximum of 21 million coins (currently, there are about 19.65 million BTC in circulation). Halving will reduce the flow of new BTC into the blockchain circulation and the BTC inflation rate. Under standard economic assumptions, given a lower supply and an unchanged demand, BTC could appreciate.

However, it is important to remember that the crypto-asset market is particularly unpredictable in terms of value fluctuations. It involves a high degree of speculation, and the lack of regulatory oversight exposes investors to a considerably higher risk compared to investing in traditional assets.

Current developments in the crypto-asset world suggest that, given the close interconnectedness in this market, significant value fluctuations could be expected not just in the case of BTC, but for other crypto-assets as well. Anyone willing to invest in crypto-assets should be aware of the inherent risks and various external factors with a potential effect on the value of those assets.

The above developments are also felt in Latvia. According to a February 2024 survey by SIA Latvijas Fakti, 94% of Latvia's population have heard of crypto-assets (a year-on-year increase of 9 percentage points). The number of people with experience in holding crypto-assets has also grown from 4% to 7% over a year.


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