Will investor behavior change once an ETF is approved?

Hope springs eternal. Or at least a few years. Maybe a decade or two?

It’s been a decade since the first ever spot bitcoin ETF application. After yet another series of spot bitcoin ETF decision delays by the US Securities and Exchange Commission, the question persists: where should a crypto-focused investor allocate funds in the event that an ETF does — some glorious day — actually earn approval?

In lieu of an SEC-blessed spot bitcoin ETF, the industry offers numerous avenues for crypto exposure right now: mining companies, venture funds, traditional stocks in companies like Coinbase and MicroStrategy, Grayscale Bitcoin Trust shares (GBTC), and of course, actual “physical” crypto held in storage — hopefully, cold.

So would the approval of a vaunted ETF really change the space all that much? Or is it nothing more than crypto’s MacGuffin, artificially pushing the plot forward with bitcoin’s orange glow emanating from a regulatory briefcase?

For institutions with billions of dollars to move around, things would definitely change for the better, says Jason Yanowitz on the Empire podcast (Spotify/Apple). “Let’s say you’re trying to deploy $2 billion into bitcoin,” he says, “it’s very tough to do that.”

“You have to get a crypto native OTC desk and implement it like that. The ETF is going to bring enhanced liquidity. It’s going to reduce the need for physical holdings,” he says.

In the same way that people don’t want to physically hold gold, slipping precious metal bars under their beds, people don’t want the responsibility of holding their own bitcoin, Yanowitz says. “They don’t want to deal with that.”

On top of the secure custody advantages, an ETF offers increased price transparency and discovery, “which institutions want,” he says.

For individual investors, an ETF provides a wider array of investment strategies. However, this might come at the cost of forgoing certain offerings that have previously acted as proxies.

“Historically,” long-time crypto investor Santiago R. Santos says, “investors have allocated to the industry by investing in venture funds, hedge funds and Grayscale products.”

Santos says a spot bitcoin ETF will likely have a negative impact on large scale funds and entities like Grayscale, if it fails to convert to an ETF. With Grayscale’s current GBTC trust, “the fees are very, very high,” Santos says. “It’s charging a one percent fee or so, whereas an ETF charges basis points,” which are “an order of magnitude less.”

“Crypto natives historically have allocated to Grayscale products through a tax advantage account, like a Roth IRA,” Santos says. With an ETF, he says, “that also becomes a possibility, which is fairly advantageous.”

An ETF offers investors enhanced access and exposure to bitcoin. It introduces a number of strategies with options markets, and facilitates the ability to borrow “in a cost-efficient manner,” he says.

This time isn’t different

Santos then asks Yanowitz, “if you had a hundred dollars to invest from scratch,” with all the options available today and ETFs to boot, “how would you allocate that hundred dollars?”

“I’m buying bitcoin and Coinbase, probably. Those are my two,” he replies, choosing to invest in something he can buy and “forget about” for ten years. “Why buy the ETF when you could buy the underlying [asset]?” he asks.

Santos answers the rhetorical question, reminding Yanowitz that an ETF offers Roth IRA possibilities, which is impossible with physical bitcoin. But such a strategy might require an investor to “max out their allocation” to achieve similar results, Yanowitz replies.

“The most dangerous thing in crypto from an allocating perspective,” Yanowitz says, “is thinking that this time will be different. And if you look at all the last cycles, bitcoin leads.”

“Bitcoin leads, that capital flows into ETH, that excess capital in ETH flows into — in 2017 it was ICOs, in 2020 it was DeFi, in 2021 it was NFTs — that keeps pushing out on the risk spectrum until the cycle is over.”

With a potential spot bitcoin ETF next year alongside the halving, a presidential election and continued pressures to “turn the money printer back on,” Yanowitz concludes, it’s “tough to be bearish Bitcoin right now.”

Despite the years of delays, the crypto faithful remain hopeful — and the convoluted plot continues.

Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the On the Margin newsletter.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.