Leaving Behind Last Yr’s Chaos, Cryptos Begin a New Life

Analysis of Bitcoin ETFs Trading in the US and Its Impact on Investors

Source and Citation: Excerpts from an article published in the Economic Times on January 13, 2024, by ET Bureau.

Analysis for Layman

Exchange-traded funds (ETFs) tracking the price of bitcoin have started trading in the US. An ETF allows investors to buy units of a fund that holds an underlying asset, in this case, bitcoin. Investors do not directly own bitcoin but can benefit or lose from its price movements.

These ETFs are now approved by the Securities Exchange Commission (SEC), making crypto investing more accessible to mainstream investors. Previously, buying bitcoin required dealing with unregulated crypto exchanges, which posed risks. These ETFs trade on normal stock exchanges, making them easier to access. Fees are lower compared to direct bitcoin funds, and taxation may be more favorable.

Impact on Retail Investors

For retail investors in India, US-listed bitcoin ETFs offer new opportunities to invest in cryptocurrencies. The complexity of digital wallets and unregulated exchanges is bypassed, and investors can buy units in these ETFs through international trading accounts. However, costs related to foreign exchange, account setup, maintenance, trading commissions, spreads, and ETF management fees should be considered. Taxes on crypto assets may still apply at a 30% rate, impacting returns.

There are risks, especially if bitcoin prices fall, as the cryptocurrency market remains highly volatile. Investments should be made judiciously after a comprehensive understanding of all aspects. Despite risks, the simplification opens up bitcoin to a wider audience.

Impact on Industries

Several industries could be impacted by mainstream bitcoin ETF investing:

• Banking/Finance: May accelerate the development of crypto offerings, but traditional banks could lose assets under management.
• Technology/Consulting: Increased interest and funding for crypto tools and infrastructure to support growing adoption.
• Regulators: Need to monitor crypto investing protections and trading integrity with broader individual participation.
• Exchanges: Mainstream exchanges may list crypto assets alongside traditional stocks/ETFs, unlocking new trading venues.
• Payment Firms: Existing systems may need to adapt if crypto becomes a payment tender, and new crypto payment rails could emerge.

The overall impact on these industries depends on how well cryptos integrate with and complement existing structures.

Long-Term Benefits and Negatives

Benefits

• Increased adoption as an alternative asset class, allowing wider investor participation.
• Potential reduction in volatility as mass scale dampens price swings.
• Innovation in financial services, exchanges, and technology around cryptos.
• Birth of new payment technologies, vendors, and systems based on blockchain.

Negatives

• Oversized boom/bust crypto price cycles that destabilize markets.
• Loss of investment capital if interest fades and prices collapse.
• Systemic dependency on unreliable technologies like blockchain.
• Misuse for illegal activities without sufficient oversight.

Outcomes will depend on how well cryptos integrate with existing structures and the extent of regulatory oversight.

Short-Term Benefits and Negatives

Benefits

• Easier access drawing more investors to boost prices.
• Validates crypto as a regulated investment as SEC concerns ease.
• Generates enthusiasm similar to early crypto rallies.
• Lends reputability that stabilizes recent slump.

Negatives

• Bitcoin prices stayed flat on the ETF launch, indicating low impact.
• Existing crypto exchanges may lose activity to mainstream platforms.
• Crypto interest could be muted after last year’s FTX/Binance fallout.
• Bitcoin itself fails to gain traction even with ETF access.

Short-term outcomes will hinge on whether investors view the availability of these ETFs as groundbreaking enough to substantially drive up bitcoin prices.

Impact of Bitcoin ETFs on Companies:

Indian Companies Likely to Gain:

1. Zerodha & Upstox: These leading Indian discount brokers offer international investing facilities under LRS. Increased interest in Bitcoin ETFs could drive account openings and trading volume, boosting their commission revenue.
2. ICICI Bank & HDFC Bank: These largest Indian banks provide forex services and international remittance channels needed for investing in US ETFs. Higher demand for these services could generate additional income.
3. Tech Mahindra & Infosys: These IT giants have expertise in blockchain technology, which underpins cryptocurrency. Growing institutional interest in Bitcoin could lead to increased demand for their blockchain consulting and development services.
4. CoinDCX & WazirX: These major Indian crypto exchanges currently face regulatory uncertainty. The success of US Bitcoin ETFs could strengthen the case for regulated crypto products in India, potentially benefiting existing players.
5. Tata Elxsi & Tech Mahindra: These companies offer digital wallet and security solutions for crypto assets. Increased institutional participation in Bitcoin could push demand for their secure storage and transaction management services.

Indian Companies Likely to Lose:

1. Gold ETFs: Bitcoin ETFs could offer investors an alternative to gold as a hedge against inflation and market volatility. This might lead to some capital outflow from domestic gold ETFs like those offered by SBI and Axis Bank.
2. Payments Companies: If Bitcoin ETFs provide a convenient way for institutional investors to invest in crypto, it could reduce their reliance on traditional payment gateways for international transactions. Companies like Paytm and Razorpay could see slower growth in cross-border payment volumes.
3. Traditional Investment Advisors: The simplicity and familiarity of Bitcoin ETFs could attract investors who might otherwise seek guidance from wealth advisors. This could impact the fee income of investment advisory firms.

Global Companies Likely to Gain:

1. BlackRock & Fidelity: These asset management giants are launching Bitcoin ETFs, giving them a first-mover advantage in potentially capturing a large share of institutional investment in crypto.
2. Coinbase & Gemini: These leading US crypto exchanges could benefit from increased investor awareness and interest in Bitcoin generated by ETFs. They might see higher trading volumes and user sign-ups.
3. NVIDIA & AMD: These chipmakers supply the hardware powering cryptocurrency mining. Higher Bitcoin prices and increased institutional adoption could boost demand for their graphics processing units (GPUs).
4. MicroStrategy & Tesla: These companies hold significant Bitcoin reserves on their balance sheets. The increased legitimacy and accessibility brought by Bitcoin ETFs could positively impact their stock prices.
5. Cybersecurity Firms: The rise of institutional involvement in crypto could attract more sophisticated cyberattacks targeting exchanges and custodians. This could benefit cybersecurity companies like Crowdstrike and Palo Alto Networks.

Global Companies Likely to Lose:

1. Traditional Financial Institutions: If Bitcoin ETFs successfully attract significant institutional capital away from traditional assets like stocks and bonds, it could disrupt the existing financial order and potentially hurt the profitability of established banks and asset managers.
2. Central Banks: The widespread adoption of Bitcoin could challenge the dominance of fiat currencies and central bank control over monetary policy. This could raise concerns about financial stability and potentially lead to stricter regulations on cryptocurrencies.
3. Energy Companies: If Bitcoin mining becomes less profitable due to increased competition or reduced energy consumption from newer mining technologies, it could hurt companies involved in fossil fuel extraction and power generation.

Market Sentiment:

The news of Bitcoin ETFs is likely to be met with mixed market reactions. Some investors may see it as a positive development, legitimizing and democratizing access to cryptocurrency. This could lead to increased inflows into Bitcoin ETFs and related companies, boosting their stock prices. However, others may remain cautious due to the inherent volatility of cryptocurrencies and potential regulatory hurdles. The overall market sentiment will likely depend on the initial performance of Bitcoin ETFs and the broader economic and regulatory environment.

Disclaimer: This analysis is based on current information and is for informational purposes only. It should not be construed as financial advice or a recommendation to invest in any particular company or asset. Please conduct your own due diligence before making any investment decisions.