Crypto: Don’t underestimate these two risks of Bitcoin ETFs

The most anticipated event in the crypto sphere in recent months is the listing of a spot ETF for bitcoin. The good news is that it’s official, we can now buy bitcoin via a spot ETF. This is a big step forward in the democratization of bitcoin. This is why we will look together at how a listing can impact the choice of investors and its performance.

The emergence of ETFs

A little history to understand the excitement around the possibility of having a spot ETF. First of all, the first ETF saw the light of day in 1990 in Canada. This was a great revolution in the world of investment.

etf canada, performance
Source : Vanguard

Moreover, we can see that Canada is often one of the forerunners in this area, whether for an equity ETF but also for a bond ETF. Canada was also the first to offer a listing on bitcoin future and not spot.

In its early days, these products were mainly for institutions, but then they were democratized to make them available to investors. ETFs can replicate variations in stock indices, sectors, but also types of assets (gold, bonds, bitcoin, etc.).

Let’s take the example of stock indices. As they are made up of several companies, like a basket of stocks, this allows investors to have shares of several companies in the same place. This allows for a diversified product. It is at the same time that over the last 20 years, passive management has gradually taken its place, recently overtaking active management.

ETF, active management, passive management
Source : Twitter

It should be added that in general, putting your money under active management involves higher management fees than buying a simple index ETF where the fees remain inexpensive.

The popularization of ETFs

The popularization of ETFs has become so important that it has practically become an incentive for those starting out in the stock market. When you want to take your first steps in the financial markets, passive management remains one of the best options. For example, it is easier to buy an index ETF because the companies within an index must face updating according to the qualifying criteria. That is to say, we remove the companies that do not correspond to the criteria and we add the new ones. Therefore, the component is optimized.

Here is precisely the evolution of the volume after the listing of ETFs throughout the 2000s (graph below). We can see a strong evolution.

volume, popularity etf
Source : Statista

The listing of an ETF, a solution to meet your needs?

ETFs can strongly influence the evolution of the underlying. Firstly, making an index, a sector, a type of asset (bitcoin, gold, bonds, etc.) accessible via an ETF is often the result of an underlying demand or an underlying need. underlying. For example, owning physical gold or buying bitcoin on an external platform may stop the interest of some investors. Therefore, when a product is more easily accessible in the same place as the other assets, this can become an incentive to obtain the other products. On the other hand, when a portfolio is under management, it is easier to add synthetic gold or bitcoin via an ETF than to have to purchase these assets individually off-exchange. Another important element that can increase demand is also tax treatment. ETFs can be more easily placed in tax-advantaged accounts.

In the case of bitcoin, adoption via institutions after so much reluctance in recent years helps provide credibility. Therefore, it can attract the most skeptical too.

Can an ETF impact financial markets?

As explained previously, ETFs can meet both demand and the needs of investors. When demand increases, the underlying components must be purchased. For example, in the case of a bitcoin ETF, you will have to buy bitcoins since the product will track the evolution of bitcoin. Investors somehow own bitcoins through the ETF. Therefore, as long as demand remains constant over time, this is likely to increase the value of bitcoin since supply is limited.

Here is an example with the release and evolution of the gold ETF. We can see that this new accessibility to investors has made it possible to increase the demand and the price of gold.

performance, gold, etf, listing
Source : Twitter

ETFs have an impact on financial markets because they are incentive and facilitating products. They are not expensive in terms of management fees, they are regulated, and can have advantageous tax treatments. Therefore, this kind of product can meet the needs of investors, which indirectly leads to an increase in demand. The more this increases, the more the demand for the underlying assets also increases.

In terms of volatility, ETFs can also play a role. For example, they can absorb a certain level of volatility because it does not involve individual trading of stocks.

Can ETFs cause a crash?

There have been so many ETFs created that the competition has become quite tough. Some will have large volumes and others will not. Therefore, an ETF with large volumes will have fewer problems facing market declines. However, those with lower liquidity may encounter problems. This is the case of the ETP which was to represent the inverse variation of the VIX. Here is the evolution of the ETP:

ETF, listing, performance
Source : CNBC

When the VIX woke up in February 2018 after several months of absence, the product lost more than 80% of its value in one evening. Therefore, this ended this product. This is why liquidity remains an important element. You have to choose your ETF carefully.

The evolution of ETFs after listing

Obviously, as previously stated, competition can be tough among ETF producers. Once an ETF listing is created, there will be several producers who will release their version. Example: Blackrock, Vanguard, Fidelity…. Even if the popularity is universal, you should know that there are more uses of this type of product in the US. This is why the listing of an ETF in the US can have much more influence on the evolution of the underlying since it is a source of investors who appreciate ETFs. This is particularly the case for bitcoin. The investor potential in the USA being significant, this may influence the variation of bitcoin in the long term.

In 1993, the first US ETF listing was created. We are talking here about the SPY (symbol) which will track the variation of the S&P500. It is today the ETF with the largest capitalization globally (see the graph below). We can also see that all of the ETFs with the largest volume are US.

ETF weight, performance, statistics
Source : Statista

For example, we can see the performance of the SPY since its listing in 1993, a performance of +1900%:

performance, stock index, listing, ETF
Source : Tradingview

If the largest ETFs are in the US, it is because demand is both high and popular. This is one more reason why bitcoin was highly anticipated because it can generate potential and attract the most reluctant. This can make access easier. Obviously, even if the ETF product is quite popular, there also needs to be significant underlying demand for it to perform well.

The interest of ETF producers

Companies like Blackrock or Vanguard are here above all to make money. Therefore, if the potential to make money through the ETF’s management fees is high, this will generate interest in it. This is also why we initially had the CEO of Blackrock who was against bitcoin and then it was also the same person who lobbied to create a spot bitcoin ETF. They don’t want to miss out on the potential to make money knowing that investor interest in crypto is growing. Here, it’s more about putting your beliefs aside to meet demand and make money.


ETF demand and passive management are becoming more and more popular, and even more so in the US. This may become simplified access for certain assets like gold or bitcoin. But beyond that and especially in the long term, it is rather the interest in the underlying that will be important.

Maximize your experience with our ‘Read to Earn’ program! For every article you read, earn points and access exclusive rewards. Sign up now and start earning benefits.

Similar Posts