Cryptocurrency animal spirits are back big time

The growing excitement in the cryptocurrency world hinges on hopes of the imminent approval of bitcoin exchange-traded funds.

Around a dozen asset managers including BlackRock, Fidelity, Invesco, Franklin Templeton and VanEck have applied to offer ETFs that hold spot bitcoin. The SEC, which faces a Wednesday deadline to approve some of the applications, has rejected prior applications, citing a lack of surveillance for fraud and manipulation in bitcoin markets.

However, a federal appeals court last year criticised the SEC’s reasoning for denying an application to list a bitcoin spot ETF as “arbitrary and capricious”. And this reprimand has sparked hopes that the regulator will be forced to abandon its previous stance and give its blessing to such products.

Bitcoin advocates argue the new funds will attract tens of billions of dollars from investors who were previously wary of owning the cryptocurrency, pushing its price, and that of other digital currencies, sharply higher.

They argue that SEC approval for spot bitcoin ETFs will finally take crypto into the mainstream, allowing fund managers and more traditional market participants to allocate a percentage of their portfolio to this new asset class.

And retail investors also find it more appealing to invest in the digital currency, because of the low fees on proposed bitcoin ETFs.

According to regulatory filings, BlackRock, the world’s largest fund manager, is proposing to charge customers just 0.2 per cent of the net asset value of its fund for the first year or until its ETF hits $US5 billion, before rising to 0.2 per cent.

More broadly, bitcoin enthusiasts argue that the appeal of cryptocurrencies is spreading.

Argentina’s new libertarian government, which faces an economic crisis with soaring inflation and a collapsing currency, has signalled that it will accept financial contracts settled in bitcoin and other cryptocurrencies. And El Salvador is offering expedited citizenship to foreigners who make “donations” to government social and economic development programs.

But bitcoin has a long path to respectability. Years of software development and investments have failed to catapult blockchain networks into mainstream finance, while the primary use of cryptocurrencies – beyond trading – is still hacking, theft, and money laundering.