The launch of spot bitcoin ETFs is an inflection point and crypto has caught some of the afterglow. But investors must watch regulators as well as market indicators.

When the U.S. Securities and Exchange Commission (SEC) approved a series of spot bitcoin exchange-traded funds (ETFs) in January, it was widely seen as a watershed moment for cryptocurrency. Not for the first time, bitcoin was leading from the front, penetrating the world of mainstream finance and proving the naysayers wrong.

The arrival of ETFs — which grant investors exposure to BTC price movements via their regular brokerage accounts — has rekindled a long-standing debate about the place of cryptocurrencies in the global investment landscape. Key to this debate is a question: is bitcoin sui generis, an exception that should not be categorized alongside the wider range of digital currencies? Or are digital assets more broadly becoming normalized to the point that they will soon be viewed as just another standard investment category? 

ETFs Trigger Bitcoin Bullishness 

Soon after the SEC approved the listing and trading of 11 spot bitcoin ETFs on Jan. 10, the market reverberations began. Despite the feel-good mood permeating the bitcoin community, the price of the asset actually dropped 15% when eager investors “sold the news.” 

The dip was short-lived, however, as inflows started to pour into ETFs in the following days and weeks, particularly those offered by financial giants like BlackRock, Fidelity Investments, 21Shares, and Bitwise. In the month after the SEC’s approval, ETFs amassed over $3 billion in net assets, with daily inflows averaging around $125 million. Such action pushed bitcoin’s total market cap past the momentous $1 trillion threshold.

BlackRock’s iShares Bitcoin Trust (IBIT) has been especially successful, breaking into the top five ETFs (non-crypto and crypto) based on 2024 inflows, ranking alongside established index ETFs from iShares and Vanguard that grant exposure to the S&P 500 or the entire stock market.

Flows have been highly correlated to the price of bitcoin, which surpassed $50,000 for the first time in over a year. This enthusiastic reception suggests spot BTC ETFs are more than just a new financial product; they represent a significant shift in the mainstream perception of bitcoin as an asset. 

The significance of regular investors’ newfound ability to engage with bitcoin through a regulated avenue, without having to physically take ownership of it with all the attendant hassles, cannot be understated. Nor can the fact that as liquidity inflows continue, and ETFs take bitcoin out of circulation, the currency’s supply will be constrained. This at a time when the quadrennial Halving is looming, an event that slashes miner rewards by 50%.

As Bitcoin Goes, So Goes Crypto?

What are the long-term implications of this growth in organic demand? Is it the catalyst that transforms bitcoin from a niche “internet currency” into a recognized component of a diversified investment portfolio, alongside stocks, bonds, and real estate? Quite possibly: even if wealth managers advise clients to allocate just 1% or 2% of their portfolios to spot bitcoin ETFs, it will have a major effect on the market.

Of course, many challenges remain. Cryptocurrencies, bitcoin included, remain volatile compared with more traditional assets, and unpredictable price swings will continue to act as a deterrent for those with a low-risk appetite. If the price of bitcoin can fall by 15% after positive news like ETF approvals, cautious investors are unlikely to adopt it in large numbers for some time.

Moreover, although the current enthusiasm for ETFs has bolstered overall confidence, in the eyes of the market it still remains to be seen how bitcoin will perform once the excitement subsides. A clearer sense of bitcoin’s medium-term trajectory — which will depend largely on the opinion of mainstream investors — may emerge later this year, after the Halving. This is due to occur in April, when the number of blocks hits 840,000. 

It’s also important to note that bitcoin, as a non-inflationary currency with the longest track record and greatest name recognition, is in many ways a unique case. Some consumers, if asked to name a cryptocurrency, might reply “the one with the dog” — meaning dogecoin. For them, serious digital assets operate on the same plain as memecoins created to provoke a laugh: they are simply not to be taken seriously. Moreover, the sheer number of them, coupled with their technological complexity and the unclear regulatory landscape in which they operate, contributes to a sense of uncertainty.

If the success of spot bitcoin ETFs produces a halo effect around the underlying asset, it will likely boost the credibility of the wider digital asset market as well, with major implications. The recent surge in the price of ETH following the success of bitcoin ETFs is a case in point. Indeed, there is growing anticipation of a spot ETH ETF, with applications already submitted by the likes of Franklin Templeton, BlackRock, Fidelity, Ark, 21Shares, Grayscale, VanEck, Invesco, Galaxy, and Hashdex.

And a spot ETH ETF would be a tremendous milestone in crypto’s emergence as a mainstream asset class.

Ultimately, the introduction of spot bitcoin ETFs is an inflection point that enhances the asset’s appeal to a broader range of investors — and crypto as a whole has caught some of the afterglow. As the landscape continues to evolve, investors will be closely watching developments on the regulatory front as well as market indicators. It’s still early days; the vast majority of wealth management firms have yet to even touch bitcoin or crypto. But the needle has moved significantly toward the integration of bitcoin, and eventually more digital currencies, into the mainstream of the global investment universe.

Jeffrey Hu is the tech lead at HashKey Capital, a digital asset and blockchain leader helping institutions, founders and talents advance the blockchain industry and find adoption anywhere.