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Most of us define cryptocurrencies without attaching them to a particular national identity. They are international, innovative, and groundbreaking. But when it comes to the regulations that control these digital assets, it is a slap in the face that we are not so independent of our respective geographies. Particularly when it comes to the long-delayed adoption of cryptocurrencies, one inevitably thinks of these regulations imposed by the leaders of the world economy as the reason for this. 

The US, the world economic leader, has been more cautious when it comes to cryptocurrencies than its neighbor Canada and the largest economy in Europe, Germany, over the last couple of years. While the second largest ETF ever, Germany's ETC Group Physical Bitcoin (BTCE.DE), launched in June 2020, has reached $802 million in assets, the US Securities and Exchange Commission (SEC) just greenlighted Bitcoin Exchange Traded Funds (ETFs) yesterday as of January 10, 2024. The SEC's approval covers submissions from leading organizations such as BlackRock, Ark Investments, Fidelity, Invesco, and VanEck, and allows them to launch ETFs offering tracking the oldest cryptocurrency. Approved Bitcoin ETFs will be listed on major US exchanges such as the New York Stock Exchange (NYSE), Nasdaq, and the Chicago Board Options Exchange (CBOE). This decision, which was highly anticipated especially by long-term crypto investors and late-comers who have suffered a lot with the crypto crisis we left behind, has put the finishing touch to an event that the financial world has been counting the days for with what it represents and the possibilities it can enable.  

Following yesterday's news, it would not be foolish to assume that crypto investors woke up this morning with excitement in their hearts. But more than 12 hours after the decision, traders have yet to see any major jumps in the BTC price, and discussions about whether BTC, which momentarily crossed the 47,000 mark, could jump back above $60,000 with the SEC's decision have divided analysts into two camps: pessimists and optimists. Rather than getting caught up in the momentary excitement, I believe it's most important to understand what this decision really means for the crypto and investment landscape. For me, the key takeaways are the implications of the SEC's decision on market dynamics: 

1. Increased Trading Activity and Liquidity

As ETFs open the doors of the Bitcoin world to the mainstream financial world, new types of investors are ready to step in. After scandals like FTX, old-school investors who have been even more reluctant to invest in crypto due to the lack of tangibility of this investment asset will now have more peace of mind. As some analysts have pointed out, I believe we will now see Bitcoin in many pension funds. 

Another new type of investor that will embrace Bitcoin will be institutional investors. The type of investor that will really impact Bitcoin's overall trading activity and, naturally, its trading volume, could be institutional players entering through ETFs. Increased trading volume is also likely to increase liquidity in the market, addressing one of Bitcoin's biggest flaws - price volatility due to insufficient liquidity in the market - and promoting a more stable market. 
 

2. Increasing Market Depth

ETFs, by their very nature, involve the creation and redemption of shares and often require the trading of underlying assets. In the case of Bitcoin ETFs, this process can contribute to increased market depth. A more liquid market can absorb larger trades without causing significant price fluctuations, providing a more favorable trading environment. We might as well say hello to a market where "whales" no longer swallow "small fish" at the drop of a hat.
 

3. Reduced Bid-Ask Spreads

With the influx of institutional investors and increased liquidity, bid-ask spreads in the Bitcoin market are likely to narrow. Reduced spreads contribute to market efficiency, allowing traders to execute orders at more favorable prices. This is an important point, as a more stable market would perhaps not make many traders who have managed to manipulate the market that happy. However, this stability is a significant advantage for both institutional and retail investors, minimizing transaction costs.

These three, even the simplest of perspectives, give us a picture of a market that is more stable, slightly de-risked, and progressively adapting and mainstreaming. The current market landscape paints a picture close to that. Following the SEC's announcement, Bitcoin moved modestly, hovering at $46,300 with a market capitalization of more than $900 billion. While Bitcoin's reaction was mild, other cryptocurrencies posted significant gains. Ethereum gained nearly 10%, XRP 7% and various altcoins such as Polkadot, Polygon, Cardano and Avalanche saw gains ranging from 14% to 20%. The total market capitalization of crypto assets exceeded $1.75 trillion. In other words, we might say that BTC has already started to reach more people. 

The real question now begins. Will these developments make Bitcoin investors pleased or disappointed? As it becomes more stable, more reliable, and closer to being centralized than it promised to be, will crypto assets still retain the loyalty of their early investors? If you look at cryptocurrencies as the currency of the future, an invention that fills the gaps of the flawed old world of finance, you will undoubtedly be happy in the long run with the maturity and light that comes with Bitcoin ETFs.

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