Everything Crypto Investors Need to Know About Bitcoin ETFs and the SEC

The crypto world has been aflutter about a potential spot Bitcoin ETF approval from the Securities and Exchange Commission (SEC) for months now. It's been one of the main drivers in Bitcoin's (BTC) recent rally. In contrast, fears that the SEC might not grant the anticipated approvals caused Bitcoin to drop 8% in just a few hours this morning.

So what's all the fuss about? Read on to find out what's got people so excited about spot Bitcoin ETFs, why the SEC has hesitated to approve any up until now, and what it means for you as an investor.

What is a Bitcoin ETF?

ETFs, also known as exchange-traded funds, are baskets of securities that trade on the stock market. That could be stocks, bonds, real estates, or commodities. Think of it like buying shares in a company that owns and manages those assets. In this case, the ETF would contain Bitcoin and investors could get exposure to the lead cryptocurrency directly from their brokerage account.

Various groups, including ARK Investment, BlackRock, and Grayscale Investments have spot ETF applications in the pipeline. The SEC has rejected previous spot Bitcoin ETF proposals on fears of fraud and market manipulation. It's concerned there aren't enough investor protections in crypto. However, last year, a court ruled that it was wrong and the SEC did not challenge the decision.

In recent months, it's been in detailed discussions with various prospective ETF issuers, fueling speculation that we may soon see an approval. The SEC has until Jan. 10 to decide whether it will approve the initial applications. Several analysts believe it will happen before that. Others say the SEC might want more time, or reject the applications altogether.

The SEC approved a Bitcoin futures ETF a few years ago, but the spot ETF is a different kettle of fish. Futures are a type of derivative. If you own futures, you own a contract to buy or sell that asset at a certain price in the future. You don't actually own the asset. A spot Bitcoin ETF would hold Bitcoin rather than contracts to buy or sell the crypto.

What a Bitcoin ETF might mean for crypto investors

If the SEC approves a spot Bitcoin ETF it would mean people could buy Bitcoin without having to use a crypto exchange or broker. It won't solve all of crypto's issues, but being able to access Bitcoin from the stock market could remove one big hurdle for institutional and retail investors alike. It would make it safer and easier to buy and store Bitcoin.

The high-profile collapse of several top crypto exchanges highlighted the limited protections in the crypto world and severely dented investor confidence. Crypto assets do not have the same protections as securities in a brokerage account or cash in a bank. If you leave your cryptocurrency on an exchange, you may lose everything if that exchange fails or is hacked. While crypto investors can opt to store their Bitcoin in a crypto wallet, this takes knowledge and brings its own risks.

In contrast, shares in an ETF -- even a spot Bitcoin ETF -- would be held in a brokerage account and covered by SIPC insurance. SIPC stands for Securities Investor Protection Corporation and covers up to $500,000 of customer assets in the event your brokerage collapses.

SIPC insurance does not protect against volatility or poor market performance. So if Bitcoin collapses completely, you would lose your investment whether you held Bitcoin in an ETF or any other form.

What steps crypto investors might take

First of all, try not to get tied up in the frenzy around a Bitcoin ETF. Speculation is rife in the cryptocurrency world, which can mean prices soar in the run up to big news events only to fall when the event actually happens. For example, Ethereum's (ETH) price dropped after its long anticipated merge to a more sustainable mining model.

Take a step back and think about Bitcoin's long-term potential and how it might fit into your portfolio. Make sure you understand the risks involved. If the SEC approves a Bitcoin ETF, that won't automatically make crypto safe. The industry is still relatively new and unregulated and there are a lot of questions about how it might unfold.

For example, we don't yet know what shape a U.S. regulatory framework will take. Some fear it could cripple this emerging industry while others believe it would give the industry stronger foundations from which to grow. A lot depends on the details, which have yet to be hammered out. But increased regulation will have an impact on crypto prices in the short term.

If you're considering buying Bitcoin for the first time, be prepared for volatility. Crypto fluctuates much more dramatically than the stock market, which can come as a shock. I've seen my crypto portfolio's value drop by around 50% in a matter of months, and it is unnerving to say the least. Make sure high-risk assets like crypto only make up a small percentage of your portfolio, and only invest money you can afford to lose.

Key takeaway

A spot Bitcoin ETF approval could change the crypto landscape, making it easier and safer to hold the granddaddy of crypto. However, don't assume it will solve all of crypto's issues. The volatility and regulatory challenges won't go away just because the SEC greenlights these ETFs, assuming it does grant the expected approvals.