Experts Warn of Unforeseen Risks as U.S. Approves Bitcoin ETFs

The recent approval of 11 spot bitcoin exchange-traded funds (ETFs) by the U.S. Securities and Exchange Commission (SEC) is seen as a watershed moment, deepening ties between the crypto industry and the traditional financial system. While crypto enthusiasts believe these ETFs will allow investors to gain exposure to bitcoin more easily and safely, some experts caution that the products could create unforeseen risks and pose challenges to the financial system.

The SEC’s approval of bitcoin ETFs is seen as a significant development for the crypto industry, allowing investors to gain exposure to bitcoin through traditional financial instruments.

However, concerns have been raised about potential risks associated with the widespread adoption of these ETFs, including increased bitcoin price volatility during market stress and dislocations between ETF prices and bitcoin prices.

Some experts argue that the interconnection between the traditional financial system and the crypto ecosystem could substantially increase as investors pour money into these products. The volatility of bitcoin, which is significantly higher than that of equities, could be exacerbated by the adoption of bitcoin ETFs, particularly during times of market stress. Risks include the decoupling of ETF prices from the underlying asset, creating stress for institutions heavily exposed to these products or relying on them for liquidity management.

The ETF industry generally disputes the idea that its products pose systemic risks, but concerns remain about the potential impact on the broader financial system. SEC Chair Gary Gensler warned that bitcoin remains a “volatile asset,” and investors should be cautious when considering exposure to such products. The ultimate extent of risks will depend on how widely adopted these ETFs become and the proportion of investors purchasing them.

While crypto industry executives argue that crypto crises have mostly been contained within the crypto sector, some experts warn of potential spillover effects on traditional markets. The SEC Commissioner Caroline Crenshaw, who voted against approving the ETFs, expressed concerns about creating a nexus with traditional markets and paving the way for riskier products.

ETF issuers emphasise guardrails, such as redeeming the products in cash instead of bitcoin, to minimise intermediaries holding the cryptocurrency. The approval of bitcoin ETFs is viewed as a turning point, opening new possibilities for investors but also raising questions about the evolving relationship between the crypto industry and traditional finance.

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