The recent launch of U.S. exchange-traded funds (ETFs) tracking bitcoin is seen as a significant step in integrating the volatile cryptocurrency space with the traditional financial system, raising concerns about potential unforeseen risks, according to some experts.
The Securities and Exchange Commission (SEC) recently granted approval for 11 spot bitcoin ETFs from issuers like BlackRock and Invesco/Galaxy Digital. This move marks a pivotal moment for the crypto industry, which has faced challenges such as bankruptcies and criminal activities. The SEC’s decision, following a court challenge by Grayscale Investments, reflects a shift in their stance on investor protection concerns.
While crypto enthusiasts believe these ETFs provide a safer way for investors to access bitcoin, SEC Chair Gary Gensler has cautioned that bitcoin remains a “volatile asset,” urging investors to exercise caution. The combined assets of these ETFs amount to around $21 billion, and analysts predict they could attract up to $100 billion this year from retail and institutional investors. Despite this, bitcoin has experienced a more than 6% decrease in value since the ETFs were launched.
Some experts express concerns about potential risks to the financial system during market stress. They worry that increased adoption of these products could heighten interconnections between the traditional financial system and the crypto ecosystem, leading to greater vulnerabilities.
Dennis Kelleher, CEO of Better Markets, an advocacy group, emphasizes the potential dangers of pouring money into these products, suggesting that it substantially increases the risk of interconnectedness between the core financial system and the crypto space.
Bitcoin’s inherent volatility, with daily average volatility approximately three and a half times that of equities, adds an extra layer of risk. Critics argue that during times of market stress, bitcoin ETFs could exacerbate volatility and create systemic risks, including decoupling from the underlying asset.
Antonio Sánchez Serrano, a principal economist at the European Systemic Risk Board, raises concerns about the complexity of bitcoin ETFs, comparing them to plain-vanilla stock ETFs and pointing out significant differences in embedded risks. He highlights the potential for stress in institutions heavily exposed to or reliant on these products for liquidity management.
Past instances of stress in complex, less liquid, and highly leveraged exchange-traded products, such as the 2018 volatility-tracking exchange-traded note collapse and the 2020 sell-off in some corporate bond ETFs, serve as cautionary examples.
Despite these concerns, ETF issuers generally dispute the idea that their products pose systemic risks. They emphasize risk disclosures, acknowledging the unpredictability of bitcoin’s immaturity.
Experts and industry figures note that the extent of these risks depends on the widespread adoption of these ETFs. Crypto industry executives argue that crypto crises, like the 2022 loss of two-thirds of cryptocurrencies’ value, have mostly been contained within the crypto sector, and connectivity between cryptocurrencies and the broader financial system remains limited.
While ETF issuers claim to have implemented safeguards, including cash redemption instead of bitcoin, some SEC officials, such as Commissioner Caroline Crenshaw, have expressed reservations. Crenshaw, who voted against approving the ETFs, raised concerns about potential spill-over effects from largely non-compliant crypto markets into traditional markets and fears that these ETFs could pave the way for riskier financial products in the future.
