Gulf investors expected to bet big on bitcoin ETFs

Pexels/AlphaTradeZone

• SEC approved bitcoin ETFs
• Gulf expected to invest
• Bitcoin remains ‘volatile’

Gulf sovereign wealth funds and institutional investors are expected to expand their portfolios to include cryptocurrencies, after spot bitcoin exchange-traded funds were given the green light.

The US Securities and Exchange Commission (SEC) approved the trading of 11 spot bitcoin ETFs, issued by global asset management companies such as BlackRock, Invesco, Grayscale, Fidelity, and Franklin.

This is a notable shift in digital asset adoption by traditional financial institutions.

• Binance pulls out of licence application in Abu Dhabi
• Tax-friendly UAE beckons blockchain businesses
• UAE to clamp down on unlicensed crypto operators

An ETF is an investment fund traded on regulated stock exchanges, much like individual stocks are bought and sold. 

The value of an ETF rises and falls as the underlying asset increases or decreases in price. It allows investment in an asset – such as gold or an index of stocks – without having to buy it. The fund provider owns the assets, and sells shares to investors. 

Last week’s decision was largely anticipated and followed a social media hack that published a false but similar statement from the regulator.

Mark Chahwan, co-founder of investing and personal finance platform Sarwa, says he expects to see more bitcoin adoption, “especially at the institutional level” from regional funds, including state-operated funds. 

“Buying and selling bitcoin is not new, but to do that on a [stock] exchange is something that a lot of the regional institutions could see as a sigh of relief,” Chahwan says. “They don’t have to go off their traditional financial institution channels to do so.”

Financial institutions have delayed or limited allocations in digital asset markets, deterred by regulatory uncertainty and limited investment vehicles.

Spot bitcoin ETFs make it easier for traditional institutions and retail investors to access bitcoin exposure without direct ownership hassles. This sidesteps the complexities of crypto storage, wallet setup, navigating anti-money laundering and know-your-customer issues, or worrying about erratic exchanges.

Market troubles

The failure of several crypto exchanges, most notably FTX, has shaken the cryptocurrency market.

FTX founder Sam Bankman-Fried was found guilty last year of stealing $8 billion in customer deposits from the now-bankrupt exchange.

Also, former Binance CEO Changpeng Zhao pleaded guilty to breaking anti-money laundering laws as part of a $4.3 billion settlement.

The US Treasury Department said Binance failed to report more than 100,000 suspicious transactions with terrorist groups including Hamas, al Qaeda and Isis.

Bitcoin ETFs recorded $4.5 billion in trading volume on their debut day, according to London Stock Exchange Group data.

Manuel Villegas, digital assets analyst at Julius Baer, says that as markets respond optimistically, investors should expect a “fee war” as asset managers vie for market share.

Villegas calls bitcoin’s fundamentals “very sound”, citing long-term holder accumulation, slowing miner supply growth, expectations that the US’s rapid monetary tightening cycle is ending, and the impending halving of block-rewards.

The next bitcoin halving, which cuts new bitcoin supply by 50 percent every four years, is slated for May.

Risks remain

Bitcoin, the world’s most valuable cryptocurrency, currently stands above $42,000. Its value fell to less than half in 2022 after hitting a high of $69,000 in 2021.

Chainanalysis figures show that the Middle East and North Africa region has the sixth-largest crypto economy. It has an estimated $390 billion in on-chain value received between July 2022 and June 2023, representing 7.2 percent of global transaction value during that period.

Bybit, a crypto exchange in Dubai, said institutions on its platform nearly doubled their bitcoin allocations in 2023.

But some executives continue to label bitcoin as a high-risk investment. Vanguard, the largest provider of mutual funds, blocked users from trading bitcoin ETFs.

A Dubai-based fintech founder and former Wall Street banker, who declined to be named, calls bitcoin ETFs a “new Wall Street scam”, saying: “They are collecting investor funds and fees without offering actual BTC holdings, defeating the very principle of decentralisation.”

But Sarwa’s Chawan argues that the SEC’s move “legitimises” the asset class especially after the FTX fallout and 2022 crypto crash. 

“It doesn’t change the volatility, but it changes how it’s managed,” he says.

SEC chair Gary Gensler clarified in a statement that the ETF approvals were not an endorsement of bitcoin, which he called a “speculative, volatile asset”.