Explainer: What does U.S. approval of Bitcoin ETF mean for Nigeria?

Global financial industry has been buzzing after the U.S. financial regulator officially endorsed bitcoin exchange-traded funds (ETFs) on Wednesday, giving the green light to 11 applications for ETF products that track the price of bitcoin.

This development has excited investors in this emerging asset class and has led to a surge in cryptocurrency’s price. Analysts say bitcoin could surge to more than $100,000 this year after the announcement.

What implications does this decision hold for cryptocurrency and bitcoin in particular, and how might it impact investors in Nigeria?

First, what is bitcoin?

Imagine bitcoin like a digital piggy bank, but instead of holding coins, it holds information about who owns how much coins. These entries are stored in a giant online ledger called a “blockchain” that everyone can see, but no one can change.

Also, think of bitcoin like a digital gold nugget:

• Limited supply: Just like there’s only so much gold in the world, there will only ever be 21 million bitcoins created.
• Decentralized: No bank or government controls bitcoin. It’s owned by everyone who uses it.
• Secure: The blockchain is like a super-strong lock, making it almost impossible to hack or steal your Bitcoin.

Here’s how it works for buying and selling:

• Imagine you have a special code that’s your proof of ownership for a piece of Bitcoin.
• When you want to spend it, you send that code to someone else with their Bitcoin code.
• The transaction gets recorded on the blockchain for everyone to see, like a digital receipt.
• At intervals of 10 minutes, these transactions get compiled into a “block,” and each block is interconnected with the one preceding it, giving rise to the term “blockchain.”

Now that you have an understanding of what it is like, let’s go back to the formal definition.

Bitcoin is a digital or virtual currency that uses cryptography for security and operates on a decentralized peer-to-peer network, typically referred to as blockchain technology. It is a form of cryptocurrency, and unlike traditional currencies issued by governments and central banks, bitcoin operates on a decentralized network of computers, allowing for peer-to-peer transactions without the need for intermediaries.

Bitcoin transactions are recorded on a public ledger called the blockchain, and the currency is “mined” by solving complex mathematical problems. It gained prominence as the first and most well-known cryptocurrency, introduced in 2009 by an unknown person or group using the pseudonym Satoshi Nakamoto. Bitcoin is often used as a store of value and a medium of exchange in online transactions.

What is an ETF?

An ETF is a type of investment fund and exchange-traded product tradeable on a stock exchange. It typically holds assets such as stocks, bonds, or commodities and aims to track the performance of a specific index. ETFs provide investors with a way to gain exposure to a diversified portfolio of assets without directly owning them.

Imagine you want to buy a bunch of different delicious treats at the market, but you don’t have enough room in your bag for everything. Enter the “candy basket”! Instead of picking out each candy individually, you can buy a pre-made basket filled with a variety of sweets.

An ETF is kind of like that candy basket, but for investments. Instead of buying shares in each company you like, you buy an ETF that already holds a bunch of different ones. It’s like a one-stop shop for investing in a whole mix of things.

Here’s what makes ETFs cool:

• Variety: Get exposure to different types of investments in one package, like stocks, bonds, or even real estate.
• Convenience: Easier to buy and sell than individual shares, just like buying that pre-made candy basket instead of picking out each one.
• Diversification: Spread your risk across multiple investments, so you’re not putting all your eggs in one basket (literally, in this case, the candy basket!).

• Examples of ETFs listed on the Nigeria Exchange are Stanbic IBTC ETF 30, Vetiva Banking ETF, Meristem Growth ETF and many more.

So, now that you know about bitcoin and ETFs, you can see how the news about Bitcoin ETFs is exciting to many investors. It’s like making that candy basket available for all those delicious Bitcoin treats!

Of course, just like you wouldn’t want to eat too much candy every day, investing in Bitcoin or any other asset requires research and caution.

What did the U.S. SEC approve?

The U.S. Securities and Exchange Commission (SEC) greenlit 11 applications from prominent fund managers like Blackrock, VanEck, and Fidelity, enabling the issuance of bitcoin-tracking ETF products. Trading for these products is anticipated to start this week.

Despite a long-standing desire from major funds to introduce Bitcoin ETFs, the SEC had previously held back, expressing concerns about potential market manipulation and the overall volatility of the cryptocurrency market.

In a statement, SEC chair Gary Gensler emphasized that the approval should not be interpreted as an endorsement of cryptocurrency by the SEC.

“Bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion and terrorist financing,” he said.

“While we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse bitcoin.”

Why the excitement?

Crypto proponents hope the historic approval by the influential SEC will further legitimise the asset class, which has long been viewed as volatile and unreliable.

Importantly, the approval opens the door to cryptocurrencies to many new investors who don’t want to be involved in buying actual bitcoin.

An ETF provides a convenient avenue for investing in assets or a collection of assets without the need to directly purchase the assets themselves. For instance, the SPDR Gold Shares ETF enables individuals to invest in gold without the hassle of locating a storage facility or ensuring its protection.

Procedurally, owning bitcoin requires the use of a digital wallet or the opening of an account on a cryptocurrency trading platform like Coinbase or Binance. The Bitcoin ETF means investors can now invest in bitcoin without directly owning them or having to worry about getting digital wallets or navigating crypto exchanges.

What does this mean for cryptocurrency and Nigeria?

Theoretically, the U.S. approval will allow sophisticated investors and funds to invest in bitcoin in a simpler manner, which supporters again believe will accelerate the cryptocurrency’s path to broader adoption.

“This further opens cryptocurrency to both retail and institutional investors via a traditional financial product,” says the chief executive of local crypto exchange BTCMarkets, Caroline Bowler.

“It is also reasonable to assume that this will expand crypto markets in general, as liquidity follows utility. So while this is an historic day for the industry, the impacts will be increasingly felt over time.”

Some, however, believe the announcement is unlikely to be enough to fix a market that is still recovering after the disastrous collapse of numerous exchanges in 2022, including the $32 billion FTX.

In Nigeria, things appear to be shaping up well for the industry after the central bank last month lifted its ban on crypto transactions in Nigerian banks.

Nigerian regulators are still closely monitoring the industry. While the Nigerian Securities Exchange Commission (SEC) approves the crypto and digital assets operations in the country, analysts say its licensing requirements will significantly reduce the number of local crypto exchanges.

The SEC requires local exchanges to have a minimum upfront capital requirement of N500 million, an amount many cannot afford. This will result in primarily foreign exchanges being operational in Nigeria.

Will there be a Nigerian Bitcoin ETF offering?

It is not clear yet. But the U.S. announcement is expected to spur a wave of crypto ETFs elsewhere, although other countries had crypto ETFs before now.

What does this mean for the price of Bitcoin?

The approval, long-awaited for months, prompted a 70% surge in bitcoin prices since October, driven by crypto investors anticipating increased demand through the widespread use of Bitcoin ETFs. Following a dip to $16,000 in November 2022 after FTX’s crypto exchange bankruptcy, bitcoin traded at $46,500 post-SEC announcement.

Standard Chartered analysts predict ETFs may attract $50-100 billion this year, potentially pushing bitcoin to $100,000, while others suggest a $55 billion inflow over five years. Some analysts believe ETFs could stabilize crypto prices by broadening their usage.

However, concerns persist that broad crypto ETF adoption might introduce excessive risk and volatility into Americans’ retirement accounts, given bitcoin’s unpredictable price swings.

Moody’s Analytics Senior Director Yiannis Giokas warns, “The notorious price volatility of bitcoin could expose mainstream investors to a less familiar spectrum of investment risks.” Ethereum’s price has also risen amid speculation about fund managers creating ETFs tied to the second-most popular cryptocurrency.