A much anticipated spot Bitcoin exchange-traded fund (ETF) will undoubtedly be good news for investors and traders, providing more security and flexibility. But, there is an underappreciated downside for some of the industry’s biggest players.
A flood of new large capitalization crypto ETFs could spell trouble for cryptocurrency exchanges. As Robert Quartly-Janeiro, Chief Strategy Officer at crypto exchange Bitrue , explains, these ETFs offer customers convenience, lower costs, and high liquidity. Can the big crypto exchanges compete with such an offer?
A cryptocurrency exchange-traded fund allows investors to gain exposure to cryptocurrency prices without directly holding the asset, offering convenience and liquidity through traditional brokerage accounts. So far, only futures-based Bitcoin ETFs, and Ether futures ETFs are available.
However, there are over 10 spot Bitcoin ETF applications currently outstanding, with industry experts widely predicting an imminent approval. Canada and the EU already have their own spot Bitcoin ETFs.
Quartly-Janeiro notes to CCN that if investors can access the major cryptocurrencies through ETFs in one place cheaply, then “why wouldn’t you?” In his view, exchanges would struggle to compete against “huge asset managers, some of which are several times larger than G10 economies.” The migration of users would likely be gradual, but could accelerate if no compelling reasons remain to stay on exchanges.
“It’s the reason why people use certain supermarkets; convenience, price, and choice,” explained Quartly-Janeiro.
To stay competitive, exchanges need to take action.
Quartly-Janeiro advises they should increase transparency, leverage their established user base, expand offerings, pursue growth, engage in [mergers and acquisitions] activity, build international brands, and aggressively enter new markets. The goal, he said, is to ensure individuals and institutions alike view them as viable options.
Whilst markets are abuzz with excitement, additional spot ETFs beyond Bitcoin could be a death blow, with Ethereum ETFs inevitably following Bitcoin. With the top 20-40 cryptocurrencies completely dominating total market capitalization, most activity could shift to ETFs if they were approved.
Traders could simply buy and sell the ETFs instead of using exchanges. As Quartly-Janeiro asks, “why pay more” on exchanges when you can access the major cryptocurrencies more cheaply?
At that point, exchanges must provide unique trading pairs and improve offerings to attract activity. But this is also a challenge for smaller cryptocurrency projects if the large caps consolidate power within ETFs. Quartly-Janeiro likens it to smaller equity markets in Europe, where liquidity and interest wane if you aren’t listed on the main exchange.
Of course, whether or not large capitalization crypto ETFs could drain liquidity and volume from exchanges depends on their approval. That, in turn, depends on who occupies the chairmanship of the SEC, an agency that has dragged its heels on spot Bitcoin ETFs for over a decade. After all, the first application for a spot Bitcoin ETF was filed all the way back in 2013 by Cameron and Tyler Winklevoss. Both are now owners of the cryptocurrency exchange, Gemini.
To compete with ETFs, crypto exchanges would also benefit from an improved user experience outside of their platforms, including more user-friendly wallets on and off their exchanges. That, by and large, is out of their control.