Bitcoin ETFs: Why Secure Custody Is The Cornerstone Of Trust For These Investment Funds

The acceptance of Bitcoin by institutional investors is a big step toward the widespread adoption of digital assets and their inclusion in the world economy.

The outlook for Bitcoin ETFs and institutional participation in the cryptocurrency market is likely to be optimistic but at the same time continues to remain elusive as well.

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By Manhar Garegrat

The approval of Spot Bitcoin Exchange-Traded Funds (ETFs) by the US Securities and Exchange Commission has drawn interest in Bitcoin from Institutional and retail investors around the world. After rejecting several applications from crypto asset managers in 2021, the SEC finally approved 11 bitcoin spot ETF applications made by leading global asset managers and ETF providers, including Blackrock, Fidelity, Franklin Templeton and others in January 2024.

Understanding Bitcoin ETFs

Bitcoin Spot ETFs are investment funds which offer direct exposure to Bitcoin’s price movements without directly buying it, whereas these ETFs either hold actual Bitcoin or Bitcoin derivatives to offer more direct exposure to the cryptocurrency’s price movements. Bitcoin ETFs provide several advantages, including accessibility, liquidity, and regulatory controls, making them an attractive option for diversifying their portfolios with digital assets. With Bitcoin ETFs, digital asset custodians secure the underlying assets and ensure that retail investors do not have to worry about the risks associated with storing Bitcoin on their own. 

The recent surge in the price of Bitcoin to $57,000 (at the time of writing) reflects the growing craze for crypto exposure among investors. These Spot ETFs have contributed to Bitcoin's recovery of its $1 trillion market capitalisation, bringing it within just 30 per cent of its all-time high. The Bitcoin ETF, along with the upcoming 4th Bitcoin Halving in May 2024, has significantly increased Bitcoin demand, surpassing the supply from miners by up to tenfold.

Role Of Secure Custody Solutions In Bitcoin ETFs

Because Bitcoin was built as a peer-to-peer network, the Bitcoin token can be self-custodied with individual holders in their wallets who have complete control over their private keys. However, handling private keys is complex and fraught with risks, wherein even the most experienced digital asset natives have lost their tokens due to improper recovery procedures. To mitigate these risks for uninitiated investors, the Bitcoin ETF offerings involve third-party custodians to store the underlying asset securely. Many regulators across the world offer digital asset custody licences which require the custodians to meet stringent security, compliance and technology standards. The new age digital asset custodians like Liminal adhere to the highest standards of security and compliance with robust security measures like travel rule compliance, CCSS Level-3 QSP certifications and insurance shields around customer funds. 

The growing popularity of Bitcoin ETFs is boosting not only the demand for investments in digital assets but also for regulated and secure digital asset custody solutions as more and more institutions seek trusted partners to fulfil investor demands. 

Bitcoin ETFs And Institutional Adoption 

The acceptance of Bitcoin by institutional investors is a big step toward the widespread adoption of digital assets and their inclusion in the world economy.

Because of their enormous wealth and rich experience in managing risks, institutional investors not only lend support to the driving forces behind the mainstream adoption of digital assets but also contribute substantially to bringing credibility and stability to the highly volatile crypto markets and creating conditions for gaining broader acceptance from regulators and new investors. Institutional investors are discerning customers who also require regulatory clarity, security guarantees in the form of insurance, bespoke services tied to SLAs and complete protection of their wealth. As the infrastructure that caters to institutional investors continues to develop, even the retail investor ecosystem will greatly benefit from these foundational pieces that are coming together as the market becomes more and more lucrative for investments. 

Meanwhile, investment funds like BlackRock and Fidelity Investments currently dominating this emergent sector own a combined 203,609 Bitcoin worth $10.6 billion for their spot Bitcoin ETFs showcasing the massive demand that is getting unlocked. Another example of a successful Institutional Investment is the firm Microstrategy, co-founded by Michael Saylor which now owns Bitcoin worth more than $10 billion, with a total profit of $4 billion. In a recent filing, Reddit the popular social media platform was also found to have invested its cash reserves in digital assets. They were also one of the few brands to capitalise on NFTs by launching NFT-based Reddit avatars, that onboarded over 4 million Reddit users into NFTs by creating self-custodial wallets for them at scale. 

As per the latest report by CoinShares, Crypto funds and asset managers witnessed record inflows totalling around  $2.45 billion globally in which Bitcoin accounted for 99 per cent of total net inflows with Ethereum products representing the second-largest inflow of $21 million.

The outlook for Bitcoin ETFs and institutional participation in the cryptocurrency market is likely to be optimistic but at the same time continues to remain elusive as well. With Bitcoin ETFs becoming a part of the mainstream investment vehicles and more institutions expressing their interest in investing in this asset class, it would mean that both - regulators as well as investors have achieved a certain level of maturity when it comes to digital asset investments as far as the risks associated are concerned. 

On the other hand, the impact of digital assets on the investment industry could be potentially much more vast since institutional presence in digital asset markets is likely to change investment patterns and regulatory practices. All of this, while we haven’t even scratched the surface when it comes to investments in tokenised versions of financial and non-financial real-world assets. All in all, it’s great to see regulatory clarity and mature infrastructure coming together to build safe and secure markets for digital asset investments. At Liminal Custody Solutions, we are not only proud participants but also pioneers working to shape new ways for investors to make safe and secure digital asset investments.  

(The author is the Country Head, India & Global Partnerships at Liminal Custody Solutions)

Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Cryptocurrency is not a legal tender and is subject to market risks. Readers are advised to seek expert advice and read offer document(s) along with related important literature on the subject carefully before making any kind of investment whatsoever. Cryptocurrency market predictions are speculative and any investment made shall be at the sole cost and risk of the readers.