2023 has been a relatively quiet year for the DeFI Space if you “discount” the Month of October into consideration. October has not been a relatively popular month for the DeFI Space but this year it experienced a surge not seen for a long time. Bitcoin has finally broken the $30,000 mark and the word “ETF” has highly contributed to this surge. So what is this Bitcoin ETF all about? And why is it significant for the DeFI Space moving forward?
Bitcoin ETF Back on Popularity…
After more than a year of absence from everyone’s attention, the DeFI Space is back in popular demand as the price of Digital Assets is flying once again. Spearheading this surge is Bitcoin which has gained more than 25% of its value in October alone with Ethereum following on a close second at 10% increase. Amongst the altcoin rally, Solana seems to be leading the charge with an astounding 75% growth in the space of a single month.
Amidst the political and economic uncertainty, the DeFI Space is showing the amount of growth that could mark the end of the winter phase. The DeFI Space also has exceeded all the expectations that are currently marked by analysts that 2023 will just be a recovery year and growth will happen in 2024 as Bitcoin halving starts to take shape. All of this could be attributed to a couple of factors but the most popular topic within the DeFI Space has been the ETF.
The word ETF has been closely associated with the DeFI Space ever since the first Bitcoin boom in 2013 when Bitcoin started to gain major traction and investment banking firms were looking to capitalize on this new growing space. It continues to be a growing topic as we head to 2021 when the DeFI Space has reached its all-time high and recently shot back to popularity with a proposed Bitcoin Spot ETF from the world’s largest asset management firm Blackrock.
Although ETFs are a common occurrence in the Stock and Commodities Market, borrowing the same concept and applying it to the DeFI Space might not be an easy task. Despite the many interests of Bitcoin ETF, there have been only a few of them that have been approved so far due to the complex and volatile nature of the DeFI Space. Proshares Bitcoin Strategy ETF was the first ETF to be approved in the US when it started trading in the 4th quarter of 2021 and so far the response has been a mixed one.
So what is an ETF you may ask? ETF or Exchange Traded Funds is a way to diversify your portfolio of assets without actually owning the assets themselves. ETFs get their value from a basket of assets or an index just like the S&P 500 but they are traded in the primary and secondary markets just like a spot asset hence the name Exchange Traded Fund. Although ETFs have been present for a long time, there are still many investors that are still not familiar with the concept.
So How does it actually work? We all are familiar with the classic index funds where the unit price or what we call Net Asset Value is usually calculated by the average value of assets and liabilities present in the mutual funds considering the ratio of each asset, number of unit holders, and the amount of asset it is holding per unit. Spot Assets on the other hand get their value from basically their demand and supply in their market and ETFs are the Net Asset Value of an ordinary Mutual Fund that is traded in the exchanges.
ETFs are aimed to combine the benefits derived from Index Funds as they provide stability over the long term as they represent a diversified portfolio of assets and with the DeFI Space it can be really huge due to the volatile nature but the only downside is it can be illiquid at times and the potential of growth can also be limited. There is also concern from the community that ETFs might not be really different from their predecessors as they carry over the fluctuations from their spot assets.
There are many types of ETFs that are available but within the DeFI Space, there are basically 2 types which are Spot ETFs and Futures ETFs. Futures ETFs consist of a basket of Future Contract on the Digital Asset while Spot ETFs comprise a basket of the Digital Asset themselves based on their Spot price. The main difference is that while Spot ETFs invest in the digital asset, Future ETFs invest in derivatives that are based on Digital Assets.
This current hurdle is why the ETFs that have been coined by Proshares and VanEck have been approved but the ETFs recently filed by Fidelity, Blackrock, Ark Invest, and others are still awaiting approval. Some of the hurdles include the regulations for the DeFI Space within the US that have not been released yet but also as Spot ETFs is a new concept to the DeFI Space. Despite the current uncertainty, there seems to be a lot of enthusiasm around the decision.
A lot of analysts expect that its impacts could be huge for Bitcoin and digital assets as we approach 2024 which is already predicted to be a huge year for Bitcoin. With more firms filing a new ETF proposal, it will be a while before approval is actually materialized but whatever the decision maybe, it’s quite interesting if we explore what are the possibilities a new Spot ETF could have on the DeFI Space.
Its Impacts on the DeFI Space
We have certainly felt the impact of these ETF fillings as the value and excitement around the DeFI Space have certainly returned after a long time but it could go far beyond that. Spot ETFs would also allow the DeFI Space to attract new communities and therefore expand its exposure. This will also allow DeFI Space to diversify its user base and reach investors who would not have been familiar before with what digital asset really is.
A new user base would also attract new capital inflow to the DeFI Space that would not have been possible before. These investments should allow the innovations within the DeFI Space to grow while simultaneously avoiding any collapse/crash from happening. With Bitcoin being the most discussed spot ETFs, imagine what could happen if Bitcoin with its Limited Supply and paired with a steady flow of demand that would come from ETFs?
These approvals for the Bitcoin Spot ETFs would also open new doors for other firms to join in and this could be massive for adoption not only for Bitcoin but also the general DeFI Space. Analyst predicts that Ethereum could be the next one to be adopted as a Spot ETF and with the buzz that is happening, who knows other digital assets could follow soon? This will then help elevate the performance of great performing digital assets while simultaneously eliminating the non-performing ones.
This could also open new opportunities for digital assets to be more widely adopted in our daily lives and establish themselves as an important part of the financial industry. All in all, these are just a glimpse of how a Spot ETF could possibly impact the DeFI Space. When we discuss impacts there are also negative ones that could unfold once these filings are approved but so far this has helped bring back the enthusiasm into the DeFI Space and let’s hope that this continues for the long run!
We at Nagaya Technologies certainly believe that there is a huge potential to be found in the DeFI space. We hope that the development going around the world will be able to help nurture growth for the rest of 2023 and beyond. That is also why we created the world’s first hybrid digital assets called Nagaya which will soon be a part of the revolution needed for sustainable Digital Assets for the Global DeFI space. Interested to know more about Nagaya, you can visit our website at www.nagaya.co
Or you can obtain your Nagaya now through the Launchpad Platform at latoken.com/ieo/NGY