US approves Bitcoin investment product. Here's why it matters

The Securities and Exchange Commission on Wednesday gave its approval for some Bitcoin ETFs, just a day after a fake post on the agency's account on X made a similar announcement and sent the value of Bitcoin soaring.

The price of Bitcoin vaulted skyward on Tuesday afternoon after the SEC appeared to deliver a major breakthrough for the cryptocurrency.

Minutes after the post went up Tuesday, SEC Chair Gary Gensler punctured the euphoria, saying on X that a hacker had commandeered the agency's account and sent out a fake message. The price of Bitcoin plummeted.

Some analysts say Bitcoin ETFs -- Exchange-Traded Funds -- could bring tens of billions of dollars of investment this year and catapult the price of Bitcoin.

In a statement on Wednesday, Gensler confirmed the decision but offered a note of caution about cryptocurrency.

After announcing that the SEC had "approved the listing and tradition" of some Bitcoin ETFs, Gensler added: "We did not approve or endorse bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto."

A Bitcoin ETF allows investors to buy into an asset that tracks the price movement of Bitcoin, while avoiding the inconvenience and risk of purchasing the crypto coin itself. But critics warn the investment product could do harm to investors exposed to the volatility and uncertainty of crypto.

Here's what to know about Bitcoin ETFs and what's at stake in their potential approval:

What is a Bitcoin ETF?

A Bitcoin ETF uses a decades-old trading method as a means of easing investment in digital assets.

An ETF amounts to a bucket of securities that gives investors a way to bet that an underlying asset will increase in price without purchasing that asset.

For instance, an ETF for gold allows individuals and institutions to put money on the price movement of the precious metal rather than buy, lug and store the physical item.

A Bitcoin ETF, in turn, gives investors access to the cryptocurrency market without facing the technical impediments and fees associated with navigating a crypto exchange.

Traders could find Bitcoin on traditional trading platforms and markets that many of them find trustworthy, assuaging concern about relatively young and scandal-ridden crypto technology.

Top investment firms like Fidelity and BlackRock were set to offer Bitcoin ETF products once federal approval is given.

While nearly 90% of U.S. adults say they've heard at least a little about cryptocurrency, three-quarters say they aren't confident about the safety and trustworthiness of current means for investing in the products, a Pew survey in April found.

What will happen after Bitcoin ETFs are made available?

Some analysts say the new products could unleash a flow of investment and trigger a major spike in the price of Bitcoin, supercharging the most well-known and successful digital asset.

A Bitcoin ETF would elicit more than $14 billion of investment inflows within its first year on the market and nearly $40 billion by the end of the third year, according to Galaxy Digital, a crypto management and research firm.

Standard Chartered Bank, a U.K.-based lender, offered a more bullish assessment, saying the financial instrument could induce as much as $100 billion worth of inflows by the end of this year, crypto outlet CoinDesk reported on Tuesday.

Under such a scenario, the price of Bitcoin could reach near $200,000 by the end of 2025, more than quadrupling the current value of the crypto coin, Standard Chartered Bank said, according to CoinDesk.

The price of Bitcoin has jumped nearly 70% over the past six months, in part due to anticipation of a surge if the Bitcoin ETF gains approval.

Critics of the financial instrument, however, say it could wreak significant damage to investors due to the volatility of Bitcoin as well as its potential use in illicit activities.

Dennis Kelleher, the CEO of nonprofit transparency group Better Markets, co-authored a letter to an SEC official last week warning of significant risk posed by the pending approval.

"It would be a grave if not historic mistake almost certainly leading to massive investor harm if the SEC approves the pending rule changes," Kelleher wrote.

He added, "The massive and unrelenting fraud and manipulation in the bitcoin market means that approving these products would expose those investors to the very harms that the SEC exists to prevent."

Why does this matter?

The crypto industry entered this year bruised after a series of high-profile collapses and company scandals.

Sam Bankman-Fried, formerly one of the industry's most prominent figures, could serve decades in prison after he was convicted on fraud charges in a federal trial. Changpeng Zhao, the founder and former CEO of major cryptocurrency exchange Binance, faces a jail sentence of up to 18 months after he pleaded guilty to federal charges of money laundering.

Government approval for a Bitcoin ETF injects a much-needed jolt of good news for the ailing sector. But, as some critics fear, the financial product could widen the reach of crypto and pose further risk.

"We believe retail investors should wait to see whether these products can garner enough traction to see the light of day -- let alone see convincing performance," Manan Agarwal and Sabeeh Ashhar, analysts with financial services firm Morningstar, wrote in August.