Bitcoin investors want more from the cryptocurrency. Or rather, some financial institutions want to make Bitcoin more appealing to outside investors.
How? The creation of a Bitcoin exchange-traded fund (ETF). A Bitcoin ETF would allow investors to trade shares of Bitcoin without ever owning the cryptocurrency, opening up an entirely new market for cryptocurrency investors.
However, the Securities Exchange Commission (SEC) isn’t keen on the creation of such a market. In fact, the SEC has shut down more than five attempts to create a Bitcoin ETF in 2018 alone.
What exactly is a Bitcoin ETF? What are the benefits and why would investors prefer it over buying actual units of cryptocurrency? Would it be good or bad? Here’s what you need to know.
What Is an ETF?
An ETF is an investment fund that allows investors to make investments in an asset without having to buy the listed asset directly. In other words, an ETF tracks the price of a commodity: as the value of the commodity moves, so does the price of the ETF.
Furthermore, you can take long and short positions on an ETF. If you think the market for an asset is going to crash, you can “short sell” the ETF and profit as it goes down. On the other hand, if you think the market for an asset is going to rocket, you can “buy long” and profit as the price goes up.
The main point is that you can make a wider range of investments in commodities, without having to head through a variety of exchanges. ETFs are a relatively new financial instrument with the first ETF having launched in 1993, but its only in the last 10 to 15 years that ETFs have become a popular method of investment, especially for beginners.
What Is a Bitcoin ETF?
A Bitcoin ETF, then, is a fund that tracks the price of Bitcoin. Investors can buy into the Bitcoin ETF without having to purchase Bitcoin itself. Although purchasing and storing Bitcoin is easier than ever, some investors only want market access and none of the other complications.
The key is allowing would-be investors to diversify their investments with cryptocurrency and blockchain assets.
Why Not Just Buy Some Bitcoin?
Investors do not want to deal with crypto exchanges or having to store their cryptocurrency securely. Some investors are likely to have existing accounts at traditional exchanges and would want to continue to trade in a secure, familiar environment.
Moreover, ETFs are vastly more understood by investors than cryptocurrencies. Investors looking to enter the cryptocurrency space can use a Bitcoin ETF to invest using their existing knowledge, instead of taking time to learn about the ins and outs of cryptocurrency markets.
Finally, although there are now Bitcoin futures and the opportunity of short selling Bitcoin on BitMEX, traditional investors can use a Bitcoin ETF for another short-selling option. (Again, without using cryptocurrency exchanges or services.)
What Does a Bitcoin ETF Need for Success?
There are a handful of key qualities the SEC will examine before accepting a prospective ETF:
- Manipulation. As you read above, the SEC is wary of Bitcoin and cryptocurrencies due to the high chance of market manipulation.
- Value. How will prospective ETF managers value the volatile price of Bitcoin in relation to the shares in the trust? Furthermore, how will a prospective trust price the shares for investors?
- Price. ETFs track the price of a given market. Bitcoin is volatile which lends itself to speculation. The SEC will want guarantees that the ETF will not deviate too far from the tracked Bitcoin price.
- Security. The SEC will require the trust to have enough Bitcoin to protect against fraud and other issues.
- Liquidity. Similarly, tying into Security, the SEC will assure investors that they can make rapid deposits and withdrawals.
Who Will Launch a Bitcoin ETF?
The first Bitcoin ETF application was back in 2013. Bitcoin entrepreneurs, The Winklevoss Twins, applied for a Bitcoin ETF in 2013 but it took until 2017 for the SEC to turn down the application. The SEC refused the application for fairly reasonable concerns regarding unregulated markets and trading, and the potential for manipulation and fraud. (Not unfounded, as it turns out.)
Since that time, the Chicago Board of Exchange (CBOE) and Chicago Mercantile Exchange (CME) have introduced Bitcoin futures contracts on their respective exchanges. After the Winklevoss Twins rejection, different companies submit a further nine Bitcoin or cryptocurrency ETFs to the SEC—all of which were rejected for similar reasons to the initial Bitcoin ETF application.
However, a day after rejecting the nine applications, the SEC announced that it would review the applications again. The SEC set the review date for October 5, 2018 but then pushed it to November 5. The final decision must come before the February 27, 2019, the last date legally allowable by the SEC.
VanEck SolidX Bitcoin ETF
There is one particular Bitcoin ETF that is attracting attention: the VanEck SolidX Bitcoin Trust.
The VanEck SolidX Bitcoin Trust ETF is viewed favorably for a few reasons.
Both firms have applied for cryptocurrency ETFs separately, although both received rejections. The proposed ETF will be tied to the VanEck MVIS subsidiary index, which will calculate the Bitcoin price in real time.
The real-time price calculations will come from bids and asks derived from over-the-counter exchanges rather than a regular exchange. (“Though the Trust may also invest in Bitcoin traded on domestic and international Bitcoin exchanges, depending on liquidity and otherwise at the Trust’s discretion.”)
SolidX will sponsor the project, while the ETF itself is expected to list on the CBOE BZX Equities Exchange. Furthermore, the VanEck SolidX Bitcoin ETF application suggests that the companies will actually hold a significant amount of Bitcoin to protect against fraud or other unforeseen losses.
And finally, each share of the VanEck SolidX Bitcoin Trust will cost a staggering $200,000. Eye-watering, yes. But as SolidX CEO Daniel H. Gallancy explained in a phone interview with CNBC, the price reflects the Trust’s focus on institutional, rather than retail investors. A successful institutional Bitcoin ETF would almost certainly pave the way for other ETFs with a focus on regular investors.
Yes, Bitcoin ETFs Are Coming Soon
Logic would tell us that opening up Bitcoin and other cryptocurrency markets to billions of dollars’ worth of new investment should propel prices skywards. To the moon, perhaps. But before everyone heads out to buy new Lambos, there will be another long wait as the SEC takes its time to conclude.
And, ultimately, it is the SEC’s role [PDF] to “prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade” and “to protect investors and the public interest.”