It seems like a match made in heaven for the fintech world: Bitcoin ETFs. There has been a lot of buzz over when this hot, new investment vehicle would reach the markets, but you might be wondering: what is a Bitcoin ETF? – and maybe, more generally, what’s an ETF to begin with?
For starters, an exchange-traded fund (ETF) is a marketable security that trades like a stock index made up of commodities, bonds, or an assortment of different assets. Although bearing some resemblance to mutual funds, they are different in so far as ETFs trade their shares which represent portions of ownership of the fund.
Although the U.S. Securities and Exchange Commission has been hesitant on allowing a Bitcoin ETF on regulated trading markets, most financial experts would agree that its release is inevitable. So let’s take a look at what all the talk is about over this new fund that will likely be approved sometime in 2019.
What’s the Status of Bitcoin ETFs Today?
Last updated: November 30, 2018
Although many Bitcoin ETFs were rejected this year, just as many are up for resubmission. We can expect the Winklevoss twins to submit yet another Bitcoin ETF proposal next year most likely.
A lot of hope has been put into the VanEck-SolidX Bitcoin ETF which has been postponed for some time now. Although the SEC has said they would rule on it sometime in November of 2018, nothing of the sort has come out yet. The ETF was filed by the Chicago Board Options Exchange (Cboe) in conjunction with the investment management firm VanEck and blockchain-based company SolidX. The Cboe was responsible for being the first U.S.-based exchange to release a regulated futures market for Bitcoin back in December of 2017.
What makes the VanEck-SolidX Bitcoin ETF fundamentally different from other proposals is that the fund would hold an actual repository of Bitcoins. All the previous proposed ETFs have been represented by Bitcoin derivatives. The VanEck-SolidX Bitcoin ETF would also have a starting price of $200,000 per share which would mean that smaller investors would be priced out. Thus, financial analysts have argued that the VanEck-SolidX Bitcoin ETF best matches the criteria the SEC has established with its previous rejections: it is backed by real Bitcoins, and hence cannot be manipulated, and it prices out smaller inexperienced investors, thereby protecting the public.
Yet, financial analysts have spoken of the SEC’s ambiguity in their precedent for rejections this year and constantly “moving the goalposts.” This is likely because the SEC knows that the first Bitcoin ETF approval would likely open the floodgates for more to follow: it would establish a precedent that would fundamentally change the cryptocurrency and traditional financial world. So, the SEC has been hesitant but it seems that this hesitation cannot continue for much longer.
Previous Attempts at a Bitcoin ETF
Currently, there exists no Bitcoin ETFs – all of them have been rejected by the SEC.
The most high-profile rejection was in July of 2018 when the SEC rejected the Winklevoss Bitcoin Trust from trading in a vote 3-1 by the commission. The Winklevoss twins have been high-profile investors in the Bitcoin space, but are perhaps best known for their initial involvement, and later dispute, with Facebook during its early years. The Winklevoss Bitcoin Fund was rejected earlier in March of 2017 for similar reasons: “concerns over Bitcoin’s volatility and vulnerability to manipulation.”
Then, in August of 2018, nine more Bitcoin ETFs were rejected before the deadline that month. Three different applications filed nine ETFs in total for the cryptocurrency, all met with disapproval from the commission. One of the rejected Bitcoin ETFs was submitted by ProShares in conjunction with the New York Stock Exchange (NYSE) ETF exchange NYSE Arca.
When Can We Expect the First Bitcoin ETF?
The simple answer is – only the SEC really knows.
Eric Balchunas, senior ETF analyst at Bloomberg, has said that the chance of a Bitcoin ETF this year is between “5 – 10 percent.” Making this statement in October, the chances are slim to none for 2018 as it stands today.
However, market analysts remain confident that a Bitcoin ETF is coming, likely in 2019, but inevitably by 2020. Given that Bitcoin’s next halving – a 50-percent reduction in block rewards –also occurs in 2020, the next few years will likely be some of the most exciting, volatile years for the flagship cryptocurrency.
What’s a Bitcoin ETF?
If an ETF is an investment vehicle that tracks the performance of an asset(s), then a Bitcoin ETF is a fund that tracks the price of Bitcoin. However, if Bitcoin ETFs just represent the price of Bitcoin, why not just trade Bitcoin then? The answer is because, simply put, ETFs make it easier for investors to diversify their holdings.
For example, if one is purchasing shares in a gold ETF (which came on the market just within the last 15 or so years), then one is able to have a stake in gold’s price without owning any gold. In this same way, investors would be able to invest in Bitcoin without needing to buy it or store it. Instead, they would buy a share of a fund that represents Bitcoin’s price. ETFs thus provide investors with a simpler alternative solution to buying assets directly. As an added bonus, investors not familiar with Bitcoin and its trading mechanisms would instead be able to purchase a share of an investment vehicle they understand, like ETFs.
Therefore, one can see why Bitcoin ETFs would be attractive to today’s investors. Not only would it make it easier for traditional market participants to invest in Bitcoin, but it would legitimize Bitcoin as an asset class that is here to stay.
Many in the cryptocurrency space point to the landmark gold ETF that first began trading in Australia in 2003 and the United States in 2004 as evidence that ETFs bring remarkable market visibility and growth to an asset class. Since the gold ETF first came on the market, gold prices have grown exponentially due to the now-easy means of investing in gold. Market analysts thus point to the gold ETF precedent as evidence that Bitcoin ETFs would be drastic in legitimizing Bitcoin and thus increasing its value.