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Will the SEC Approve a Bitcoin ETF?

Samburaj Das on 07/02/2017


Rulings on the approval of Bitcoin Exchange traded funds (ETFs) are set to be disclosed in the coming months. Investors brace themselves for what could be a historic reveal in the world of investments; flooding in new money to Bitcoin, and ushering in a new era of similar products and innovation. But, because of the lack of this type of product in the market, combined with Bitcoin’s history of price volatility and the Securities and Exchange Commission’s (SEC) stimulus to protect consumers, many question, “Will a Bitcoin ETF ever happen?”.


ETFs are investment funds, similar to mutual funds (although not actively managed), that can be bought and sold on a stock exchange like ordinary shares. They’ve been around since 1993, aiming to provide investors with a benchmark return at minimal cost; popular because investors get exposure to various investment types through one security, and are low-maintenance and low-cost in terms of trading and managing.


Bitcoin ETFs, in particular, would mean that individual investors could invest in Bitcoins on a long-term basis rather than having to simply buy them directly, and then save them and wait for the price to go up. Additionally, short-term traders could bet on small changes in price to try and reap profits.


After New York venture capitalists the Winklevoss brothers filed for the first listed Bitcoin ETF with the SEC back in July 2013, two others have done so: finance and technology firm SolidX Partners in July 2016, and Grayscale Investments as recently as the third week of January 2017.

Delay Tactics


The SEC designated March 11 2017, some three years after the Winklevoss brothers first put the ETF in registration, as the date it should either approve or disapprove the proposed rule change; March 30 for SolidX. Given the delay patterns seen for the first two, the deadline for the Grayscale ETF could similarly be drawn out. The SEC has typically 45 days to approve a measure from the time an application is filed in the federal register. As we’ve seen, this can be considerably prolonged.

The Upside Of Approval


As well as the potential muting of volatility, approval could see the price of Bitcoin soar. Investment bank and asset management firm Needham & Company released a report on January 10 of this year projecting that a Bitcoin ETF could attract as much as $300 million in new assets in its first week alone. It deemed even this projection to be conservative.


“We think a concurrent shift in perception and regulatory risk would be at least as significant in driving price higher. In terms of perception, the SEC approving a Bitcoin ETF would add legitimacy to Bitcoin in the eyes of investors,” said Spencer Bogart, the firm’s Research Analyst.


“In addition, we think the approval of a Bitcoin ETF would significantly improve perceived regulatory risk. A mainstream investment vehicle such as a Bitcoin ETF would significantly increase the percentage of the population financially exposed to Bitcoin and would consequently decrease the political appetite for enacting onerous regulation,” he added.

The Challenges Facing ETF Approval


As previously mentioned, there are a few reasons the SEC could refrain from approving the new form of investment in its bid to protect consumers and markets:


Past volatility


The SEC could be unnerved by the by the volatility of Bitcoin as an asset. Adam White, General Manager at digital currency platform Coinbase, tracked the volatility of Bitcoin from roughly 2011 in a recent white paper in conjunction with investment firm ARK Invest. The report found daily per cent price changes of 50 per cent. “In contrast, on any given day, stocks and bonds rarely fluctuate by 50 per cent in the absence of a severe financial crisis,” said the report.


A Shady Reputation


Bitcoin prices tended to drop as negative headlines appeared, creating further uncertainty for investors. Such negativity surrounding Bitcoin included:


   numerous Bitcoin gambling sites operate with anonymity and minimal to no regulation. The cryptocurrency’s decentralised status means there is little protection of player funds.

   according to a Reuters report, Anthony Murgio, former operator of coin.mx, this month pleaded guilty to Bitcoin related cybercrimes. These included conspiracy to operate an unlicensed money transmitting business, wire fraud and bank fraud.

   earlier this month, Italian politician Lucrezia Ricchiuti went as far as connecting Bitcoin to money laundering through mafia-controlled gambling sites (during the recent debate in Italian senate on its anti-mafia commission report).

   there have been a number of accounts of Bitcoin exchanges being hacked, one being the story of Bitfinex, a major Bitcoin exchange provider that lost 119,756 in Bitcoins (currently the equivalent of more than $110 million), following a breach in August 2016.


Chinese influence


More than 90 percent of Bitcoin trading activities occur on Chinese shores according to Reuters; the SEC could be wary of approving a new ETF product where prices were indirectly controlled by China.

Is The Bitcoin ETF An Inevitability?


Despite the (mostly relevant) naysaying, there were also a number of reasons the SEC could approve the rulings:


Promoting pioneering


ETFs have quite a history in innovative investing including the first gold ETF (which was also the first fixed-income ETF), which took more than four years for the SEC to approve. Now “it is widely acknowledged that the launch of gold [exchange-traded products] has had a very significant impact on the gold market and is now a key part of it,” said Graham Tuckwell, Chairman at ETF Securities, as he marked the 10th anniversary of the first gold ETF in 2013.


Volatility petering


Coinbase and Ark Invest’s white paper did note that Bitcoin volatility was dampening: “In April 2016, lower volatility triggered headlines as investors began to realize Bitcoin had been more stable than gold over the short period of one month.”


It added this decline volatility was caused by factors including: more stable and liquid spot exchanges, greater regulatory clarity, broader ownership, and increasingly reliable price discovery data.


More security


A Bloomberg report confirmed there were “about 60 bona-fide ETFs that are more volatile than Bitcoin” including the Direxion Daily Junior Gold Miners Index Bull 3x Shares. “It’s more than three times as jumpy as Bitcoin.”


Curve ball


The previously mentioned Needham report stated a rather unlikely scenario: “The process for this type of rule change indicates that if the SEC has not disapproved the rule change by a deadline (March 11 in this case) then the proposed rule change is automatically approved.”

So What Now?


The SEC has held out this long, but it cannot do so any longer. With the three filings already in place, it’s a near certainty that the first Bitcoin ETF will be approved in the near future, and most definitely a big deal, given the doors it could open, and the scale of Grayscale’s $500 million recent public offering. The herald of a new ETF and the positive monetary and ground-breaking prospects it brings, will certainly not go unheeded by the SEC. The fact that it hasn’t outright rejected approval indicates a sophistication in the product being offered by the three filings and a positive indication toward regulatory endorsement. In the face of nail-biting uncertainty, keep in mind that the approval for any ETF has always been long; but once approved, we could see demand for, and investment in Bitcoin, spurred at an unprecedented rate.

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