Do We Need A Bitcoin ETF?

Whether or not a Bitcoin ETF (Exchange Traded Fund) will get SEC approval is a big news story in the crypto community.

But does it really matter?

Some think we must have one if Bitcoin is going to become global internet money. Others think it's necessary if we ever want to see Bitcoin increase in value to $100,000 or more since it's a tool that institutions can use to buy and sell Bitcoin. Others still don't think it matters at all. Some of the more libertarian or anarchy based early Bitcoiners don't want to see Bitcoin get a product like an ETF. They see ETFs as part of the financial system they are trying to disrupt.

Are any of them right? We are going to look at ETFs in more depth and you can decide for yourself.

What is an ETF?

ETF stands for Exchange traded fund. Here are some of the features and benefits of an ETF from Investopedia.

  1. Trades like a stock on a market like the NYSE or NASDAQ. It gets its own ticker symbol. The benefit of this is pretty obvious as individuals and institutions won't have to go to Coinbase or Bitfinex or Binance to open an exchange account. They can buy Bitcoin through the ETF through an account they already have that accesses the market. Ease of access and ease of use mean ease of adoption.
  2. The ETF tracks a stock index, commodity or basket of assets. The asset or commodity, in this case, is Bitcoin only in an ideal ETF. Don't be surprised if some ETF proposals (there are more than 1 currently) include other cryptocurrencies as well.
  3. ETFs have higher avg volume and lower fees than a mutual fund. ETFs can be an attractive investment option for individual investors and institutions since volume means liquidity and lower fees don't eat away at investment returns.
  4. An ETF should own the underlying asset. An approved ETF will have to be a continuous buyer or seller of Bitcoin in the open market as the ETF grows or if they need cash for redemptions after others have sold.
  5. ETFs can use margin or leverage. This can be good and it can be bad depending on how responsible the managers are. This is something that the ETF prospectus should disclose. So it's possible one or more of these Bitcoin ETFs could use leverage to buy, sell or short Bitcoin.

Here's how the first attempts at SEC approval for an ETF have fared.

Attempt #1 & #2: Winklevoss Twins

The Winklevoss Twins who were involved in early versions and lawsuits around Facebook were the first to try to get SEC approval for a Bitcoin ETF. The first attempt got rejected in March 2018 and the second in July 2018. The SEC's rejection letter, which you can see in part in this Coindesk article, gives some good insight into what they are looking for.

Before digging any deeper into this, if this topic interests you at all then Kobre Kim securities attorney Jake Chervinsky is a must read and a must follow on Twitter. His handle is @jchervinsky. His insights are all legal, no shilling, and while he is a Bitcoin fan he shoots very straight about what is going on, why, chances for approvals and opportunities to improve an ETF submission.  For instance, this one tweet helps us non-legal types know when the real deadline is...

Back to the ETF attempts, the SEC stated in its rejection letter saying that 'over time regulated Bitcoin-related markets may continue to grow and develop.'  One of the SEC's biggest concerns is where the spot price (current daily price) of Bitcoin comes from to determine the ETF's Net Asset Value. The SEC states that most Bitcoin exchanges are 'not significant, not regulated, or both' making it inconsistent with Section B of the Exchange Act. The Exchange Act is the act new proposed ETFs must follow and the framework they must use to get one approved.

Attempt #3: Van Eck/CBOE

On January 31st, a group led by the Chicago Board Options Exchange (CBOE), Van Eck and SolidX submitted their final ETF proposal. They started this process in June and finalized last month.

The Van Eck ETF, according to Gabor Gurbacs quoted above who is Van Eck's chief of digital strategy, is the only physical ETF where the Bitcoin is held and insured. This ETF is dividing the Bitcoin held in their trust into shares worth 25 BTC. Since 25 BTC is around $100,000, this is an institutional product. Van Eck believes building something for institutions will help them get approved. Van Eck's Bitcoin pricing for the ETF will come from an index that comes from mostly OTC trades.

As Jake's tweet above states, the clock has started with the SEC so we will get an answer or a delay from the SEC soon.

Attempt #4: Bitwise & NYSE

The other major attempt at ETF approval is from Bitwise Asset Management teaming up with NYSE Arca. Their Bitcoin ETF is a physical one as well with shares listed on the NYSE Arca, which more individuals can access than the CBOE. They want to use a combination of spot prices and physically settled futures prices (meaning the Bitcoin had to be delivered to fulfill the futures contract) to determine Bitcoin's daily price for the ETF. Bitwise says its proposal is different through the use of third-party custody to hold the Bitcoin.

Many people, myself included, are optimistic that an ETF will get SEC approval soon. Many believe 2019 is the year as markets and the ecosystem has grown much during this bear market on price. The industry is working on creating products and services people need. Not to mention people didn't think we would have a Bitcoin futures market, and yet we do. Started in late 2017, the CME Bitcoin futures are trading over 18,000 contracts in February where each contract is 5 BTC, meaning over 91,000 BTC or $360 million in active trading.

Impact of an ETF

People and governments around the world are waiting to see if an ETF will be approved here in the States. The creation of a wallet, secure storage and management of private keys, and overall security for a noobie to hold Bitcoin are all factors creating friction and making it more difficult for the average person to buy and hold Bitcoin safely. SEC approval is considered a sign of legitimacy for Bitcoin as an investment as well.

South Korea makes up 30% of all cryptocurrency trading globally and they are watching. Koreans see an ETF as a huge risk reduction in buying or otherwise accessing Bitcoin. Korea's stock exchange said their attitude toward crypto (ICOs have been banned there) will be influenced heavily by the US ETF decision.

Individual investors will get better access through an ETF. More Americans own ETFs and mutual funds than they do individual stocks so this is an investment vehicle where they are already comfortable.

So to answer the question of do we really need an ETF? I'm not sure but I do think we will get at least one and us long term holders of Bitcoin will benefit from it.

About the author

Stu Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending. Check me out on Twitter, LinkedIn and Google+

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