There has been a lot of talk about publicly traded bitcoin ETFs potentially being back on the table since the launch of regulated bitcoin futures contracts on the CME and CBOE. Even so, in 2018, we did not see a single bitcoin ETF receive approval from the U.S. Securities Exchange Commission.
That said, the bitcoin industry now has an outspoken ally in the SEC, Hester Peirce, who would like to see a bitcoin ETF approved sooner than later. Many bitcoin advocates believe that she could cause the final push that the SEC needs to allow a bitcoin ETF to trade on a U.S. exchange.
What Is a Bitcoin ETF?
An exchange-traded fund, commonly known as an ETF, is a type of investment fund that tracks the price of an underlying asset, such as gold, oil, an index or a basket of stocks. It is traded on exchanges in the same way as stocks. That means that any investors – retail or institutional – can buy and sell holdings in an ETF to other market participants over the stock exchange.
ETFs are usually cheaper than mutual funds as they are usually set up as passive index tracking funds, and they allow investors – even private investors – to gain access to asset classes and niche markets in which it would otherwise be difficult to invest.
A Bitcoin ETF, such as the one proposed by the Winklevoss twins, would have the digital currency bitcoin as an underlying asset. That means that by purchasing a bitcoin ETF, an investor would be indirectly purchasing bitcoin, as he or she would be holding the bitcoin ETF in a portfolio as opposed to the actual digital currency itself. However, as the ETF would closely track the price of bitcoin, for the investor it should make little difference whether he or she is holding a bitcoin ETF or the actual digital currency.
The main difference between buying a bitcoin ETF versus bitcoin itself would be that investors would be purchasing a regulated investment vehicle that they can buy and sell on exchanges instead of having to buy and securely store bitcoin.
How to Invest in a Bitcoin ETF
While there is currently no investable bitcoin ETF on U.S. exchanges, there are exchange-traded bitcoin financial products available on European exchanges and an over-the-counter Bitcoin Trust in which investors can invest.
XBT Provider ETN
The Bitcoin ETNs (exchange-traded notes) by XBT Provider can be bought and sold on the Nasdaq Stockholm stock exchange in euros or Swedish krona since 2015. They enable both retail and institutional investors to gain regulated exposure to bitcoin (BTC) and, since October 2017, also to Ether (ETH).
U.S. investors who want to purchase the Bitcoin ETN, however, will have to expose themselves to added currency risk as the ETNs are currently only available in SEK and USD.
Investors are charged a 2.5 percent annual management fee for holding the Bitcoin One Trackers.
The Bitcoin Investment Trust
Grayscale Investments’ Bitcoin Investment Trust was launched in 2013 to provide accredited investors with the opportunity to purchase bitcoin in the form of a regulated investment vehicle. Investors can purchase shares in the over-the-counter traded investment fund that holds bitcoin as an underlying asset on behalf of its shareholders.
Investors are charged a two percent annual management fee for holding shares in the Bitcoin Investment Trust.
Moreover, there are also a number of blockchain ETFs that invest in blockchain stocks on behalf of their investors. Currently, there are around half a dozen blockchain ETFs in the market including the Amplify Transformational Data Sharing ETF (NYSEARCA: BLOK), the Innovation Shares NextGen Protocol ETF (NYSEARCA: KOIN), and the Reality Shares Nasdaq NexGen Economy ETF (NASDAQ: BLCN).
The Benefits of an ETF for Bitcoin as an Asset Class
A bitcoin ETF is seen as the holy grail for bitcoin as an asset class by many investors. The ease of purchasing a bitcoin ETF would expose the asset class to several new types of investors with deep pockets that were previously not able to invest in bitcoin, such as mutual funds and pension funds, for example.
The approval of a publicly traded bitcoin ETF would also very likely boost the price of bitcoin to new highs as the above-mentioned institutional investors, as well as private investors who are not very versed in technology, would now be able to freely invest in the digital currency through the ETF.
In fact, that is what happened in the early 2000s when the ETF market opened up gold investing to private investors and the price of gold subsequently experienced a tremendous rally that peaked in 2011.
A similar scenario would be expected to happen to bitcoin, where new highs, well above its most recent all-time high, would be highly likely. This would especially be the case if mutual funds, pension funds, and private banks would jump onto the bitcoin investing bandwagon. Given the strong demand for the high returns that bitcoin could potentially offer, this would be likely.
Will Bitcoin Futures Pave the Way for Bitcoin ETFs?
With the regulatory approval of the CFTC to list bitcoin futures contracts on the CME and CBOE, the door has been pulled wide open for potential bitcoin ETFs in the future. This is the case not only because a major U.S. financial regulator has approved bitcoin-based financial products but also because this opens up the opportunity to base a bitcoin ETF on bitcoin futures, which are standardized, publicly traded, and transparent. This, of course, would address some of the issues that the SEC currently has with the listing of a bitcoin ETF based on “physical” bitcoin as the underlying asset.
In fact, the SEC has reportedly already received several bitcoin ETF proposals that use bitcoin futures as the underlying asset since the launch of bitcoin futures on the CME and CBOE. However, all of these applications were withdrawn after Blass’ staff letter on cryptocurrency ETFs was released on January 18, 2018.
“Until the questions [on valuation, liquidity, custody, and potential market manipulation] can be addressed satisfactorily, we do not believe that it is appropriate for fund sponsors to initiate registration of funds that intend to invest substantially in cryptocurrency and related products, and we have asked sponsors that have registration statements filed for such products to withdraw them,” the letter stated.
The Bitcoin ETF Saga Continues but with ‘Crypto Mum’ on Our Side
After the SEC Commission did not approve the listing of the long-awaited Winklevoss Bitcoin Trust in mid-2018, SEC Commissioner Hester Peirce, which has since been dubbed ‘Crypto Mum’, published a letter of dissent stating that she believes that the market is ready for a Bitcoin ETF and that she does not agree with her colleagues on the disapproval of the Bitcoin ETF in question.
With Commissioner Peirce now on its side, the cryptocurrency community is more confident than ever that there will be a Bitcoin ETF on US exchanges in the near future. However, the SEC’s concerns around the potential for market abuse due to the lack of oversight of the bitcoin trading ecosystem stands in the way of a Bitcoin ETF approval.
As the bitcoin market matures and the transparency surrounding its trading activities increases as well as the security measures of leading digital currency exchanges, it is not far-fetched to assume that a bitcoin ETF will eventually become listed on a major U.S. stock exchange.
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