Bitcoin ETF Status: The Basics (Aug 2018)

So, the crypto market is falling through the floor today.

Again.

It appears that the market is spooked by the SEC’s decision to postpone a decision on approval for a Bitcoin ETF to be listed on the CBOE.

I keep answering the same questions about this, so I thought I’d do an article with answers to the most common questions.

DISCLAIMER: This is not legal advice, and I am not qualified to practice law in any US jurisdiction. Some concepts have been simplified or details omitted to make this piece more easily (and quickly) readable.

What is an “ETF” anyway, and why should I care?

An “Exchange Traded Fund” is a security that trades in the financial markets and tracks the value of an underlying asset because the fund holds that asset.

So for example, for most people who want to invest in gold, it is much easier for them to buy shares in a gold ETF (through their normal brokerage accounts or pension funds) than to go out and buy gold bars. The ETF in turn will hold gold bars (usually — there are some complexities beyond the scope of this article). The value of a share of the gold ETF will fluctuate up and down in line with the price of actual gold bars (ie the “spot” market).

So everyone is happy — you get to buy gold (in effect) without having to build a vault at home, plus you can effectively buy fractions of a gold bar by buying small numbers of ETF shares, which would not otherwise be possible. There is also a great increase in liquidity and in-flow of funds to the gold market because it gets opened up to entirely new classes of investors including retail and institutional investors who may not have wanted to go out and actually buy gold bars and store them in a vault because of all the hassle involved. ETFs are also typically heavily regulated by financial regulators because they are accessible to everyone, so investors have some assurance about the integrity of the ETF.

Exactly the same thing applies to a Bitcoin ETF and that is why people are so excited about it. It could give Bitcoin much more credibility in the traditional financial markets and open up broad retail and institutional investment in Bitcoin.

It could make it much easier to invest in Bitcoin without having to sign up for a new account at Coinbase or learn about “bitcoin wallets” and deal with custody issues.

There are no guarantees but an ETF is likely to be very good for the price of Bitcoin (and other cryptocurrencies — because Bitcoin profits usually flow into other cryptos and because if there is a Bitcoin ETF, it is only a matter of time before there are ETFs for other cryptos, especially those in the top 10).

Aren’t there Bitcoin ETFs in existence already?

No.

Well, kind of, but not really.

There is an instrument similar to an ETF in the Swedish financial markets, there is a “Bitcoin Investment Trust” in the United States managed by Grayscale Investments and some other options. However, none of them have the potential reach and influence on price that a “true” ETF is likely to have. In essence none of them tick all the boxes to be an ETF, and have significant downsides.

This CNBC article from January 2018 explains the complexities in more detail for anyone who really wants to know.

Background to a Bitcoin ETF in the United States

This is quite complicated and the full details are beyond the scope of this piece.

In essence, there have been several attempts by different people to get SEC (the US financial regulator) approval to launch a Bitcoin ETF, but the SEC has not yet approved any. Personally I think it is only a matter of time before one of the applications is approved, but it is impossible to say when that will be.

The most important one till date has been the Winklevoss twins’ (initially of Facebook litigation fame, later Bitcoin early adopters and owners of the US-based Gemini crypto exchange) application for an ETF. This was rejected once in 2017, and again in July 2018 when there was a second attempt.

The SEC released a public letter in January 2018 setting out some of their concerns about approving a Bitcoin ETF, and the SEC decision rejecting the Winklevoss ETF in July 2018 also explains their concerns (with the opinion of the sole dissenting SEC commissioner — who wanted to approve it — being very interesting reading).

More details about all this background is in this CNBC piece.

There are several other Bitcoin ETF applications still pending with the SEC .

The ones I am aware of are:

• NYSE Arca/Direxion ETF application
• VanEck/SolidX Bitcoin Trust ETF application for listing on the CBOE (this one is widely believed to have the best chance of approval for a number of reasons including that it will actually buy and hold bitcoin in the “spot” market instead of gaining exposure to the bitcoin price through futures contracts like most of the other ETF applications, plus the SEC has been flooded with public comments in relation to this application).
• Bitwise ETF application

So what’s the current status then?

The current state of play:

• Winklevoss/Gemini ETF: Denied twice, most recently in late July 2018
• NYSE Arca/Direxion ETF: This was filed in January 2018 and the decision has been postponed repeatedly, most recently till 21 September 2018. However, there is a good chance that a final decision will be issued in September 2018. While it is possible that this ETF will be approved, it did not receive as much public support as the VanEck application and is not believed to be as strong a candidate for approval.
• VanEck/SolidX Bitcoin Trust ETF: Today the SEC postponed its decision to 30 Sep 2018, but it is highly likely that they will postpone their decision again in stages to the latest date permitted by law (early March 2019).
• Bitwise ETF: This was only filed in July 2018 and a decision is not likely until well into 2019, after the final decision about the VanEck ETF.

There has also been media speculation based on anonymous sources which suggests that the SEC intends to approve the VanEck ETF proposal but wants to do so at the same time as announcing a broader regulatory framework for cryptocurrencies.