An Open Letter to the SEC | The Case for a Bitcoin ETF

Nicholas Merten
Jul 26, 2018 · 4 min read

Dear Commissioners,

With the recent move of the SEC to postpone any decisions on a variety of proposed Bitcoin ETFs until September, I thought it might be helpful to get a balanced opinion from someone who’s active in the space. Today, I’d like to provide the case in support of a Bitcoin ETF, along with providing details as to how this will help meet some of the SEC’s current concerns for this emerging currency market.

The SEC’s stated objective is to provide protection to retail investors, and various concerns have been listed, such as liquidity and manipulation. Understandably, there will be multiple concerns in any new market. But these two, I feel, make up the majority of the SEC’s concerns in approving an ETF, which is why I’ll be primarily addressing these two points. They not only coincide with one another, but there is a high degree of evidence that proves a Bitcoin ETF would help to dissolve these concerns.

Liquidity & Manipulation

There’s no doubt that in an emerging currency market, which has only existed for a little over nine years, there will be excessive volatility. But I feel the SEC’s concerns aren’t stemmed simply in the speculative or fast moving price action of cryptocurrencies. If that were the case, things like 3x leveraged ETFs on volatility, commodities, or pharmaceuticals wouldn’t be able to trade. If I’m correct, most of these concerns stem from the large concentration of ownership in the hands of a few (commonly referred to as whales in the cryptocurrency space). With headlines from major media outlets like Bloomberg claiming that, “1,000 People Own 40 Percent of the Market”, or estimations that Satoshi Nakamoto, the anonymous founder of Bitcoin, owns over one million of the coins in circulation, there’s a large amount of fear on the fundamental distribution of the currency. There are even studies that aim to dispel these fears, such as a research piece done by Chainalysis, which claims that nearly 3.9 million bitcoin have been lost. Staying critical however, let’s take this fear into account, along with the fact that the market is still quite small at around a $300 billion valuation. The SEC has reason to be cautious with these points alone.

But excluding manipulation such as smaller scale “pump and dumps” (P&Ds) and the fraudulent activity in the ICO space, we have yet to see a massive exit sale of Bitcoin in cryptocurrency markets, leading the price to zero. Why is this? The obvious answer many would claim is that most, if not all, are holding. But in reality, some are selling, they’re just not doing it on the exchanges. OTC markets have been the leading force in allowing early adopters, mostly miners, early investors, libertarians and cypherpunks to liquidate some of their holdings, bringing both better distribution to the supply and a way for billions of dollars worth of trades to be facilitated that would have otherwise never happened. On the buying side, we see that most are family funds, hedge funds, or other institutions of finance that manage money for their clients. On traditional exchanges, both the buyers and sellers could never make these types of transactions. When dealing with millions, if not, billions of dollars, both sides would face concerns of slippage in the underlying cryptocurrency’s value.

This leads me to my case for a Bitcoin ETF. When we open up markets, and allow more participants to gain access to any given asset, commodity, or currency, markets flourish, and distribution is an inevitable symptom. Much like how the OTC market opened up an opportunity for institutional participants to gain access to Bitcoin under hedge funds, ETFs help markets become mainstream, providing an easy framework for investors to obtain a holding of the underlying item. By creating an ETF to allow both retail and institutional investors to gain exposure to Bitcoin, many of these whales will open the doors to swap their bitcoin for fiat currency over OTC markets, which will provide the opportunity for ETF producers to purchase the underlying bitcoin for each share. All of this could happen without major fluctuations of price on the open exchanges, and will lead towards a healthier distribution of the underlying cryptocurrency.

There are many steps that the SEC and other regulators can take to help protect investors in this emerging market of currencies. Establishing large penalties for partaking in coordinated “pump and dumps” and establishing ways to protect investors from scams in ICO markets are all great steps that financial regulators have already taken. And to that, many of us, myself included, appreciate you for your hard work and determination. But blocking the possibility of everyday citizens to engage in these new markets will not only hinder the SEC’s long-term objectives of fighting manipulation and bringing liquidity into the space, but it will also prevent retail participants, yet again, from having the freedom to easily access these new markets.

I’ll finish off by referring to a quote made by SEC Chairman, Jay Clayton, on initial-public-offerings (IPOs) in a recent interview on CNBC. In reference to the growth of private equity markets, rather than public equity markets, he claimed that this trend was, “shrinking the opportunities for our Main Street investors”, and I couldn’t agree more. As someone who’s spent seven years investing in traditional equities markets, it upsets me that more and more opportunities are being stripped away from the people who the SEC aims to protect; Main Street, retail investors. And though I believe that regulation and protection are necessary functions of the SEC, I also feel that in doing so, the organization should also aim to guarantee that the investors they’re protecting have an equal set of opportunity to their institutional counterparts.


Nicholas Merten

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