Context In the Blockchain: Bitcoin ETFs
My name is David, and I’m new to the world of cryptocurrency. Often times, it’s hard as a beginner to trace a story back to its roots. Whenever a piece of news happens, I miss out on all the historical context that can accompany it.
Follow me on my journey in my series “Context in the Blockchain,” where I explore the significance behind the different moving pieces in the blockchain world and provide you background from what I learn. In this article, I examine the recent buzz of the Bitcoin ETFs, the confusion surrounding them, and why its even important at all.
General Overview: Bitcoin ETFs
Over the last two weeks on Twitter, I’ve noticed a lot of buzz about the potential approval of Bitcoin exchange-traded funds (ETF). Coming from a vanilla trading background, I wasn’t sure what an ETF really entailed or what the implications were if it was granted. All I knew was that a lot of people made it out to be a big deal, and they might be right. The latest piece of news about the delay of a highly-anticipated ETF may have caused the cryptocurrency market cap to crash ~10%. Because of this, I decided to dive deeper into the topic to see why an ETF is so crucial for institutional acceptance.
If you’re like me and didn’t know what an ETF was, here are the two best sites I found that explained it simply: ETF.com and USNews.
TL;DR - They’re an easy way for people to put their money into a basket of themed investments with minimum effort, and people have the flexibility to trade that share of the basket like a share of stock at an exchange. In the context of Bitcoin, by purchasing one share of the ETF, you would actually be investing in a bundle of Bitcoin-themed investments.
ETFs are a huge deal, and they’ve been instrumental in other sectors. When the first Gold ETF was introduced in 2003, the price eventually shot up 500% higher than its previous all time high in 1980. With Bitcoin, an ETF could be a signal to institutional investors that cryptocurrencies are a safe investment to begin earnestly entering the market. This could lead to wider retail acceptance, which would be a game-changing driver for volume.
To get listed for an ETF, one has to go through an approval process with the SEC — this process being what has garnered quite a bit of attention in recent weeks. Several companies have attempted to get a Bitcoin ETF approved, but it’s a long process that critically examines the digital asset itself. The SEC’s goal is to protect the investing public, and unfortunately for Bitcoin, cryptocurrencies are infamous for having little regulatory supervision. With hacks, manipulation, and volatility — all words that get thrown around a lot — it’s no wonder that the SEC has been taking their time to approve an ETF. There’s a lot of potential downside if they approve an ETF without proper vetting.
Bitcoin ETF Proposals
There have been a slew Bitcoin ETF proposals and most have garnered their fair share of attention and controversy. Here are three that everyone should know about.
Direxion ETF Proposal
Direxion’s ETF was delayed from July to September 2018, and CoinDesk’s report on the rescheduling included a disparaging quote from a chief investment strategist who called the proposal an “embarrassment.” The main issue is that the quote they found was all the way back from January and wasn’t relevant to Direxion’s proposal today. Not all hope was lost though, as the SEC didn’t make a blanket decision for all ETFs after this proposal.
Winklevoss Twins’ ETF Proposal
Another ETF rejection came from the Winklevoss Twins’ proposal just a couple days after the Direxion decision. They are perhaps best known for two things — (1) being prominent characters in the Facebook bio movie “The Social Network” and (2) for being the first public Bitcoin Billionaires after putting $11 million into the cryptocurrency as early investors.
They’ve been trying to get an ETF passed while partnering with the Bats BZX Exchange (BZX). One big reason for the rejection was because they were lacking “rules… designed to prevent fraudulent and manipulative acts and practices.” In other words, the SEC wasn’t convinced that the twins could keep the public safe. Even though many people predicted this outcome, some in the cryptocurrency community feared for the worst, and the prices dropped almost 3% soon after.
As a side note, this event created a new Bitcoin celebrity, as SEC Commissioner Hester Peirce’s dissenting vote created a 3–1 decision. She ended up writing an excerpt about why she believed this decision was wrong, and it ended up increasing her Twitter follower count by over 10x. It’s likely that in future ETF proposals she’ll be a big factor in pushing the SEC Commission towards acceptance.
CBOE ETF Proposals
With Bitcoin ETF proposals processing for many months now, one of the most highly-anticipated applications comes from the Chicago Board Options Exchange (CBOE) in cooperation with Van Eyck Investment and Solid X, who both have experience in ETFs. Moreover, the CBOE itself was the first traditional exchange to list Bitcoin Futures back in December of 2017. As a trio, it is speculated by many that this proposal has the highest chance of success.
While the deadline for the decision on this ETF was initially set for August 10, it ended up getting delayed until the middle of September. It should be noted that this was expected by some legal experts as they predicted the delay — noting that the SEC will continue to push things off every chance they get until they can delay no more to avoid any downside for premature acceptance.
Even so, the delay is not necessarily a bad sign. There is no negative reason for the delay with the SEC stating, “The Commission finds that it is appropriate to designate a longer period within which to take action on the proposed rule change so that it has sufficient time to consider the proposed rule change.” That’s it. They just want more time to consider some new factors.
The first factor is that this is the CBOE’s third attempt at a Bitcoin ETF, which means they’ve had a lot of chances to amend for any issues the SEC had in the past two rejections. This attempt calms fears of endangering the general public because one share of their proposed ETF would be 25 Bitcoins! Even during the current bear market, that amounts to over $150,000 — nowhere near a trivial amount for the average person. By doing this, they keep their ETF focused exclusively on experienced investors or institutions. They’ve also introduced a hefty insurance policy of $25 million in primary coverage to safeguard against any trouble that would arise. They’ve done their best to cover their bases for the SEC and potential investors.
The second factor is likely all the public feedback they’ve gotten, as they opened their decision to public commentary and received a large number of comments. In fact, the number was over 200, which is a lot compared to the other Bitcoin ETFs (Direxion’s Bitcoin ETF only got 4).
The last factor is another piece of bullish news that came out a week ago in regards to the Intercontinental Exchange’s (owner of the New York Stock Exchange) development of a new blockchain platform called Bakkt. Basically, Bakkt has major companies behind it, and it will provide regulated services that the Bitcoin space is currently lacking to gain institutional investment.
Final Thoughts
There’s been a lot of hype and FUD surrounding Bitcoin ETFs these last several weeks. While everyone sorts through the confusion, the SEC is just looking for assurance that the public will be safe if a proposal is accepted. The CBOE ETF seems to have the highest chance of convincing the SEC to approve a Bitcoin ETF, but it will still take some time. If the CBOE ETF gets accepted, it will be a landmark historical moment for cryptocurrency making its way into the mainstream.
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