Is a Bitcoin ETF Possible in 2019?
New year, new crypto?
While 2018 was an awful year for “hodlers” and an amazing one for “bears”, this year promises to invert that scenario with some interesting decisions and events that will shake the market and, perhaps, completely transform its landscape.
You probably heard about Bitcoin ETF recently, but the first one was filed for the Winklevoss Bitcoin Trust on July 1, 2013. Since then, other firms have been trying to work with the U.S. Securities and Exchange Commission (SEC) and U.S. Commodity Futures Trading Commission (CFTC) to successfully bring this well known “product” into Bitcoin.
Why all this hype around an ETF? What is an ETF? Do we really need it? What are the companies and firms working on it? Are we close to having one?
What Is an ETF?
According to Investopedia, the definition of an ETF is:
An ETF, or exchange-traded fund, is a marketable security that tracks a stock index, commodities, bonds, or a basket of assets. Although similar in many ways, ETFs differ from mutual funds because shares trade like common stocks on an exchange. The price of ETFs’ shares will change throughout the day as they are bought and sold. The largest ETFs typically have higher average daily volume and lower fees than mutual fund shares which makes them an attractive alternative for individual investors.
ETFs have several advantages: low fees, tax efficiency, lower costs, buying and selling flexibility, transparency. Usually, this brings more volume into the equation than mutual funds shares which makes them a very attractive financial product, not only to individual investors but also to institutions.
Does Bitcoin Need an ETF?
We can’t really say that Bitcoin needs an ETF. In fact, Bitcoin is trying to disrupt the legacy of the financial technology stack, so things are not supposed to mix well together.
An ETF is nothing more than a well-known solution for professionals investors and companies to invest in assets. A recent survey made by the Bitwise Asset Management corporation states that:
We recently commissioned a formal survey of 150 financial advisors, and a strong majority — 58% — said that an ETF would be their preferred way to invest. When asked what would make them more comfortable allocating to crypto in client portfolios, 54% said “better regulation” and 35% said “the launch of an ETF.” This holds true for many family offices and institutions as well.
An ETF will allow people to buy and sell Bitcoin in their financial account with increased simplicity and trust rather than having all the struggle to create an account at a crypto-exchange or other less known platforms. This fact, per se, not only allows for more prompt and active participation in the market but also handles the custody of the assets. This adds an extra ladder of interest as the majority of people don’t want to be responsible for their private keys.
What Are the Companies Working on It?
Bakkt
Intercontinental Exchange (ICE), the firm that owns the New York Stock Exchange (NYSE), plans to launch a digital assets platform and a Bitcoin futures product, called Bakkt. The company will leverage partnerships with big companies like Microsoft and Starbucks, to allow consumers and institutions to trade, store and spend digital assets.
The first product, a physical Bitcoin futures contract, will allow investors to receive Bitcoin as a return instead of fiat, much like the current futures contracts that are active on the market. On December 31st, they announced that its launch would again be delayed — this time until ‘early 2019’ (originally Nov 2018, then Jan 24th 2019). They want to make sure they have a green light from the U.S. Commodity Futures Trading Commission (CFTC) and have all the funds and tools to provide the issuance of the first product successfully.
They recently secured a $182.5M first round of funding from several reputable companies, as it shows the trust and confidence in their ability to deliver solid and robust products.
VanEck-SolidX
After 9 ETFs denied by the U.S. Securities and Exchange Commission (SEC), this proposal got delayed again until the 27th of February of this year. This is the last decision to either approve or reject the ETF. The VanEck/SolidX proposal differs from others in that its value is dependent on Bitcoin itself, rather than futures markets.
Nasdaq-VanEck
Nasdaq, the second largest stock Exchange of the world is partnering with the investment management firm VanEck to bring new cryptocurrency financial products into the market.
According to Gabor Gurbacs — VanEck’s director of the digital asset strategy — their aim is to “inspire confidence with regulators and institutions trying to get involved [in the crypto markets]” :
“What I’d like to point out is we ran a few extra miles working with the CFTC [Commodity Futures Trading Commission] to bring about new standards for custody and surveillance” — Gabor Gurbacs.
By leveraging Nasdaq’s technology and experience, they plan to use their surveillance system, called SMARTS, a software designed to automatically pick-up on suspicious market activities such as spoofing or wash trading. Besides that, they also plan to deliver a trusted pricing benchmark, provided by MVIS. We can expect more details about their first product early this year.
Bitwise
The most recent Bitcoin exchange-traded fund (ETF) was proposed by the crypto-startup Bitwise Asset Management, which states that will address the regulatory concerns that previous attempts had, counting with very experienced people in the ETFs space.
Bitwise wants to use its Bitcoin Total Return Index for the valuation — with spot prices from exchanges and physically settled futures contracts — , like the most recent VanEck/SolidX ETF proposition. They also differ from other offerings by having a regulated third-party custodian responsible for trusty storing Bitcoins.
Are We Close to Having One?
Everyone was positive-biased towards an ETF acceptation by early this year but recent events delayed, once again, that increased expectancy. With the recent USA government shutdown, with the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) being closed, all the possibilities of any progress in the regulation and proposals analysis seem to vanish in thin air. Also, as a result of those obstacles, even the main ETF proposal withdrew until further notice.
In the minute 10:45, Jan Van Eck explains the reason for that withdrawal: the main concerns from SEC — custody, price manipulation, price overseas — and the fact that Bitcoin pulled some demand from gold investors in 2017 (but got restored in the last year).
One interesting fact from one of the CNBC commentators is the that we are still trying to understand the real value/price of Bitcoin and only a few months ago have we started to hear the SoV narrative.
The main reason for the withdraw is the fact they can’t keep conversations with SEC. Therefore, a logical decision of withdrawing and “stop wasting time without any progress” was made.
The Reaction of the Market?
No reaction from the market just shows that this event was already priced in.
They Didn’t Lose Any Time Re-Filling the Application
The deadline before the withdraw was 27th February and, with this new re-fil, they earned more time to work in their application. This time, they made some modifications countering some of the SEC concerns.
The clock will start when the proposal gets published in the Federal Register and, assuming that that happens soon, we are looking into a final deadline by early October.
VanEck withdrawal decision was a very smart decision and it demonstrates somehow their vast experience and knowledge about ETFs.
Could 2019 Be the Year of Regulation and Big Institutional Money Entering the Market? Is This the Catalyst to End the Bear Market?
The day a Bitcoin ETF is listed it will be a very bullish milestone for the market but is important to acknowledge that it is just the first door opening for institutional and professional investors, as they will spend some time to research and evaluate the market before recommending an investment to their clients.
Even if all these propositions get declined, this will be very helpful for the market as these reputable companies are working together with the regulatory entities to trace a good path for future crypto products. We will see a lot of products from reputable financial companies coming to the market as soon as the regulation becomes clear.
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