Bitcoin ETF: We’ve been talking for months about how we’re expecting a wave of institutional money to carry bitcoin to new heights this year.
So to get you thinking about how institutional investing intersects with bitcoin, let’s take a look at the big bitcoin news from this week – the Securities and Exchange Commission rejecting a bitcoin ETF.
Let’s start with the basics. What’s an ETF? Investopedia does a great job with the long explanation. But the short answer is ETF stands for exchange-traded fund. The fund is basically an index – a way to invest in a commodity (gold, oil, etc.) or a group of stocks (S&P, Nasdaq) without actually owning the commodity or stocks.
The two really cool things about ETFs is that you’re buying shares (basically stock) of the fund and you can trade those shares like you’d trade shares on the stock market. You never own the underlying asset. That makes it easier for retail investors like you and me to invest in more expensive assets.
Institutional investors love ETFs because the prices go up and down throughout the day, creating all sorts of opportunities for traders to find buying and selling points that generate profits. They also offer an easy and cost-efficient way to buy assets that otherwise would be difficult to hold (gold, crypto, etc). Hedge funds and other investment firms love ETFs.
And that’s why the crypto community is so excited about a bitcoin ETF. It will create a new vehicle that makes it easier for institutional investors to participate in the crypto economy. But the SEC hasn’t quite warmed up to the idea of a bitcoin ETF – not yet, at least.In rejecting the Winklevoss ETF application, the SEC outlined three reasonswhy the proposed ETF wasn’t ready for investors. That’s fairly normal. But the SEC also did two things that are definitely NOT normal.
Let’s start with the normal stuff. The SEC rejected the proposed bitcoin ETF because…
- It didn’t like the volatility of the underlying asset (bitcoin)
- It believed the ETF was vulnerable to market manipulation
- It believed the ETF could not reasonably protect investors.
The price of bitcoin is volatile. There’s no denying that. But bitcoin’s volatility alone doesn’t concern the SEC (after all, Facebook lost $120 billion in market capitalization yesterday). What really worries the SEC is that bitcoin’s volatility creates an environment that attracts people trying to manipulate the market. And that the proposed ETF didn’t do enough to protect against that.
That’s a fair criticism. The 24-hour volume for the Gemini exchange (which was the exchange being used in this proposal) as of this writing is $34.8 million, according to CoinMarketCap. That’s a small fraction of $5.5 billion 24-hour trading volume for all of bitcoin, according to CoinMarketCap.
And if an ETF is susceptible to market manipulation, it can’t protect investors.
So it’s clear WHY the ETF was rejected. The big question then becomes, if a bitcoin ETF satisfies these requirements, will the SEC approve it?
This is where we start delving into the atypical parts of the SEC ruling. The SEC left the door open for approving a future bitcoin proposal (of which there are many).
|Although the Commission is disapproving this proposed rule change, the Commission emphasizes that its disapproval does not rest on an evaluation of whether bitcoin, or blockchain technology more generally, has utility or value as an innovation or an investment.|
The SEC ruled narrowly on the technicalities of the proposed ETF, not on the value or worthiness of bitcoin. That leaves the door open for a successful ETF to get through. The sentence above was probably placed in this opinion to mollify SEC Commissioner Hester Peirce, who published a very sharp dissent.
|In addition, I am concerned that the Commission’s approach undermines investor protection by precluding greater institutionalization of the bitcoin market. More institutional participation would ameliorate many of the Commission’s concerns with the bitcoin market that underlie its disapproval order.|
The SEC usually tries to build a consensus before issuing a ruling. The goal is to keep the in-fighting from becoming public. That’s what makes this dissent so remarkable. Peirce wants to speed up the process of approving both a bitcoin ETF and future market innovations. Her fellow commissioners want to play it more slowly.
Ultimately, the SEC will approve a bitcoin ETF. It’s published a road map. And the ETF that satisfies those requirements will be approved. The only question now is how long it will take.