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What Is Bitcoin Exchange-Traded Fund (ETF)?

By on October 2nd, 2019 at 8:02 am UTC · 9 min read

In this guide, we are going to explore the ins and outs of Bitcoin ETFs in tandem with the reasons why they are a viable choice for investment.

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Photo: Shutterstock
Photo: Shutterstock

Bitcoin ETFs as an investment option are widely discussed. Though they are said to bring a lot of benefits for investors, the regulatory bodies still have a lot of doubts about them. We believe that after reading this text, you will be able to decide for yourself whether or not the regulatory authorities should approve Bitcoin and subsequently, another cryptocurrency ETF.

Understanding of a Bitcoin ETF

Bitcoin ETFs are investment vehicles that provide investors with the opportunity to venture into the Bitcoin markets without the attendant risk of purchasing the asset itself. 

Traditionally, ETFs are classified by the United States Securities and Exchange Commission (SEC) as securities, and they monitor the movements of particular security which could be commodities, fiat currency or particular company stock. They can carry this out without the investor buying or owning that security.

They are very useful for palliating risks while still allowing adequate or real-time exposure in live markets, and have been long recognized as important tools for new and wary investors.

As such, Bitcoin ETFs will be an excellent tool for new cryptocurrency investors who are familiar with investment activities but are still trying to find the ropes with crypto investments. These investors could be institutional ones with deep pockets who are looking to invest in Bitcoin ETFs and secure their capital rather than investing in several cryptocurrencies.

How Does a Bitcoin ETF Work?

Cryptocurrency is an extremely volatile and unstable market and has rather high entrance barriers for new investors. Thanks to the ETF option, traders won’t directly invest in Bitcoin itself and they don’t have to bother with complex storage and security measures expected by default. Bitcoin ETFs will add layers of insulation and protection since the investors’ funds will be tied to the price and not to the cryptocurrency itself.

Another feature that makes the Bitcoin ETF interesting is the fact that there is no minimum investment. Most exchanges demand certain minimum buy to cover their fees when a user is buying or selling Bitcoin.  Since ETFs do not mean ownership of the underlying asset, this discomfort can be bypassed.

If you’re looking for a tool to help you manage risks while still being as purely volatile as possible, then Bitcoin ETFs can be considered the way to go.

Why Not Just Invest in Bitcoin?

Sometimes, people are interested: “If Bitcoin ETFs mimics the price of the cryptocurrency itself, why not just invest directly in Bitcoin?” Well, there are several reasons for this. 

Firstly, as mentioned above, in the case of ETFs, investors seldom have to bother about the security procedures associated with investing in Bitcoin or another cryptocurrency directly. Also, there is no need to deal with cryptocurrency exchanges directly, investors can trade ETFs through traditional exchanges and markets.

Another very important benefit of trading Bitcoin ETFs rather Bitcoin itself is that being an investment vehicle, ETF provides investors with an option of short selling Bitcoin if they believe that the price of Bitcoin might decline. This cannot be done in the traditional cryptocurrency market.

One more point that is worth being mentioned is the numerous advantages that ETFs provide traders with, including minimal trading fees, immediately reinvested dividends, limited capital gains tax, lower discount or premium in price, adequate diversification, an easily understandable interface, and a host of other advantages. Investors looking to get involved with digital currency with little time to learn every detail can easily navigate ETFs.

These are the main reasons why ETFs are getting increasingly adopted globally.

The Road to Bitcoin ETF Approval

Currently, establishments looking to release Bitcoin ETFs are facing strong resistance from regulatory bodies.

Winklevoss Bitcoin Trust

Cameron and Tyler Winklevoss, known for their involvement with Facebook and for the launch of their digital currency exchange Gemini, made a petition to launch a Bitcoin ETF called the Winklevoss Bitcoin Trust, which got unapproved by the SEC in 2017. 

The reason for the denial was the fact that Bitcoin was (and still is) traded on exchanges that were highly unregulated thereby rendering it very open to fraud and manipulation. However, in June of 2018, their unrelenting efforts caused them to secure a patent from the U.S. Patent and Trademark Office for a firm called Winklevoss IP LLP, 2018.

The Winklevosses are not alone in this run to successfully launch a Bitcoin ETF. CBOE Markets, Inc., the firm responsible for developing Bitcoin futures, has high hopes that the authorities would permit its cryptocurrency-based ETFs.

VanEck/SolidX Bitcoin ETF

VanEck and SolidX have also announced their plans on rolling out its ETF product. But the SEC delayed its decision more than once (only in spring it happened twice).

Later though, they took a  different approach that might guarantee them an ETF product. The VanEck SolidX Bitcoin Trust ETF (XBTC) would target only institutional investors and would be opening with a share price of $200,000. The SEC 144A rule categorically allows for restricted trading of securities to institutional investors.

These kinds of arrangements are profitable for large investors and provide them with easy market entry, which could hasten the procedures of approval from the authorities. The aim of this is to allow for the creation of rapid capital inflows which will act as a booster for the markets where these transactions are carried out.

However, private transactions like these are not scrutinized by the SEC. Sensitive activities like the total duration of a transaction, the process of the sale, the amount of the sale and a lot more, are not monitored by the SEC and is therefore prone to fraudulent acts and misrepresentations. 

Also, it could create an opening for shady foreign actors to gain access to the United States financial space, which could prove detrimental to the financial markets.

The launch of XBTC has not gained the positive impact and widespread acceptance it was purported to elicit. 

Soon after its release, Jake Chevinsky, an industry lawyer, tweeted that the XBTC was not a representation of a legal ETF and that it looked exactly the same as the Grayscale Bitcoin Trust, which was launched years ago, tagging the ETF product as “misleading”.  The product grossed only $40,500 in assets. VanEck and SolidX have pulled out their application for the second time which has incited distrust in many.

In September 2019, VanEck, SolidX voiced their plan to offer a limited version of Bitcoin ETF, which is actually targetted at institutional investors only, following the SEC rule 144A, that allows for restricted trading of securities to private investors who are institutional in nature. Be as it may, the same month, VanEck, SolidX withdraw Bitcoin ETF proposal from SEC review.

Bitwise Bitcoin ETF

In February 2019, Bitwise filed its application with the New York Stock Exchange Arca. Bitwise was hopeful that the SEC would decide on their ETF filing within 45 days.

Later on, the U.S. Securities Exchange Commission revealed that it wasn’t going to review Bitwise’s proposal just yet and that the expected filing response timeframe was going to be increased as the agency claimed it needed more time to analyze products like this. In August, the SEC increased that timeframe even further.

 As a consequence of this delay, the entire crypto markets dropped. Bitcoin fell from a high of around $10,000 to a low $7,812 level. Bitwise has, however, said that they still have a strong conviction that its proposal would be approved. Regardless, Bitwise has presented another application to the Securities and Exchange Commission still on the approval of its ETF. 

Bitwise established that the concerns flagged by the regulatory body have been adequately addressed. The application addressed the ways of how the institutional-grade Bitcoin infrastructure was being built, how the Bitcoin spot market had become more efficient and also how the issue of “fake volume” in the market was being handled.

Bakkt

Such negative effects are reasons why partnerships like Bakkt are necessary for the market. Bakkt is a part of the Intercontinental Exchange (ICE) Futures US Group. This group also provides support for some of the world’s most actively traded markets in including the renowned New York Exchange. 

The idea behind the release of Bakkt is to promote the availability of physically-settled Bitcoin futures in the United States. In this contract, the buyer is entitled to receive the relevant crypto investments after a defined duration. 

The US Commodity Futures Trading Commission (CFTC) is the authority charged with the responsibility of monitoring and enforcing laws and regulations surrounding Bakkt. After your futures contract is due, your Bitcoin is delivered by an entity dubbed Bakkt Warehouse. 

Bakkt was launched on the 23rd of September. It is expected to attract institutional investors and provide a safe entry for investors willing to take part in the crypto market. 

However, reports claim that the launch of Bakkt caused Bitcoin price to plummet. The price of Bitcoin plunged as low as 18 percent on the 24th of September 2019. Bitcoin has pared its losses and is trading at $8,386 at the time this article is being written.

Bakkt has, however, challenged these claims, saying that price is just reacting to the new development and that stability of price would be achieved in no time.

Conclusion

Even though the SEC has so far refused to approve any cryptocurrency ETF, enthusiasts are optimistic that one would be approved soon. An insider at the Commodities Futures Trading Commission (CFTC) has said that there is a 90% chance of a Bitcoin ETF getting approved this year. A reason this might be possible is that the crypto markets have become a bit more moderated and regulators have observed the drama surrounding the Bitcoin futures across several exchanges around the globe. 

The SEC has created a commentary forum relating to Bitcoin ETF for the public to solicit opinions on the product. A lot of commenters including cryptocurrency enthusiasts and traditional investors have expressed quite optimistic opinions about the new product, which has proved that a Bitcoin ETF launch is likely to have early success. Successively, a Bitcoin ETF launch would result in drastic gains for Bitcoin and, as other altcoins are connected to the performance of Bitcoin, it would mean gains across the entire cryptocurrency space.

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