• Bitcoin ETF fund: for now without US Securities and Exchange Commission approval
• VanEck bitcoin as ‘light version’ for institutional investors
• Positive impact on prices expected after final approval

Bitcoin and the mainstream financial world are moving closer together. Professional and institutional investors have long been waiting for an ETF (exchange traded fund) on bitcoin. However, the cryptocurrency with the largest market capitalisation is and remains largely unregulated, which poses a problem for regulators

Regulators delay decision on bitcoin ETF

Regulators, especially in the US – the Securities and Exchange Commission (SEC) – are reluctant to allow ETFs to enter the unknown cryptocurrency market. However, if the first Bitcoin ETF is introduced, it is likely to have a very positive impact on the Bitcoin price. If regulators give the green light to this financial product, it will send a signal to the public about the safety of this new asset class. In this article we aim to show:

• What is an ETF?
• What advantages would an ETF on bitcoin have?
• How could it affect the price of bitcoin in the medium term?

What is an ETF fund?

An ETF fund can contain a variety of assets. An ETF owns the underlying assets, designs a fund that tracks their performance and then sells shares of that fund to investors. This means that investors can simultaneously buy several selected assets and follow an investment strategy without having to buy each position individually. They receive fixed dividend payments over time. The ETF operates in three stages:

1. An ETF chooses to create an ETF from one or more assets (e.g. gold or the S&P 500 index).
2. Investors can buy shares of this ETF on the exchange.
3. The price of the ETF depends on the underlying asset, as well as the supply and demand for the ETF’s securities, which are traded on the exchange like ordinary shares.

Advantages of a Bitcoin ETF

The first question one might ask is: why buy a bitcoin ETF when one can buy bitcoin directly? For professional investors, the main purpose of such a fund is a bitcoin ETF, which has several advantages. They do not have to worry about how a cryptocurrency exchange works and how to store bitcoins securely with bitcoin wallets. Furthermore, ETFs are still much better understood in the financial investment world than cryptocurrencies. This saves investors time in exploring the topic and offers an option with which they have long been familiar.

Regulatory hurdles for ETFs investing in bitcoin

The main problem with the introduction of bitcoin ETFs is that cryptocurrency markets are not regulated and the risk of price manipulation on the cryptocurrency exchange on which such an ETF would be based is very high. Security aspects related to the proper storage of Bitcoin as an asset are also of concern to the Securities and Exchange Commission. So far, no applicant has been able to address these concerns, although the situation has improved since the first requests.

History of the Bitcoin ETF application

2016

The fight for the approval of an ETF on bitcoin began in 2016. At that time, the exchange Bats BZX submitted an application to the SEC, which was rejected in March 2017. The proposed financial product would allow trading in the Winklevoss brothers’ bitcoin mutual fund shares. This was justified on the basis of inadequate controls over the cryptocurrencies in question and a lack of regulation of the markets. An attempt to revise the procedure was to no avail and ended in rejection – for the same reasons.

2018

The investment company VanEck filed its first application in June 2018. Due to the temporary US government shutdown, VanEck withdrew its application on 23 January 2019 and resubmitted it a week later. The following month, a new applicant appeared: Bitwise Asset Management. The company, which was founded in 2017 in San Francisco and works closely with financial advisers and institutional investors, also wants to create an ETF on bitcoin. In July, Wilshire Phoenix followed suit, resulting in three filings with the SEC. The decision on these applications was again postponed until 12 August 2019.

Other bitcoin ETF dates for 2019

29. September: deadline for Treasury’s decision on the Wilshire Phoenix Bitcoin ETF

30. October: deadline for decision on listing on the New York Stock Exchange (NYSE)

31. October: deadline for decision on VanEck Bitcoin ETF

Insights into the SEC’s thought processes

In an interview with CNBC, SEC Chairman Jay Clayton gave a rare insight into the regulator’s thought process, saying that the regulator must both get used to dealing with cryptocurrencies and address concerns about market manipulation. Cryptocurrency ETFs should not undermine the necessary security offered by regulated markets.

“We are addressing this issue, but there are still some problems to be solved. The first is supervision: this is a long-standing requirement in our markets. When you say you have something, it means you really have it’.

At the SEC, however, more positive voices are being heard. SEC Commissioner Hester Pierce has been much more outspoken on the subject than her boss. Just three days before Clayton’s comments, she had argued for reducing the reluctance to use bitcoin ETFs. Regulatory caution would deprive investors of a significant financial product.

Senate committee wants US to develop cryptocurrencies

At first glance, the numerous delays caused by the Securities and Exchange Commission seem insurmountable. However, if one analyses the situation a little more closely, one can see that there are positive voices in US political circles regarding cryptocurrencies and their regulation.

While the numerous delays by the SEC may seem like a permanent roadblock, other areas of the US government are showing an approach to cryptocurrencies. On 30 July, the Senate Committee on Banking, Housing and Urban Development held a hearing on cryptocurrencies. This was mainly about Facebook Coin Libra, but Senator Mike Crapo of Idaho also spoke positively about cryptocurrencies as a new technological development.

“It seems to me that innovation in digital technology is inevitable and can be beneficial. I believe the US should be a leader in the development of these innovations and the rules to be applied

Which bitcoin ETFs are planned?

Van Eck/SolidX

VanEck is an investment company with headquarters in New York and offices in Germany and Australia. Founded in 1955, it manages around USD 49 billion, 75% of which is in ETFs. VanEck had long wanted to create an ETF on bitcoin and was in talks with the US exchange regulator. In September 2019, progress was made. To circumvent the SEC’s requirements, the investment firm is launching an ETF on bitcoin (SolidX Bitcoin ETF) available only to institutional investors:

“The ETF is not available over-the-counter or on regulated markets. Only qualified investors can invest […]. It must therefore be an institution […]. They can be companies, banks or hedge funds. “

Retail investors cannot yet invest in this product because VanEck is not yet authorised to do so. However, experts say that the SEC might be persuaded to reconsider if, in the future, the VanEck Bitcoin ETF proves to work well for institutional investors and operates without complications.

NYSE Ark

NYSE Arca – on which both shares and options are traded. The NYSE would like to list the shares of the Bitcoin Investment Trust and the Treasury-owned Wilshire Phoenix Fund on its exchange. To that end, they have filed an application with the Securities and Exchange Commission (SEC) that will allow them to do so. As reported, Coinbase’s depository division will act as the investment company’s bitcoin custodian.

Working in partnership with Coinbase, the trust will have up to $200 million of insurance on hot and cold wallets against hacking/theft. This investment vehicle is a separate initiative from the Bitcoin ETF, for which NYSE Arca and Bitwise are seeking SEC approval. The approval process officially begins with Monday’s filing. The SEC now has 45 days to approve, deny or defer the application and up to 90 days to make a final decision.

The impact of bitcoin ETFs on the price of BTC

The SEC’s final decision on the various bitcoin ETFs could be one of the factors affecting bitcoin prices. These effects are often exaggerated. Past history shows that news of decisions and delays on bitcoin ETFs are not an important factor in the development of bitcoin prices.

Bitcoin rebounded significantly from its lows of $3,200 and then recovered to levels above $10,000. Therefore, the positive trend in cryptocurrency prices can happen even without ETFs. It is not possible to say with certainty to what extent institutional investors would invest in a bitcoin ETF and what impact it would have on the price.

29% of the world’s millionaires are interested in cryptocurrencies

To date, there is little reliable data to state this with certainty. A report by consulting firm Capgemini shows that 29% of millionaires have expressed a strong interest in investing in cryptocurrencies. Almost 27% of the millionaires surveyed expressed a general interest in digital assets. Major players in the financial world, such as Blackrock, have already expressed interest in the past year.

ETFs would be a great deal for these investors, who cannot, for obvious reasons, open an account on Coinbase and buy bitcoins for tens of millions (or more). A bitcoin ETF would offer them exactly the same thing. In this case, all participants would be safe. According to the principle of supply and demand, any impact on the bitcoin price would be positive in any case.

Conclusion

It is expected that the first bitcoin ETF will appear sooner or later. The SEC is serious in its work on important issues and obviously wants to minimise existing risks for ETF investors. Perhaps everything is happening a little slower, but progress has been made since the first filing in 2016. Bitcoin enthusiasts need to be patient, but they can probably also enjoy the rising bitcoin price while they wait.