In 2020, financial institutions and those seeking a safe haven from their inflationary national currencies turned to Bitcoin and other cryptocurrencies. At the beginning of 2021, it seemed like only a matter of time before the first US-based Bitcoin ETF would be given a green light by regulators.
However, after this month’s latest Bitcoin price drop, widely credited as a result of tweets from Elon Musk, people are starting to question whether Bitcoin truly is mature enough an asset to merit having its own Bitcoin ETF.
But what is a Bitcoin ETF, why has it taken so long for one to be accepted, what are the arguments against a Bitcoin ETF, and how would a successful Bitcoin ETF application affect the crypto community? Read on for a deep dive into the topic of Exchange Traded Funds.
What is a Bitcoin ETF?
Put simply, an Exchange Traded Fund is a security that you can buy from your local stock exchange, which follows the price of something else.
An ETF can follow the price of an index (like the S&P 500), the price of commodities (like Gold and Silver), or the price of assets, like Bitcoin.
Although it seems like a no-brainer to many in the crypto industry, US investors are still unable to purchase Bitcoin through a regulated ETF product.
The downside of this is that people who work within traditional finance cannot trade Bitcoin on the platforms and markets they are already familiar with. And even if the individual investors themselves may be willing to trade Bitcoin and other cryptocurrencies on crypto exchanges, the companies they represent may not allow them to engage in what is still seen as ‘risky’ trading.
Bitcoin ETFs do exist in other jurisdictions, though. A Brazilian-based fund manager called Hashdex has teamed up with NASDAQ, the American stock exchange, to launch a Bitcoin ETF in Bermuda.
And in February of this year, the Purpose Investments Bitcoin ETF gained regulatory approval in Canada, becoming the first Bitcoin ETF in mainland North America that allows investors to hop in and out of the asset as they see fit.
It is available on the Toronto Stock Exchange under the ticker BTCC, where it can be bought with either US or Canadian dollars. The fund is subject to a 1% management fee, which is half of what is charged by the popular Bitcoin trust fund Grayscale.
How is GBTC different from a Bitcoin ETF?
GBTC is an investment trust or fund which buys and secures Bitcoin on your behalf. When you buy GBTC, you are buying shares of the trust, although these shares are limited by supply. An ETF, on the other hand, allows buyers to create and redeem as many shares as they like, which means that premium prices are avoided, and the process is quicker and more transparent.
Grayscale’s GBTC product is a closed-ended fund, meaning that the investment cannot be settled in BTC and is subject to a 6-month lock-up period. Once you buy GBTC, you can’t send it around the crypto ecosystem, or exchange it for other crypto assets, like you can with BTC. To combat these restrictions, Grayscale are hoping to launch their own fully-fledged Bitcoin ETF.
The company did already try this in 2017, but was rejected by the American Securities and Exchange Commission.
Why won’t the SEC approve a Bitcoin ETF?
With the SEC having, last year, rejected applications from New York based investment firm Wilshire Phoenix, and global investment manager VanEck, who managed to launch a similar product in Europe, Grayscale warned that investors ‘should not assume that such products will ever obtain an approval’.
In 2019, when the SEC denied the Bitwise Asset Management company’s ETF application, it said that the application had ‘failed to show that there was a real market for Bitcoin that was isolated from fraudulent and manipulative activity.’
And still in 2021, despite a huge growth in institutional demand for Bitcoin and other cryptocurrencies, such as Ethereum, the SEC continues to cite crypto’s vulnerability to market manipulation as a reason to blanket-reject ETF applications.
The recent 40% drop in the price of BTC is unlikely to help in this regard, even if it was likely an overdue correction caused by more than just a few tweets from the Tesla CEO, Musk.
The SECs own commissioner, Hester Peirce, has however dissented with the continued rejections handed down by the organization, and believes that the decision should be based on the merits of the assets themselves, and not the exchanges on which they are hosted. She also voiced disapproval of the SEC’s ‘stubborn stodginess in the face of innovation’, which is a feeling that most crypto advocates will know very well!
The crypto industry is nothing if not innovative, however, and companies like Gemini and Bakkt are already offering their own solutions for institutional investors.
Gemini Fund Solutions will support fund managers at every stage of the crypto experience, from onboarding to custody, and will utilize Bitcoin ETFs that already exist on the Toronto Stock exchange.
Bakkt, which offers Bitcoin futures trading and custody settled in real BTC, obtained the so-called ‘BitLicense’ from the state of New York last month, allowing New Yorkers to buy and sell virtual currencies in a completely regulated fashion.
With multiple companies launching new, slightly-tweaked applications to the SEC, and previous SEC chairman, Jay Clayton, stepping down at the end of last year, it seems like it’s only a matter of time until the SEC caves in.
It’s been confirmed that the next chairman will be Gary Gensler - a former professor of blockchain technology at the Massachusetts Institute of Technology. Gensler has already suggested that he’ll seek to safeguard crypto innovation whilst protecting investors from risk at the same time.
The SEC under Gensler will likely increase government oversight of the crypto market, but his appointment will also bring some much needed nuance and experience to the discussion.
Will a Bitcoin ETF finally be approved?
Rather than fixating on whether the SEC will approve a Bitcoin ETF, a better question might be to ask whether the first Bitcoin ETF will actually be a good thing for crypto?
Obviously the launch of the first U.S Exchange Traded Fund will give additional mainstream legitimacy for Bitcoin. Due to ease of investment, it will also probably lead to the increased inclusion of cryptocurrency into pension and retirement funds, where a huge amount of capital is locked up.
This will likely be very positive for the price of Bitcoin and other crypto assets in the long term, but may cause a brief short-term price correction via the erosion of the BTC price premiums that have been building up on crypto investment funds such as Grayscale. What goes up, must come down!
Additionally, we should remember that cryptocurrency was a necessary innovation because the world of traditional finance was working for the few, and not for the many.
ETFs and custodial funds risk creating the same old economic imbalance in which a large percentage of the monetary supply ends up being held by only a handful of companies.
The ideal scenario would be that individual investors hold their own cryptocurrency, and also the keys to that cryptocurrency, as well as all of the voting and on-chain rights that self-custody brings. The Exodus Crypto & Bitcoin Wallet allows users to keep their crypto investments in their custodial crypto wallets as well as the ability to securely exchange crypto safely from within their wallet.
Download and set up your Exodus Crypto & Bitcoin Wallet today in minutes!
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.