The wait for a licensed bitcoin ETF started five years ago. However, recent events have signaled that the wait is about to come to an end.
What is an ETF?
ETF is an investment fund that tracks the price of an underlying asset (index, bonds, commodity or basket of assets). It allows investors to spread their investments without necessarily owning the assets that the ETF is tracking. And since many of these ETFs tracks a basket of assets (assets that have something in common), investors are able to diversify their investments.
What is a Bitcoin ETF?
Bitcoin ETF is an ETF that tracks the performance of the price of bitcoin. Therefore investors that buy into this ETF are indirectly investing in bitcoin.
Why Are We Crazy About Bitcoin ETFs?
Now you must be wondering-since bitcoin ETFs mimic the price of bitcoin, why not just buy into bitcoin directly? The trading of bitcoin ETFs comes with some added benefits. Firstly, people or corporations who invest in bitcoin ETFs are not required to buy and hold physical bitcoin. Therefore, the risks associated with owning cryptocurrencies are effectively eliminated. Investors are allowed to trade shares of the ETF just like they would trade common stocks.
Secondly, some investors have been skeptical about investing in bitcoin because they have not been able to grasp the technicalities of the market. Therefore, introducing a much better-understood version of the bitcoin market will advertently leading to the mass adoption of bitcoin. In particular, institutional investors which can only trade regulated assets will be able to invest in regulated bitcoin exchange-traded products.
How Has The Buzz Affected The Price Of Bitcoin?
A Bitcoin ETF promises to be the next launching pad for bitcoin. Therefore, investors have diligently monitored different events that relate to the actualization of a bitcoin ETF. This is why there is always a spike in bitcoin’s price anytime a bitcoin ETF application is rejected. Crypto investors are known to panic whenever news of the rejection of a bitcoin ETF.
Types of Bitcoin ETF
There are two major ways an ETF can mirror the price of bitcoin. The first way is for a bitcoin ETF to buy and store bitcoin, while the second one requires a bitcoin ETF to own bitcoin futures. The major ETFs that are looking to get regulated on US soil falls under this two categories.
Winklevoss Twin Bitcoin Trust
Tyler and Cameron Winklevoss were the first to introduce the concept of bitcoin ETF on US soil. They began working on a bitcoin price index dubbed Winkdex. In 2014, the brothers revealed that they had already filed an ETF application before the Securities and Exchange Commission (SEC). Winklevoss bitcoin ETF had a framework that would allow its ETF use Gemini exchange as its index to track the price of bitcoin.
Four years after the application was filed, the commission reached a decision to reject the application. In the rejection order published in March 2017, SEC cited lack of a regulated market that would ensure that fraudulent practices were curbed as part of the reasons for its decision. The firm filed a petition for the review of the rejection order which was granted. However, after a thorough review, the commission rejected the application on July 26, 2018. The price of bitcoin dipped 3% immediately after the announcement was made
Proshares ETF was registered on December 26, 2017. The ETF is based on CBOE and CME bitcoin futures markets. These two bitcoin futures markets are regulated and approved by Commodity Futures Trading Commission CTFC. However, the majority of the crypto community argued that since the bitcoin futures market is barely a year old, the chances that bitcoin futures-backed ETFs will be approved is very slim.
SEC did not give a ruling on the Proshares bitcoin ETFs until a day before the applications’ deadline which was August 23, 2018. The commission rejected both applications citing the lack of records to conclude that either CBOE or CME bitcoin futures are of significant size. The commission added that both markets are in their infancy, therefore, there are no ways to predict the growth of these markets. As a result of this, the price of bitcoin fell from $6,800 to $6,300.
Vaneck Solid X Bitcoin ETF
VanEck controls about $45 billion in assets and has over 70 exchange products. The firm first filed an application for a bitcoin future backed ETF last year August. However, SEC asked the firm to withdraw the application since there was no existing bitcoin future market at the time of application. After CBOE and CME launched their bitcoin futures market in December, VanEck went on to file another application. Nonetheless, the firm was again advised to withdraw its application. This time, the commission cited extreme bitcoin volatility as one of the reasons why it had asked VanEck and several other firms to withdraw their applications.
On its third attempt, VanEck teamed up with blockchain company SolidX-who also had an application for a bitcoin ETF rejected in March 2017- to design an ETF that is based on physical bitcoin. Unlike the Winklevoss bitcoin ETF, VanEck and SolidX will get a third-party insurer for the bitcoin and keep them in cold storage.
VanEck will be marketing the ETF, and SolidX will be the one to buy and sell the underlying asset (bitcoin) while the Bank of New York Mellon will be the asset’s custodian. In addition, the VanEck SolidX ETF is more focused on instructional investors, as a share is priced at $200,000.
On July 2, the two firms filed for an ETF application before SEC, and the commission delayed the application till September 30. The final deadline for the commission to give its decision is August 23, 2019.
VanEck SolidX bitcoin ETF has been applauded by the crypto community as many believe that the proposed ETF will be the first bitcoin ETF to be approved in the US.
SEC to Approve Bitcoin ETF?
In January, the U.S. Securities and Exchange Commission released a report that listed the five major issues a bitcoin ETF must resolve before it can be approved. The issues are:
- The fund must design a way of calculating the Net Asset Value (NAV) of bitcoin for tax and reporting reasons.
- The ETF application must propose a secure and reliable way of storing bitcoin.
- The SEC wants bitcoin-related products to have sufficient liquidity that can meet daily redemptions.
- The ETF application must be able to prove that the crypto market can be protected from fraud and manipulation.
- The ETF application must design a solution to the problems of arbitraging between a fund and a volatile asset.
At first glance, SEC’s history with bitcoin looks like a lopsided war. However, taking a broader view of the situation, you would notice that the approval of a bitcoin ETF is inevitable. The commission’s rejection of Winklevoss bitcoin ETF application in July was not unanimous. The commissioners had voted 3 to 1. Therefore, it is only a matter of time before we see the first approved bitcoin ETF.
Can I Short Bitcoin ETF?
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