It won’t be news for the crypto enthusiasts that Bitcoin ETF might just be the next derivate instrument to be launched. If reports are to be believed, the SEC (Securities and Exchange Commission) has already been delivered over 15 applications for bitcoin ETFs.
But do we know all we need to know about it?
What is ETF?
Acronym for Exchange Traded Funds, ETF is a type of fund which owns the underlying assets. ETFs are investment funds which are traded on stock exchanges, more or less, like stocks. That is, ETFs can be understood as index mutual funds.
An ETF can hold assets such as stocks, bonds, commodities etc. and are usually an attractive investment vehicle owing to their low costs, stock-like features, and most important of all, tax-efficiency.
And according to the latest buzz, ETF can now hold bitcoin as well.
Where do ETFs trade?
Some of the popular stock exchanges for trading ETFs include NY Stock Exchange, London Stock Exchange, Hong Kong Stock Exchange, SIX Swiss Exchange, and NASDAQ.
How do ETFs trade?
Like common stock. ETFs are traded all day; their prices fluctuate; they are liquidated in the market, and they invite investors. An ETF once listed on an exchange becomes open to thousands of traders.
ETFs are funds which own assets like bonds, gold bars, stocks etc. and divide its ownership into shares which are held by shareholders. The shareholders are entitled to a share of profits and may also get a residual value in case an ETF is liquidated in the market.
They are different from traditional mutual funds in that they are traded all throughout the day like stocks and they do not sell or redeem their individual shares at the Net Asset Value.
The purchasing and redeeming of ETF shares is done directly from the ETF in large blocks called creation units. These creation units give ETFs a mechanism that is intended to reduce the potential deviation between the market price and the NAV to a minimum.
All existing ETFs have a transparent portfolio which allows the institutional investors to assemble the right portfolio assets to purchase an ETF.
What will happen if bitcoin ETFs are approved?
ETFs are mainly used for two reasons—to provide a basic return to the investors at minimal cost (which comes from a long-time increase in the value of the underlying assets) and to take on the opportunity to profit from day trading.
It is no secret that ETF has been designed to make the investors richer. Therefore, if Bitcoin ETFs were to be approved, the market will take a huge turn. The ETFs ROI depends on the fluctuation in the price of the underlying asset which makes Bitcoin ETFs a very lucrative option.
To quote Eric Ross, the chief investment strategist for Crescent Securities, “ETFs will bring a LOT more capital to bitcoin.”
Bitcoin ETFs will open the way for a whole new level of trading, holding, and investing in bitcoin. This will especially be a good opportunity for the sceptics. It will provide individuals with an opportunity to purchase and store the cryptocurrency on an exchange for an extended period of time.
Bitcoin ETFs will certainly be a good opportunity for those who bet on the growth of the coin price but are not so tech-savvy or worry about thefts in their digital wallets.
The approval of bitcoin ETFs might surge the price higher than ever but this would also mean the currency will have to bear with increased regulations and manipulations. (read below)
Background on Bitcoin ETFs
There is one bitcoin ETF that has been approved—Bitcoin Tracker One—and is regularly traded on the NASDAQ Nordic exchange.
But that is all. Other appeals for other bitcoin ETFs have so far been denied.
The most famous bitcoin ETF was requested by the Winklevoss Twins back in the year 2013. This ETF has been going through the approval process for the longest period of time. The SEC which is responsible for approving ETFs denied their request on the grounds that “the rules of a national securities exchange were designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.”
A similar request was then put forward by the ETF firm VanEck but that too ran into more or less the same problem. They withdrew their application in September 2017.
Another request by the Bitcoin-linked ETF SolidX was rejected in April 2017. And before that, in March 2017, a similar bid from Bats BZX Exchange was rejected.
Why does the SEC repel bitcoin ETFs?
Most experts have recognised the rejection of the ETF requests as a pattern. It could be because of the SEC’s conclusion that the bitcoin is an unregulated market because of which it would not be able to enter into the surveillance agreements with other agencies.
In the denials of 2017, the regulatory agency hinted that the ETFs in question lack the sufficient market regulation and surveillance to be listed on the Exchange. This is a prime reason for SEC’s reluctance to list crypto-based ETFs on the exchanges. The authority strongly believes that regulation is a crucial factor in the path to legitimacy for any market including cryptocurrency.
However, bitcoins and other cryptocurrencies were created to battle the central regulation and the increased range of their use-cases has only proven the point further. But, the issue to meet certain expectations in order to become a participant in this market still persists.
Alternative views on Bitcoin ETFs
There are also experts who believe that Bitcoin ETFs were, in plain and simple language, a bad idea.
Simon Dixon, the CEO and the co-founder of BnkToTheFuture, held the opinion that ETFs will introduce a counterparty risk into Bitcoin. For him, the whole concept is a classic example of traditional regulations curtailing the consumer protection.
Dixon persuades people to be happy with the denials since it prevents Bitcoin from becoming an even scarcer asset since the decision to remove such a large number of Bitcoin from circulation will contribute to the decreased stability of the coin followed by control and manipulation from instructional money.
So what now?
Yet there is a population who is vouching for the approval of bitcoin ETFs with the broader vision of appearance of bitcoin-based ETFs on the bigger stage. But, the SEC’s actions indicate that the agency is struggling hard to figure out how to deal with these requests and it doesn’t look like the debate is going to end anytime soon.
The only thing to do is to watch out for all ETF related news and take shelter in the fact that with time, more platforms, participants, and maturity are sure to sprout.
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Hitesh Malviya is the Founder of ItsBlockchain. He is one of the most early adopters of blockchain & cryptocurrency enthusiast in India. After being into space for a few years, he started IBC in 2016 to help other early adopters learn about the technology.
Before IBC, Hitesh has founded 4 companies in the cyber security & IT space.
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