Wednesday, 17th October 2018
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Op Ed: Why Is There So Much Talk About a Bitcoin ETF?


An exchange-traded bitcoin fund (ETF) would signal greater acceptance of bitcoin as a mainstreet investment, while also making it much easier for both institutional and retail investors to get involved.  

Although much easier than in the past, buying, owning and investing with bitcoin is still confusing to many, even with the creation of more familiar user experiences through exchanges such as Coinbase, for example.

A bitcoin ETF would let investors gain a stake in bitcoin in a way that already feels familiar: through their brokerage firm. They wouldn’t have to open an account with a cryptocurrency exchange and learn how the exchange works and the dangers of an exchange hack potentially leaving them empty-handed. Moreover, they wouldn’t have to learn how private keys and seed phrases work or worry about losing them or having them stolen. They wouldn’t need to learn about the risks of hot wallets, and they wouldn’t have to buy and learn how to use a cold wallet.

By opening up the market to retail and institutional investors, a bitcoin ETF could rapidly increase the demand for bitcoin, bringing rewards to those brave enough to learn how to buy cryptocurrency before it got easy. And if a bitcoin ETF succeeds, it could boost the price not only of bitcoin but of other cryptocurrencies as well.

The existence of a bitcoin ETF, like bitcoin futures (which became available for trading last December), would also allow investors to take short positions and profit from declines in bitcoin’s price. When purchasing bitcoin directly, it is only possible to profit when its price goes up.

The buzz about a possible bitcoin ETF has been ongoing since bitcoin multimillionaires Cameron and Tyler Winklevoss, founders of the Gemini crypto exchange, filed the first petition for a bitcoin ETF in 2013. It would have traded under the ticker symbol COIN, but regulators rejected the proposal in 2017.

The Road to a Bitcoin ETF Approval by the SEC

The Winklevoss twins were not the only ones seeking approval for a bitcoin ETF; other applicants would soon find themselves summarily rejected as well. In January, the U.S. Securities and Exchange Commission (SEC) requested that anyone who had filed a petition for a bitcoin ETF withdraw their request.

These ETFs would have held bitcoin futures. But trade volume in bitcoin futures had been low since their December introduction, and the SEC saw that lack of liquidity as a major problem for potential bitcoin ETFs. ETF shares are supposed to be highly liquid, just as shares of publicly traded companies are. The SEC also cited concerns about valuation, custody, arbitrage and market manipulation. Pump-and-dump schemes in cryptocurrency are common, for example, but they aren’t illegal because of the lack of cryptocurrency regulation.

The Winklevoss brothers sought to address the SEC’s January concerns and filed again. But in July 2018, they were rejected for essentially the same reasons they were rejected the first time. And on August 22, the SEC rejected nine ETF proposals from ProShares, GraniteShares and Direxion. It cited concerns about fraud and manipulation.

Despite all these rejections, the SEC has shown signs that it may be open to approving a bitcoin ETF. For example, in its formal rejection of the Winklevoss proposal, it stated that “its disapproval does not rest on an evaluation of whether bitcoin, or blockchain technology more generally, has utility or value as an innovation or an investment.”

And SEC Commissioner Hester Peirce, the lone dissenter in the second Winklevoss rejection, stated that allowing institutional investments in bitcoin via an ETF could eliminate many of the problems that concern regulators.

The VanEck SolidX Bitcoin Trust and the Ongoing SEC Bitcoin ETF Decision Delays

In June, the Chicago Board Options Exchange (CBOE) submitted to the SEC a joint ETF proposal by investment fund provider VanEck and fintech company SolidX, which has been working toward bitcoin ETF approval since 2015. SolidX would sponsor the fund, while VanEck would market the shares. 

If approved, VanEck SolidX Bitcoin Shares would be the first bitcoin ETF approved in the United States. But is this proposal any more likely to succeed than those that have gone before it?

You may have read that the VanEck SolidX ETF would be unique in that it would be backed by physical bitcoin, not bitcoin futures. But bitcoins aren’t physical; they’re just code. So how would this work?

What the trust will do is store the private keys to its bitcoin holdings offline in cold storage wallets on air-gapped computers that are not connected to the internet or to other computers, a setup designed to prevent hacking. As a further security measure, when transferring bitcoin, the trust will use multi-signature transactions that must be digitally signed by more than one private key.

And as still further protection for investors against the loss or theft of bitcoin, the trust would carry insurance. This insurance would not protect against any downturns in bitcoin’s price that might cause investors to lose money, but it would protect against hazards such as theft of funds by a trusted employee, computer fraud and funds transfer fraud. It would, in other words, protect investors against a Mt. Gox-style hack and provide something akin to the SIPC insurance that protects brokerage accounts.

That being said, the SEC rejected SolidX’s proposal for a physically backed bitcoin ETF back in March 2017, and VanEck was one of the companies that withdrew its proposal for a futures-based bitcoin ETF in January 2018.

Has enough changed with the proposal and the market for the SEC to approve the new proposal? The trust hopes so. The CEOs of VanEck and SolidX said in an interview with ETF.com that the new insurance proposal is more solid and the fund is not geared toward the retail investors the SEC is especially concerned about protecting.

The trust would sell the initial shares in blocks of five called “baskets,” with one basket holding the equivalent of 25 BTC or roughly $164,375 at today’s (October 5, 2018) price. The high price is designed to limit the ETF to institutional investors, a step that could increase the likelihood of SEC approval and pave the way for approval of future bitcoin ETFs.

The trust would sell these baskets to broker-dealers, who would then list individual shares for trading on the Cboe BZX Exchange under the ticker XBTC. The trust would use the MVIS® Bitcoin OTC Index as the basis for bitcoin’s price. The SEC will decide whether to approve this ETF by September 30, 2018.

The SEC originally postponed its decision earlier this summer on some bitcoin ETFs including the VaneEck Solidx proposal, until September 21, 2018, including its decision on the five ETFs offered by Direxion Investment Management.  

As September 21 approached, the SEC announced it was again postponing its decision as it needed more time to evaluate the 1,400 letters it received from the public regarding the proposed ETFs. The commission also stated it needed to explore whether to approve or disapprove a proposed rule change under BZX Rule 14.11€(4), Commodity-Based Trust Shares that would allow the listing and trading of the SolidX Bitcoin Shares.    

Conclusion

Regulatory approval of a bitcoin ETF would not only provide a new and easy way to gain exposure to this asset but could also provide a sense of legitimacy to bitcoin that would increase the general public’s interest in it. Still, even though an ETF is a familiar investment vehicle, this investment, just like an investment in bitcoin itself, would be highly speculative if approved. Bitcoin’s price can be volatile, and investors would be wise to put only money they can afford to lose into a bitcoin ETF.

This is a guest post by Eric Jansen. It is intended for information purposes only and does not constitute investment advice. Views expressed are his own and do not necessarily reflect those of Bitcoin Magazine or BTC Inc.



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