Why bitcoin ETFs are likely to be approved

Posted: 24 July 2018 7:44 pm
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Spoiler: It's because of a lot of hard work, not because of random comments submitted to the SEC.


An Exchange Traded Fund (ETF) is essentially a way for people to invest in the price changes of something without actually buying or selling that thing.

A gold ETF, for example, lets someone invest in the value of gold without actually needing to buy or sell gold or finding a place to store it. Other ETFs might track the value of a basket of different assets, like an index fund.

A bitcoin ETF would let people speculate on the value of bitcoin without actually needing to buy or sell it themselves. Instead, the company that trades the bitcoin ETF would back the product with an appropriate amount of bitcoin holdings. These ETFs can then be traded easily and quickly, traded on margin and generally managed much more quickly and easily than the asset itself.

Right now bitcoin ETFs are reportedly in the works and, subject to SEC approval, will be made available on open markets. This is generally considered to be pretty bullish because it will let more institutions and individuals more easily buy and sell actual bitcoin, via an intermediary, and generally legitimise bitcoin as a real, viable and regulated asset class.

The technical barriers to buying and selling bitcoin are currently quite high, and it's thought that bitcoin ETFs could ensure that people who want to put money into bitcoin can do it much more easily, thereby raising prices.

Previous attempts at approval for bitcoin ETFs have failed, but that's exactly why it seems more likely to go through this time. A lot of reporting has focused on the many entertaining comments submitted for the SEC's consideration and noted their encouraging tenor as a promising sign.

But comments aside, in the real world this request might be more likely to go through because a lot of people have put a lot of hard work into making sure it meets SEC ETF guidelines, in line with previously-received feedback.

Regardless of how "liiiiiit" bitcoin ETFs are or how nicely I.C. Weiner asks for ETF approval, it was probably going this way anyway.

Previous failed attempts

The new up-for-approval bitcoin ETFs are specifically a "Cboe BZX Exchange request to list trade Shares of SolidX Bitcoin Shares Issued by the VanEck SolidX Bitcoin Trust."

This is bringing together several different players. VanEck first filed for an ETF based on bitcoin futures in August 2017, but withdrew the application in September at the SEC's request, because the bitcoin futures didn't exist yet. VanEck and other firms then filed again in December after the launch of bitcoin futures on CME and Cboe. This application was withdrawn once again in January, also at the SEC's request. This was possibly because the request came right as bitcoin was in the middle of an unsustainable expansion.

The SEC went on to express concerns about bitcoin's extreme price volatility and potential liquidity issues, which conflict with the requirement that ETFs receive daily valuations and let customers withdraw funds easily. It wouldn't be considering bitcoin ETFs until these concerns are addressed.

Other exchanges, such as Gemini, have also made similar requests for bitcoin ETFs. Acceptance will likely throw open the doors for a range of different players.

Third time lucky

The Cboe/SolidX/VanEck third attempt might be more likely to succeed. They've had a chance to address previous SEC feedback while bitcoin has settled into a more reliable price routine over the last six months. It's now generally accepted that bitcoin is here to stay for the foreseeable future and even if it's not the future of money it at least won't go to zero overnight.

Given the state of the market previously, it should come as no surprise to anyone that bitcoin ETFs were justifiably knocked back. Given the state of the market now, it might similarly come as no surprise to anyone if bitcoin ETFs are approved.

SEC insiders are reportedly feeling optimistic about the odds of approval as well.

"I would call it 90% at this point," said one to ZeroHedge. "The crypto markets have moderated and regulators have watched the lack of drama surrounding Bitcoin futures across several global exchanges. The price moderation and adoption of a 'peer product' is what the conversations have centered around. In January we were justifiably concerned about a bubble and the harm[ful risk that] a quickly-approved product could attract speculators and create losses that led to significant lawsuits. Now, those factors seem to be mitigated significantly."

"I would expect a positive outcome in September," another said. "Or if it gets strung out a little further it is simply a few dotted i's and crossed t's are being finalized on larger regulatory language in the crypto space."

Other recent developments in the cryptosphere have also made it possible to bring additional benefits to the table that weren't an option just six months ago, such as insurance for digital assets.

"I believe that bitcoin has emerged as a legitimate investment option, as a type of 'digital gold' that may make sense for investors' portfolios," Jan van Eck, chief executive officer of VanEck, said in a statement. "A properly constructed physically-backed bitcoin ETF will be designed to provide exposure to the price of bitcoin, and an insurance component will help protect shareholders against the operational risks of sourcing and holding bitcoin," he said.

Even if bitcoin ETFs are knocked back once again, it's just another opportunity for interested companies to further improve and better meet SEC requirements, and then go for a fourth attempt, or fifth attempt or however many it takes.

Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VET, XLM, BTC, ADA

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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