Bitcoin (BTC) ETF Explained

Bitcoin ETF vs U.S. SEC

The digital money market is waiting for the launch of an investment tool that can take the industry to a new level. Most of the news from the world of cryptocurrencies is due to the fact that the US Securities and Exchange Commission (SEC) is considering launching a Bitcoin ETF.

Changelly explains in plain language what it is, how it works in the field of cryptocurrencies and why everything can not be accepted.

How Bitcoin ETF Works

Exchange-Traded Fund (ETF) is an index fund whose shares are traded on a stock exchange. ETF is a type of security that acts as a certificate for a portfolio of stocks, bonds, commodities, or cryptocurrencies. The price of this security follows the index based on certain underlying assets.

An ETF provider submits an application to the Securities and Exchange Commission (SEC) to register a fund in the United States. The SEC classifies stocks of such funds as securities. Using ETFs, you can carry out the same operations as with stocks in exchange trading. Transactions with ETF shares can be completed throughout the trading day, and their prices may vary depending on the ratio of supply and demand, as well as the activity of market participants.

ETF Principle
How ETF works

ETF stocks are more liquid than units of an investment fund. The latter usually applies in the country of establishment of such a fund. At the same time, exchange-traded investment funds can be traded on foreign markets. Margin trading is acceptable with ETFs.

Since ETFs are traded like stocks, the net asset value is not calculated daily, as is the case with an investment fund. Moreover, the market value of such assets may be higher or lower than the net asset value.

Why Do We Need Bitcoin ETF?

ETF is a familiar tool for representatives of the world of traditional finance. The popularity of such products is growing from year to year. Market participants do not need to open a wallet, register on the digital asset exchange, worry about a safe deposit of funds, etc. 

Investors are not exposed to the risks of hacking trading platforms, fraud by dishonest exchange owners, phishing attacks. These tools may be of interest to traditional investors who do not wish to delve into the technical aspects.

It is likely that Bitcoin ETFs will certainly attract large investments to the cryptocurrency market, and this will contribute to the growth of its capitalization, as well as the massive adoption of new assets.

The main driver of the next medium-term rally for Bitcoin prices will be the influx of institutional investors. The main barrier preventing large investors from entering the industry is the lack of reliable solutions for storing digital assets targeted at the whales of the market.

Why not just invest in Bitcoin?

The attractiveness of bitcoin funds is that they allow you to invest in bitcoin without buying the cryptocurrency itself. For those who believe in its future, this will be a sufficient incentive to buy ETFs.

There are some negative issues of ETF approvement. When you buy ETFs, you are actually buying stocks in a portfolio that tracks the performance of a particular index. In this case, the fund management company will buy bitcoins and sell you a share of its reserves. In other words, you will not become the owner of bitcoins, which means you will not be able to spend them.

Firstly, there is counterparty risk. If any of the parties involved in the scheme (for example, the party providing the portfolio manager with the presence of bitcoins) does not do its job, the ETF balance will be violated and its parameters will no longer coincide with the situation on the market. In this situation, the client depends on the managerial skills of administrators, the structure of the fund, the supply chain, the operational reliability of the company, regulatory authorities and delivery protocols. 

Secondly, the Bitcoin ecosystem is unstable. Will asset keepers, banks, be able to cope with the task of searching and storing bitcoins providing BTC ETFs? The question is, will the bank itself survive the bitcoins in the bank’s vault, and will the bank be able to protect its digital assets?

Bitcoin vs U.S. SEC History

Immediately after the appearance of bitcoin futures, the New York Stock Exchange asked the US Securities and Exchange Commission (SEC) for permission to list two exchange funds associated with bitcoin. 

SEC plays an important role as the main regulator of the financial market. On the official website, the Commission defines its mission in three points.

  1. Investor protection;
  2. Maintaining a fair, orderly and efficient market;
  3. Promotion of capital formation.

For the first time, the Winklevoss brothers’ intention to launch Bitcoin ETFs became known in mid-2013. However, more tangible plans were formed only by the end of June 2016. That’s when the Winklevoss Bitcoin Trust announced its intention to issue its own shares and thus raise up to $65 million of borrowed funds. At the same time, Cameron and Tyler Winklevosses abandoned the original idea of entering the Nasdaq and instead planned to post on the BATS Global Exchange.

winklevoss brothers
Tyler and Cameron Winklevoss

In 2016, Tyler and Cameron Winklevoss filed an application for bitcoin-ETF in the SEC. SEC postpones ETF decisions several times. To the disappointment of the Tyler and Cameron Winklevoss brothers, the US Securities and Exchange Commission (SEC) refused permission to start the Bitcoin ETF in March 2017. 

At the same time, SolidX Bitcoin Trust and Barry Silbert’s Bitcoin Investment Trust also awaited approval from the SEC. As a result, the US Securities and Exchange Commission (SEC) postponed a meeting on the Bitcoin Investment Trust for 45 days due to changes in the NYSE Arca rules, listing of which was planned to include Barry Silbert ETF (under the GBTC ticker). After that, the fund withdrew its applications. SolidX Bitcoin Trust application was refused.

In April, the U.S. Securities and Exchange Commission (SEC) granted BATS Global Exchange a request to reconsider its decision to refuse the Winklevoss brothers’ Bitcoin ETFs. At the same time, companies like ProShares Capital Management, VanEck, REX ETF, Horizons ETF Management are applying for the Bitcoin-ETF. Most companies themselves withdraw their applications, some reject SEC. 

In early 2018, the U.S. Securities and Exchange Commission (SEC) expressed serious doubts about the liquidity and price volatility of cryptocurrencies and related products. The ministry believes that the activity of exchange-traded investment bitcoin funds at the moment will not meet the requirements of the regulator.

On 26 July 2018, the US Securities and Exchange Commission (SEC) for the second time rejected the application of the brothers Cameron and Tyler Winklevosses to create a Bitcoin-linked exchange-traded investment fund. The price of the first cryptocurrency fell by more than 3.5%, dropping below $8,000.

During all these clarifications, Ethereum Creator Vitalik Buterin expressed the opinion that the crypto industry needs not only exchange-traded investment funds but practical and useful applications.

Head of the US Securities and Exchange Commission (SEC) Jay Clayton during the Consensus: Invest conference said he did not see the possibility of approving cryptocurrency-based ETFs until the problem of market manipulations was solved.

By the beginning of 2019, VanEck, SolidX, and CBOE are waiting for their decision. Then the Winklevoss brothers declare that they will not abandon their idea. 

In January, the Bitwise Cryptocurrency Fund has submitted an application for the launch of Bitcoin ETF to the US Securities and Exchange Commission (SEC). The company planned to place shares of the new index fund on the NYSE Arca stock exchange.

In September 2019, Bitwise Asset Management has attempted to convince the US Securities and Exchange Commission (SEC) that the market is ready to launch Bitcoin-based exchange-traded funds (ETFs).

The company presented to SEC a presentation, in which it identified three main reasons for the approval of the Bitcoin ETF. According to Bitwise, these are the efficiency of the cryptocurrency spot market, the availability of regulated storage services and the growth of the futures market.

The final decision on the Bitwise application for the launch of the Bitcoin ETF SEC should be made on October 13.

When can we expect Bitcoin ETF to be approved by U.S. SEC?

The news feed on this topic is full of words such as “REFUSED” or “REVOKED.” Many well-known representatives of the crypto industry are skeptical about funds traded on the exchange.

Crypto-community trader and analyst Tone Vays claims that the price of bitcoin will not necessarily increase after the launch of ETF based on it.

Bitcoin evangelist Andreas Antonopoulos even calls such funds a “terrible idea”. According to him, due to ETFs, the cryptocurrency market will become more centralized and prone to aggressive manipulation by institutional investors.

The famous cryptographer Nick Szabo also criticized the Bitcoin ETF. He believes that such funds can be more harm than good.

Apparently, the SEC is not interested in approving applications in the field of cryptocurrencies. They constantly consider this area not fully understood and incomprehensible to most Americans.

Bottom Line

As for now, Bitwise Asset Management’s executives claim that:

“We’re closer than we’ve ever been before to getting a Bitcoin ETF approved.”

Well, we will see, if they were right in a couple of days, on 13th October. However, the confrontation between cryptocurrency enthusiasts and the SEC continues. 


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