Three years after the infamous "crypto winter" of early 2018, Bitcoin has surged to nearly triple its previous $20,000 high water mark, and has surpassed a $1 trillion market cap—making it by far the largest cryptocurrency in an overall crypto market worth $2 trillion.
With more mainstream popularity than ever, many new people are interested in acquiring some Bitcoin. But many of the crypto-curious still view buying Bitcoin from a crypto exchange as an intimidating and opaque process. The technical aspects of holding Bitcoin—such as crypto wallets, Bitcoin addresses and private keys—are confusing to newcomers, and scare some investors away.
All of this has intensified the appeal of a Bitcoin ETF, or exchange-traded fund. While Canada now boasts three Bitcoin ETFs, the U.S. has yet to approve any for trading.
What is an ETF?
- An ETF is an investment vehicle that is publicly traded, like a stock, but tracks the performance of an underlying asset or index, rather than one company.
- An ETF is a way for investors to get exposure to the value of its underlying asset, like gold or oil.
- ETFs trade on a traditional stock exchange, and their value should rise when the asset increases in price, and fall when it decreases.
A Bitcoin ETF works in much the same way as any other ETF. Investors buy shares in the ETF through whatever brokerage they buy stocks, and can trade them the same way they'd trade shares in Apple or Tesla.
Bitcoin ETFs track the current price of Bitcoin, and should act in lockstep with Bitcoin's price swings.
Why the need for a Bitcoin ETF?
So, why wouldn’t investors just buy Bitcoin?
For most regular retail investors, Bitcoin and cryptocurrencies in general still look risky.
Besides having unclear regulations around them, owning Bitcoin requires keeping a Bitcoin wallet and trusting crypto exchanges, which are still uncharted territory for people unfamiliar with the space and require a certain level of self-education.
Holding Bitcoin places the burden of security squarely on you, making you responsible for keeping your own private keys safe (unless you want to entrust them to the exchange). This may mean buying a hardware wallet to protect purchased Bitcoin, or storing private keys in a secure manner. You’d also have to work out how to file taxes for sales of Bitcoin that resulted in capital gains.
With a Bitcoin ETF, investors need not worry about private keys, storage, or security. They own shares in the ETF just like their shares of stock, and can gain exposure to the cryptocurrency market without having to go through the hoops of purchasing and holding crypto.
And to put it plainly, that is an extremely appealing proposition for many regular folks—as well as sophisticated institutional investors.
That's why so many hedge funds and other investment firms have filed applications with the U.S. Securities and Exchange Commission (SEC) for Bitcoin ETFs—we count at least seven high-profile Bitcoin ETF applications as of April 2021, from the likes of Fidelity, VanEck, SkyBridge Capital, Bitwise, and others.
Gemini founders Cameron and Tyler Winklevoss were first out of the gate with an application for the Winklevoss Bitcoin Trust in 2013. In 2018, the U.S. Patent and Trademark Office awarded the Winklevoss brothers a patent for “exchange-traded products." But the SEC still hasn't approved their ETF—or any others.
Monday marked the 6 year anniversary of the first filing of the Winklevoss Bitcoin Trust ETF. Onward and upward!
— Tyler Winklevoss (@tyler) July 4, 2019
How does a Bitcoin ETF work?
A Bitcoin ETF is managed by a firm that buys and holds the actual Bitcoin; the price is pegged to the Bitcoin held in the fund. The firm lists the ETF on a traditional stock exchange, and you, the investor, trade the ETF just as you would any other stock. Bitcoin ETFs also offer new types of trading opportunities, including short-selling, where investors can bet against Bitcoin.
But there are also some key differences between a Bitcoin ETF and other ETFs.
First, some ETFs, like those that track the S&P 500, represent equity shares, so you get a cut of the dividends that any company in the ETF pay to their shareholders. When Tesla pays a dividend and you have shares in an ETF that includes Tesla, you get a (smaller) dividend. Bitcoin is decentralized, so that won't happen with a Bitcoin ETF.
Second, just like with other ETFs, you have to pay fees to the company offering the ETF. But with a Bitcoin ETF, some portion of your fees would go to paying the custody and management fees for the purchase and storage of the Bitcoin that underlies the ETF.
A brief history of Bitcoin ETF progress
- July 2013: The Winklevoss Bitcoin Trust files the first Bitcoin ETF proposal.
- June 2018: The SEC rejects the Winklevoss’ second Bitcoin ETF proposal.
- October 2019: The SEC rejects Bitwise's Bitcoin ETF proposal.
- February 2020: Wilshire Phoenix becomes the latest project to have its Bitcoin ETF project rejected by the SEC.
- September 2020: The world’s first Bitcoin ETF is listed on the Bermuda Stock Exchange.
- December 2020: VanEck files its latest proposal for a Bitcoin ETF, after pulling its previous proposals before formal rejection multiple times.
- February 2021: Canada's first Bitcoin ETF launches, the Purpose Bitcoin ETF (BTCC). Two more would be approved in the same month: the Evolve Bitcoin ETF (EBIT) and the CI Galaxy Bitcoin ETF (BTCX).
What’s so special about a Bitcoin ETF?
A Bitcoin ETF in the U.S. is expected to bring a new level of mainstream trustworthiness and acceptance to Bitcoin investing. In 2020 and 2021, big publicly traded companies including Square and Tesla bought Bitcoin as an investment for their balance sheets, which spurred new adoption—but the cryptocurrency is still seen by many conservative investors as a risky bet or even a gimmick.
The approval of a Bitcoin ETF by the SEC would mean institutional investors can more easily speculate on the price of Bitcoin. It would functionally bring Bitcoin to Wall Street, with the Bitcoin ETF traded through the same places as Tesla stock, bonds, gold, oil, or any other traditional assets.
And it would likely be a huge boost to the price of Bitcoin.
Why hasn't the SEC approved a Bitcoin ETF?
Since 2017, the SEC has repeatedly rejected proposals for Bitcoin ETFs.
The SEC's main argument is that Bitcoin’s price is prone to market manipulation. And even if a Bitcoin ETF only drew prices from the most scrupulous cryptocurrency exchanges, Bitcoin’s price could be manipulated on less reputable exchanges with looser restrictions.
The other common concerns the SEC often cited include a lack of transparency in crypto markets and potential lack of liquidity.
But that was all during the Jay Clayton era.
In January 2021, newly elected U.S. President Joe Biden announced his choice for the next SEC chair would be Gary Gensler, whose past experience teaching a course on cryptocurrency at M.I.T. prompted a new wave of optimism that the SEC will approve a Bitcoin ETF imminently.
The Future of Bitcoin ETFs in the U.S.
Of course, just because Gensler knows about crypto doesn't necessarily mean he will take a pro-crypto stance as SEC Chair. But that isn't stopping investors with skin in the game from banking on Gensler opening the Bitcoin ETF floodgates.
"I'm hoping that with the introduction of Gary Gensler now into the regulatory rubric, and my understanding of where he's coming from, although I don't know it personally, is that possibly we can get an ETF in place by the end of the year," Anthony Scaramucci, whose SkyBridge Capital has applied for a Bitcoin ETF, told Decrypt in March.
SkyBridge is one of the firms that has a Bitcoin fund for its own clients, which isn't quite an ETF, but it aims to convert that fund into an ETF if and when the SEC approves a Bitcoin ETF.
Another is Grayscale Investments, the largest U.S. crypto asset firm, which offers publicly-traded investment products pegged to specific cryptocurrencies, such as the Grayscale Bitcoin Trust (GBTC). In April, Grayscale confirmed that it intends to convert its Bitcoin Trust to a Bitcoin ETF if and when the SEC allows it.
Morgan Creek Capital Management CEO Mark Yusko is also convinced U.S. Bitcoin ETF approval is "going to happen" imminently; Morgan Creek has invested in Bitwise, which applied for an ETF.
SEC approval would represent a major step towards Bitcoin being seen as a legitimate investment by the same traditional investors who have dismissed it for years.
Guide & Tools
Post a Comment