By LongHash
Updated on July 26, 2018, 18:19 PM

A Delay on Bitcoin ETFs is Probably a Good Thing


The crypto community has a lot of hope riding on Bitcoin exchange-traded funds (ETFs). If approved by the US Securities Exchange Commission (SEC), many believe that the price of Bitcoin will skyrocket. It will be the bull run everyone’s been waiting for: Cryptocurrency will become mainstream, leading to the launch of other crypto investment vehicles. But the SEC’s announcement to delay its decision on the investment firm Direxion’s Bitcoin ETF application on Tuesday is probably a good thing.

An ETF is a type of fund that invests in different assets, such as stocks or gold, and divides ownership of those assets into shares. These shares can be bought and sold like stocks, which makes ETFs very accessible to laymen investors, hence the excitement around Bitcoin ETFs making crypto more mainstream. Unlike traditional ETFs on the market, a Bitcoin ETF wouldn’t invest in bonds or stocks, but Bitcoin-related investment products like Bitcoin futures contracts.

While many on social media anticipate the inevitable approval of Bitcoin ETFs, as other applications are also currently under review, it’s worth stepping back to consider why regulators may not be ready to approve Bitcoin ETFs just yet.

While the SEC has had to play catch-up with initial coin offerings, where companies issue their own cryptocurrencies in a crowdsale, the US regulatory body has more control over the approval and rollout of Bitcoin ETFs. In its statement on Direxion's Bitcoin ETF, the SEC said that it needed more time to decide because it wanted to allow for “additional analysis.”

This analysis would in part be used to determine whether or not the SEC is equipped to “prevent fraudulent and manipulative acts and practices” upon approval of Direxion’s Bitcoin ETF, and whether it could “protect investors and the public interest” as well as “promote just and equitable principles of trade.”

Given the current state of the crypto market, it’s easy to see why the SEC is delaying its decision until September 21st, in order to have as much time as possible to accomplish the above -- which is part of the Securities Exchange Act of 1934.

In particular, Direxion’s ETF invests in Bitcoin futures, an investment product that only became available about half a year ago. Though their daily trade volume has increased since launching at the end of last year, Bitcoin futures are still an early product. As of July, the Chicago Mercantile Exchange (CME) Group and Cboe Group currently see about 13,000 and 7,000 contracts per day, respectively -- a fraction of the exchange operators’ total daily futures volumes.

That is expected to change in the future, but it does add to the challenge of evaluating ETFs that are based on Bitcoin futures. On top of that, Bitcoin futures contracts might be responsible for drops in the price of Bitcoin. According to Thomas Lee from Fundstrat Global Advisors, there is “significant volatility” around Cboe and CME futures expirations, and the price of Bitcoin drops by 18 percent on average 10 days before the contract expires. This phenomenon likewise could have an adverse impact on ETFs.

Besides the novelty of Bitcoin futures, there are other unresolved issues in the US crypto industry that the SEC has to consider: the Department of Justice’s ongoing investigation into Bitcoin price manipulation, controversy around stablecoins like Tether, and potential trade volume inflation at cryptocurrency exchanges.

Not all of these are directly tied to Bitcoin ETFs, but they indicate market unreadiness for a product like ETFs, which would likely open the floodgates to retail investors. In taking its time to decide, the SEC is also letting the market mature, which will be beneficial for investors and the overall crypto industry.