What A Bitcoin ETF Would Mean For Crypto Investment
December could be the month that we see a much-anticipated US Bitcoin exchange-traded fund (ETF). Many Bitcoin and cryptocurrency investors are hoping a Bitcoin ETF could bring a fresh injection of capital into the beleaguered market, which has lost some $700 billion in value over the course of 2018.
If a US Bitcoin ETF actually appears, what can we expect in the long and short-term?
But First, What is a Bitcoin ETF?
As we previously described, an ETF is a fund that invests in assets like stocks or gold, and divides ownership of those assets into shares. The shares can be bought and sold like stocks, making ETFs relatively welcoming to ordinary investors.
ETFs allow people to buy into an asset indirectly, making it easy to diversify one’s holdings without actually having to buy a variety of assets. Some of the most popular ETFs include market indices, traditional commodities like gold and oil, and foreign currency.
In the case of Bitcoin, ETFs would allow traders to invest in Bitcoin without having to deal with cryptocurrency exchanges, which often require drawn-out security procedures. Exchanges have also suffered a loss of public trust thanks to a seemingly never-ending stream of hacks and thefts.
A Bitcoin ETF would either own and store actual Bitcoins or be valued through Bitcoin futures, which approximate the price of Bitcoin. Bitcoin futures are already available and New York’s Nasdaq exchange will be launching its own Bitcoin futures product from early next year.
It should be noted there are different versions of Bitcoin exchange-traded products on the market already, though they are not quite the ETFs many are waiting for.
Since 2015, a Bitcoin exchange-traded product has been available through a Swedish company, the Stockholm-based XBT Provider. The XBT product is an exchange-traded note (ETN), which CNBC describes as “an unsecured debt instrument that promises to pay the pattern of returns of the Bitcoin price.” It can be accessed by investors across Europe and has attracted investment of over $1 billion across the past three years.
In the U.S., the Bitcoin Investment Trust (GBTC), managed by Grayscale Investments, allows American investors access to the Bitcoin market. However, it is not an ETF and not SEC-registered. It trades on the Nasdaq over-the-counter market at a high premium on the going rate for Bitcoin, and it can be even more volatile than the cryptocurrency itself.
Why December is important for a Bitcoin ETF
Last week, representatives from U.S. investment firm VanEck, blockchain software company SolidX, and the Chicago Board Options Exchange (CBOE), met with the U.S. Securities and Exchange Commission to make a last-ditch bid for ETF approval. The SEC will vote on the proposal on December 29, after multiple postponements.
Bitcoin’s recent sell-off, which has hit the wider cryptocurrency market hard, cast fresh doubt over the likelihood of a Bitcoin ETF being approved. In November SEC chairman Jay Clayton said the cryptocurrency market had to resolve issues around custody, price manipulation, and surveillance before he would feel “comfortable” allowing a Bitcoin ETF to come to market.
The SEC’s Bitcoin ETF record is, so far, one-sided. In August this year, the SEC rejected nine separate applications for a Bitcoin ETF. In our previous article, we argued that this delay was not necessarily a bad thing.
How the market will react
It looks likely that the Bitcoin and cryptocurrency market will react positively to an approved US Bitcoin ETF—but we don’t know to what degree.
"The entire crypto industry dreams of the magical day when the fabled 'big bank money' starts pouring into Bitcoin,” said Glen Goodman, Bitcoin analyst and author of forthcoming book, “The Crypto Trader.”
“If this Bitcoin ETF backed by 'real' Bitcoins is finally approved by the SEC, it could change everything, because large financial institutions may finally decide it's secure enough and respectable enough to invest in."
This confidence could take months to filter down to tangible investment, however, with investors feeling “beaten pretty bloodily,” by recent market falls according to Charlier Hayter, the chief executive of Cryptocompare, a data company.
Others have pointed to the creation of a gold-backed ETF and the rare metal’s subsequent price rise as a blueprint for how a Bitcoin ETF could boost the Bitcoin price.
"A sign-off of a Bitcoin ETF will open the market up for further ETFs to be agreed and there are many that see a direct correlation to what happened to the price of gold once the first gold ETF was established: a long bull run,” David Thomas, director and co-founder of London-based cryptocurrency broker GlobalBlock, told LongHash.
“I think that there will undoubtedly be positives to come out of an ETF for the wider market in terms of investment. However, I am slightly more reticent to think that the effect will be as groundbreaking as some predict, predominantly because I think there is still much to be taken from the adage of ‘buy the rumor and sell the fact.’”
Still, there is reason to be confident that a Bitcoin ETF will eventually happen in the US—even if the SEC does not wave it through in December. In the aftermath of a positive decision, we can expect traders and investors to be celebrating, at least over the short term.