Background to the Bitcoin ETF debate
Will, we or won’t we see a Bitcoin ETF?
Markets have been trying to decide what the answer to that question is for more than two years, since the Winklevoss twins, (of Facebook fame), submitted an initial proposal for their Kryptoin Bitcoin ETF, to the SEC back in 2019.
Since then many other organisations have also submitted proposals, including the worlds largest listed Bitcoin investment vehicle, the Grayscale Bitcoin Investment Trust, which has some $40 billion under management.
However, the SEC has been stalling about whether to allow the creation of listed tracker funds for the cryptocurrency or not.
Last week the US regulator kicked the can further down the road, announcing that it had delayed its decision on four Bitcoin ETF proposals, the applications of Global X, WisdomTree, Kryptoin and Valkyrie. The SEC will review these proposals again between November 21st and Christmas eve.
What is a Bitcoin ETF?
ETFs attempt to replicate the price performance of the assets they track rather than outperform them, though some ETFs are leveraged or move inversely to their underlying assets.
The proposals for Bitcoin ETFs are for funds that would track physical Bitcoins or Bitcoin Futures, such as those traded on the CME.
Grayscale would like to convert its existing closed-end physical Bitcoin fund into an ETF, whilst Valkyrie would like to launch an ETF that tracks Bitcoin futures, prices rather than those of the coins themselves.
What are the benefits of investing in Bitcoin through an ETF
Investing in an asset through an ETF can often make sense for retail investors, who for instance, don’t want to trade in derivatives or overseas markets, and by using ETFs instead they can get exposure to the performance of an equity index or say Japanese smaller companies, markets that they might otherwise find difficult to access.
Investing in Bitcoin, and other Cryptocurrencies is far from straightforward, and there are issues around the security and storage of the coins, and their conversion back into fiat currencies.
A Bitcoin ETF would allow traders to gain exposure to price changes in Bitcoin or Bitcoin derivatives, without any of those issues, and to do so via a vehicle that can be traded just like any other stock.
What are the risks of investing in Bitcoin through an ETF
Assuming that the ETF is well capitalised and that any underlying Bitcoin it owns are securely stored and out of harm’s way, then the risk of an investment in a Bitcoin ETF is purely market risk. That is the price action in Bitcoin and the Bitcoin ETF. and the investors underlying position i.e. long or short.
That said the underlying market in Bitcoin is fragmented and largely untested in adverse conditions, aside from the inherent volatility in the price of Bitcoin.
So any investment in Bitcoin, even one made through an ETF, should still be considered high risk.
Is a Bitcoin ETF a good thing?
Since 2013 there have been 35 attempts to launch a Bitcoin or Bitcoin-related ETF in the USA, according to Bloomberg data. None of which has been successful, and that should tell us that SEC and other US regulators have plenty of concerns about Bitcoin ETFs.
Bitcoin ETFs wouldn’t remove the risks of trading in Bitcoin, but in theory, they would negate many of the logistical barriers and security concerns, associated with investing in Cryptocurrencies.
Whilst the SEC continues to deliberate, European exchanges such as Deutsche Bourse in Germany, and SIX in Switzerland, have allowed a range of Cryptocurrency ETPs and ETNs to list and trade. For example, Deutsche Bourse lists 7 separate Bitcoin-related ETPs from 6 different providers, including VanEck and WisdomTree.
The popularity of these instruments may ultimately force the SEC’s hand as the market move around them.
Darren is a veteran of the financial markets with almost 36 years of experience under his belt. He has worked in trading, sales, analytical, and research roles, he has been a regular guest & commentator on financial television channels and publications. During his career, Darren has been fortunate to act for and advise major hedge funds and investment banks as well as HNWI. Darren analyses the markets using a blend of technical and fundamental analysis