The lack of a Bitcoin ETF in the United States (and elsewhere) has led institutional investors to seek other avenues such as Grayscale to gain exposure to bitcoin, ethereum and other cryptocurrencies. However, with ETF filings on the increase again and a new US administration, the time for regulated ETF’s is fast approaching.
Exchange Traded Funds were created in the 90’s to combine the best parts of Index Funds and Stocks. Similar to an Index Fund, they track an underlying asset or assets but can be traded on exchanges. Normally, they are considered to be low-risk investment vehicles and are regulated by the Securities Exchange Commission in the United States.
Bitcoin ETFs – A Brief History
Bitcoin’s history is filled with attempts to register an ETF with the SEC, none of which have been successful. While reasons for this outcome vary, the main ones that are paraded are bitcoin’s maturity as an asset, it’s supposed volatility and the lack of demand for an ETF from institutions.
To get around this, institutions worked around this through Grayscale’s Bitcoin Trust (GBTC). however, doing so came with lock-up periods and a significant premium (sometimes 80% or higher) which has only recently subsided due to increased competition. Since the 23rd of February 2021 this premium has traded in negative territory – in large part due to three available Bitcoin ETFs in Canada on the Toronto Stock Exchange.
These ETF’s were launched by Evolve Funds Group (EBIT), Purpose Investment (BTCC) and CI Global Asset Management (BTCX) – the latter of which filed for an Ethereum ETF in February. The Purpose Investment’s BTCC reached $1 billion AUM just a month after launch, and on the 19th of March 2021, Brazil became the second country to launch a Bitcoin ETF – QR Capital’s QBTC11.
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Who else is trying to launch one?
At the time of publishing there are five applications for ETFs with the SEC. These are by SkyBridge Capital, Valkyrie Digital Assets, NYDIG and WisedomTree. However, the most important ETF is VanEck’s listing since the SEC acknowledged their application on March 18th, which begins the 45-day countdown for a formal decision to be made on the proposal. This is the canary in the coal mine for other ETF filings. The SEC can also extend the review period for an additional 240 days before delivering the final verdict and it has always done so.
Different this time?
While it’s prudent to use these words cautiously, some elements have changed which might end up with a positive verdict. Bitcoin has reached a market capitalisation of over $1 trillion – as such, the maturity argument is no longer tenable. Over the months (all throughout 2021 and 2021) payment giants Mastercard, Visa, PayPal as well as Wall Street giants like JP Morgan, Goldman Sachs and Morgan Stanley have all found ways to offer their clients exposure to bitcoin – many of whom would gladly do so due to decreased tax friction. In a research paper, VanEck found that bitcoin was actually less volatile than 34% of the companies listed on the S&P 500 in 2020, making the ‘volatility’ argument null and void.
Per these developments, it’s clear that the environment has changed to a more positive tone for bitcoin. But that’s not all – another reason to be optimistic for a bitcoin ETF is Biden’s pick for the chair of the SEC – Gary Gensler. Being an ex-professor at MIT, Gensler lectured about bitcoin and blockchain as well as testified on digital currencies policies before the US Congress. Gensler is also friendly with the SEC commissioner Hester Peirce (aka Crypto Mom), who on the 15th of March spoke at the British Blockchain Association on the topic of ETF hopes in 2021 – which would be a ‘turning point’ for crypto regulation in the United States.
Why is this good for Bitcoin?
While bitcoin ETFs exist, the SEC is the ultimate gatekeeper for the biggest market in the world. An SEC-approved ETF would be the strongest sign that Crypto has become a proper asset class, which in turn would open the flood gates to billions of dollars pouring into bitcoin (since it provides the simplest method of exposure to the asset class) without cumbersome custodial processes, understanding private keys, gas fees etc. ETFs are useful for tax efficiency and can also be used in savings accounts – which unlocks the potential of billions of dollars in pension funds flooding into bitcoin (and eventually Ethereum and crypto more broadly). This would by definition increase the number of long-term HODLers while solidifying bitcoin’s value proposition as digital gold.
Could an ETF be bad for Bitcoin?
In the bitcoin white paper, Satoshi Nakamoto explicitly wrote down that bitcoin was to be an alternative to the financial system, not become part of it. The more bitcoin is held by legacy financial organisations, the less decentralised it becomes and the more prone to the woes of traditional finance it gets. Aside from the ideals bitcoin was founded on, this could cause issues for any future hard forks or Bitcoin Improvement proposals (BIP) as financial institutions would vote to their own benefit without any consideration for bitcoin’s ideals. Finally, a bitcoin ETF would likely have an effect on bitcoin’s price movements since ETFs can be grouped with traditional financial assets (or a basket of assets), making it more prone to traditional finance correlation. These thoughts are of course, well beyond the time-frame of 2021 and are in large part dependent on HODLer behaviour moving forward.
As the great American economist Thomas Sowell has often remarked, there are no solutions only trade-offs. A bitcoin ETF would consolidate bitcoin’s position as digital gold as a consequence of huge capital inflows. At the same time, bitcoin will likely begin to ‘move’ differently as a new phenomena emerges in the crypto markets. If this were an isometric action RPG, you could say bitcoin would be entering a new ‘act’ or ‘epoch’ in its experimental financial journey.
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