ARE BITCOIN ETF’S ON THE NEAR-TERM HORIZON?

 

Bitcoin ETF

With an extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interests include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency ecosystems.

 

Bitcoin is perhaps the most recognized cryptocurrency while it is also the number one currency based on market cap. For example, the live Bitcoin price today is $46,779.00 USD and had a 24-hour trading volume of $37.2 Billion USD. The current CoinMarketCap ranking is #1, with a live market cap of $880 Billion USD. It has a circulating supply of 18,893,731 BTC coins. Unlike certain other cryptocurrencies, however, the supply of Bitcoin is limited as it has a maximum supply of only 21,000,000 BTC coins. It is expected that Bitcoin will cease issuing new coins in 2140.

 

To buy Bitcoin or any other cryptocurrency, an investor will need a cryptocurrency exchange. A cryptocurrency exchange, or a digital currency exchange (DCE), is a business that allows customers to trade cryptocurrencies or digital currencies for other assets. Such other assets may include conventional fiat money (i.e., US dollars) or other digital currencies. Typically, exchanges accept credit card payments, wire transfers or other forms of payment in exchange for digital currencies or cryptocurrencies. Presently, there are hundreds of exchanges in existence. Popular crypto exchanges include Coinbase, Gemini and Binance.US. Although many have tried, there are presently no Bitcoin related Exchange Traded Funds (ETFs). However, that may soon change.

 

Generally, an ETF is an investment vehicle that tracks the performance of a particular asset or alternatively, a group of assets. The argument goes, that ETFs provide potential investors an opportunity to diversify their investment portfolios. One important aspect of such an investment is that the potential investors are not required to own the assets themselves. For individuals looking to focus only on gains and losses, ETFs provide what is perceived as a more efficient alternative to buying and selling individual assets. And because many traditional ETFs target a collection of potentially similar investment assets (e.g., an EFT that concentrates on US public corporations that have Bitcoin on their balance sheets), ETF’s allow investors to diversify their investment portfolios.

 

Although there is presently no Bitcoin based ETF, many have attempted to register a Bitcoin ETF with the U.S. Securities and Exchange Commission (SEC). And yet the SEC has failed to act on any one of these submissions. For example, just last week, Fidelity Investments announced plans to launch a new Bitcoin ETF called Wise Origin Bitcoin Trust. According to Fidelity’s recent filing, this proposed fund would track “eligible” BTC spot markets. A spot market is where financial instruments, such as commodities, currencies, and securities, are traded for immediate delivery. Delivery is the exchange of cash for the financial instrument.

 

Fidelity's Bitcoin ETF

Fidelity’s ETF will purportedly reflect the performance of Bitcoin in U.S. dollars. These current spot markets purportedly include Coinbase, Bitstamp, Gemini, itBit, and Kraken. The fund will track the Fidelity Bitcoin Index and could potentially be the first cryptocurrency ETF listed on a major U.S. exchange. Unfortunately for Fidelity Investments and many of its submission predecessors, there is a long history of proposed Bitcoin ETFs that have been rejected by the SEC. In its rejections, the SEC typically has cited concerns over extreme volatility in Bitcoin prices and potential risks to investors. However, Bitcoin maximalists and wanna-be crypto investors are hopeful that new SEC Chairman Gary Gensler will be more open to cryptocurrency funds than his predecessor Jay Clayton.

 

An excellent summary of the long history of unsuccessful Bitcoin ETF submissions is provided here. Below is a brief summary of this long history:

 

July 2013: First Bitcoin ETF submission submitted by Cameron and Tyler Winklevoss program named Winklevoss Bitcoin Trust. The SEC rejected this submission in March 2017.

 

July 2013: SolidX filed a proposal for its own Bitcoin fund. The proposal for the VanEck SolidX Bitcoin Trust was officially withdrawn in January 2019

 

July 2017: Grayscale officially filed an application for its Grayscale Bicoin Trust (OTCQX). Three months later, Grayscale withdrew its application to the SEC and chose to list its fund on the OTC market. As of today, the OTC GBTC fund is the largest and most popular Bitcoin fund. However, this fund is not listed on a major U.S. exchange.

 

September 2017: ProShares apples for two Bitcoin ETFs in September 2017 — the ProShares Bitcoin ETF and the ProShares Short Bitcoin ETF. The SEC rejected both proposals along with seven other proposed Bitcoin ETFs in August 2018.

 

December 2017: Direxion and GraniteShares filed applications with the SEC for respective Bitcoin ETFs. Both were rejected in August 2018. January 2019: Bitwise proposed the Bitwise Bitcoin ETF Trust in January 2019. The SEC rejected its proposal nine months later.

 

January 2019: Wilshire Phoenix proposed a unique approach to a Bitcoin fund with the United States Bitcoin and Treasury Investment Trust. The company was hoping the funds investment in both Bitcoin and U.S. Treasury securities would win over the SEC. This proposal was rejected in February 2020.

 

February 2019: Realty Shares ETF Trusts proposed a Bitcoin fund that would invest up to 25% of its total assets in Bitcoin futures contracts. The SEC forced the company to withdraw its proposal just two days later.

 

June 2020: WisdomTree submitted an application for a commodity fund that would invest up to 5% of its assets in Bitcoin futures. WisdomTree followed up by proposing a separate Bitcoin ETF just this month.

 

December 2020: SEC Chair Jay Clayton resigned from his position. In January 2021, President Joe Biden nominated former chairman of the Commodity Future Trading Commission Gary Gensler as Clayton’s replacement.

 

December 2020: VanEck re-filed its application for a Bitcoin ETF. The new proposal marked the first filing following Clayton’s resignation. The SEC officially acknowledged the filing on March 15, giving the regulator 45 days to rule on the proposal or extend the 45-day review window. January 2021: Valkyrie filed a new application for the Valkyrie Bitcoin Fund to be listed on the NYSE.

 

February 2021: NYDIG filed for approval of its own Bitcoin ETF on the same day the price of the cryptocurrency hit $50,000 for the first time. March 2021: Fidelity filed for approval of the Wise Origin Bitcoin Trust.

 

 

If a Bitcoin ETF merely mirrors the price of the cryptocurrency itself, why not just purchase Bitcoin directly from an exchange? ETF advocates provide a number of benefits for purchasing Bitcoin by way of an ETF.

 

First, ETF investors do not have to bother with the security procedures associated with holding Bitcoin and other cryptocurrencies. Second, there is no need to deal with cryptocurrency exchanges in the process. Rather, ETF investors can merely purchase and sell the ETF through traditional exchanges and markets.

 

Third, there is a perceived crucial benefit to focusing on a Bitcoin ETF rather than on the Bitcoin currency itself. Because the ETF is an investment vehicle, investors would be able to short sell shares of the ETF if they believe the price of Bitcoin will go down in the future. Short selling is something that cannot be accomplished in the traditional cryptocurrency market. Although the SEC has so far not approved any digital currency ETFs, investors remain broadly optimistic. A source at the Commodities Futures Trading Commission explained that the chance of a bitcoin ETF being approved in 2018 was "90% at this point." The reason for the shift may have something to do with the fact that "the crypto markets have moderated and regulators have watched the lack of drama surrounding bitcoin futures across several global exchanges." The SEC also opened up bitcoin ETF applications to public comments, with the vast majority of commenters voicing their approval for the new product.

 

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity whatsoever with which Thomas Wettermann has been, is currently, or will be affiliated.

 

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor. Thomas Wettermann is not an independent financial advisor.